##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2005
 Commission File Number 1-13388
 GUIDANT CORPORATION
  INDIANA
(State or other jurisdiction of
incorporation or organization)
    
    35-1931722
(I.R.S. Employer
Identification No.)
 111 MONUMENT CIRCLE, 29TH FLOOR
INDIANAPOLIS, INDIANA 46204-5129
 (317) 971-2000
  þ o
  þ o
  Class
    
    Number of Shares OutstandingCommon
    
    330,033,634




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TABLE OF CONTENTS  PART I FINANCIAL INFORMATIONItem 1. Financial StatementsItem 2. Managements Discussion and Analysis of Results of Operations and Financial ConditionItem 4. Controls and ProceduresPART II OTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 6. ExhibitsSIGNATURESEXHIBIT INDEXSection 302 CertificationSection 302 CertificationSection 906 CertificationSection 906 CertificationExhibit 99    Table of Contents  
 PART I FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 GUIDANT CORPORATION
 Consolidated Statements of Income  (In millions, except per share data)
(unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net sales
    
    $
    974.1
    
    
    $
    938.8
    
    
    $
    1,927.4
    
    
    $
    1,872.9Cost of products sold
    
    
    346.2
    
    
    
    234.6
    
    
    
    571.5
    
    
    
    460.9Gross profit
    
    
    627.9
    
    
    
    704.2
    
    
    
    1,355.9
    
    
    
    1,412.0Research and development
    
    
    143.9
    
    
    
    136.8
    
    
    
    273.5
    
    
    
    274.4Purchased in-process research and development
    
    
    10.0
    
    
    
    73.0
    
    
    
    10.0
    
    
    
    99.8Sales, marketing and administrative
    
    
    351.8
    
    
    
    298.1
    
    
    
    662.1
    
    
    
    612.8Interest, net
    
    
    (12.0
    )
    
    
    (0.2
    )
    
    
    (19.6
    )
    
    
    (1.2
    )Royalties, net
    
    
    12.3
    
    
    
    12.5
    
    
    
    25.0
    
    
    
    24.6Amortization
    
    
    4.8
    
    
    
    7.7
    
    
    
    12.6
    
    
    
    15.0Other, net
    
    
    (0.1
    )
    
    
    6.4
    
    
    
    (7.2
    )
    
    
    8.9Impairment charge
    
    
    
    
    
    
    
    
    
    
    60.0
    
    
    
    Income from continuing operations before income taxes
    
    
    117.2
    
    
    
    169.9
    
    
    
    339.5
    
    
    
    377.7Income taxes
    
    
    1.1
    
    
    
    34.3
    
    
    
    46.7
    
    
    
    89.1Income from continuing operations
    
    
    116.1
    
    
    
    135.6
    
    
    
    292.8
    
    
    
    288.6Loss from discontinued operations, net of income taxes
    
    
    (8.8
    )
    
    
    (9.1
    )
    
    
    (23.2
    )
    
    
    (22.7
    )Net income
    
    $
    107.3
    
    
    $
    126.5
    
    
    $
    269.6
    
    
    $
    265.9Earnings per share-basicIncome from continuing operations
    
    $
    0.36
    
    
    $
    0.44
    
    
    $
    0.91
    
    
    $
    0.93Loss from discontinued operations, net of income taxes
    
    
    (0.03
    )
    
    
    (0.03
    )
    
    
    (0.07
    )
    
    
    (0.07
    )Net income
    
    $
    0.33
    
    
    $
    0.41
    
    
    $
    0.84
    
    
    $
    0.86Earnings per share-dilutedIncome from continuing operations
    
    $
    0.35
    
    
    $
    0.42
    
    
    $
    0.89
    
    
    $
    0.90Loss from discontinued operations, net of income taxes
    
    
    (0.03
    )
    
    
    (0.03
    )
    
    
    (0.07
    )
    
    
    (0.07
    )Net income
    
    $
    0.32
    
    
    $
    0.39
    
    
    $
    0.82
    
    
    $
    0.83Dividends declared per common share
    
    $
    0.10
    
    
    $
    0.10
    
    
    $
    0.20
    
    
    $
    0.20
 See Notes to Consolidated Financial Statements
 2




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GUIDANT CORPORATION
 Consolidated Balance Sheets  (In millions, except share data)
 June 30,
    
    December 31,2005
    
    2004(unaudited)AssetsCurrent AssetsCash and cash equivalents
    
    $
    2,022.6
    
    
    $
    1,894.2Short-term investments
    
    
    574.6
    
    
    
    320.1Accounts receivable, net of allowances
of $19.7 (2005) and $22.0 (2004)
    
    
    797.2
    
    
    
    845.9Inventories
    
    
    345.2
    
    
    
    353.9Deferred income taxes
    
    
    283.0
    
    
    
    215.1Prepaid expenses and other current assets
    
    
    92.7
    
    
    
    78.7Total Current Assets
    
    
    4,115.3
    
    
    
    3,707.9Other AssetsGoodwill
    
    
    512.2
    
    
    
    511.7Other intangible assets, net
    
    
    96.2
    
    
    
    168.8Deferred income taxes
    
    
    60.8
    
    
    
    36.2Investments
    
    
    85.9
    
    
    
    81.5Sundry
    
    
    57.9
    
    
    
    57.2Total Other Assets
    
    
    813.0
    
    
    
    855.4Property and equipment, net of accumulated depreciation of
$827.8 (2005) and $780.4 (2004)
    
    
    847.1
    
    
    
    808.9Total Assets
    
    $
    5,775.4
    
    
    $
    5,372.2
 See Notes to Consolidated Financial Statements
 3




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GUIDANT CORPORATION
 Consolidated Balance Sheets  (In millions, except share data)
 June 30,
    
    December 31,2005
    
    2004(unaudited)Liabilities and Shareholders EquityCurrent LiabilitiesAccounts payable
    
    $
    82.7
    
    
    $
    56.2Employee compensation
    
    
    114.6
    
    
    
    141.3Other liabilities
    
    
    327.0
    
    
    
    284.8Income taxes payable
    
    
    283.1
    
    
    
    220.5Short-term debt
    
    
    350.3
    
    
    
    302.0Current liabilities of discontinued operations
    
    
    35.2
    
    
    
    23.9Total Current Liabilities
    
    
    1,192.9
    
    
    
    1,028.7Noncurrent LiabilitiesLong-term debt
    
    
    5.5
    
    
    
    357.2Other
    
    
    236.8
    
    
    
    244.2Total Noncurrent Liabilities
    
    
    242.3
    
    
    
    601.4Commitments and ContingenciesShareholders EquityPreferred stock:Authorized
shares:        50,000,000Issued shares: none
    
    
    
    
    
    
    Common stock, no par value:Authorized
shares:   1,000,000,000Issued
shares:
             328,852,000 (2005)320,692,000 (2004)
    
    
    890.2
    
    
    
    609.1Additional paid-in capital
    
    
    530.9
    
    
    
    344.6Retained earnings
    
    
    2,862.5
    
    
    
    2,657.6Deferred cost, ESOP
    
    
    (10.6
    )
    
    
    (12.6
    )Unearned compensation
    
    
    (97.4
    )
    
    
    (36.9
    )Accumulated other comprehensive income
    
    
    164.6
    
    
    
    180.3Total Shareholders Equity
    
    
    4,340.2
    
    
    
    3,742.1Total Liabilities and Shareholders Equity
    
    $
    5,775.4
    
    
    $
    5,372.2
 See Notes to Consolidated Financial Statements
 4




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GUIDANT CORPORATION
 Consolidated Statements of Cash Flows  (In millions)
(unaudited)
 Six Months EndedJune 30,2005
    
    2004Operating ActivitiesNet income
    
    $
    269.6
    
    
    $
    265.9Adjustments to Reconcile Net Income to Cash
Provided by Operating ActivitiesDepreciation
    
    
    74.8
    
    
    
    69.0Amortization of other intangible assets
    
    
    12.6
    
    
    
    15.0Provision for inventory and accounts receivable
    
    
    35.6
    
    
    
    13.2Purchased in-process research and development
    
    
    10.0
    
    
    
    99.8Deferred income taxes
    
    
    (116.4
    )
    
    
    2.9Compensation associated with equity programs
    
    
    59.5
    
    
    
    44.0Impairment charge
    
    
    60.0
    
    
    
    Other noncash, net
    
    
    27.1
    
    
    
    27.8432.8
    
    
    
    537.6Changes in Operating Assets and LiabilitiesReceivables
    
    
    (3.7
    )
    
    
    (15.9
    )Inventories
    
    
    (38.6
    )
    
    
    (12.9
    )Prepaid expenses and other current assets
    
    
    (5.6
    )
    
    
    (9.9
    )Accounts payable and accrued liabilities
    
    
    (6.8
    )
    
    
    (80.6
    )Income taxes payable
    
    
    147.4
    
    
    
    80.5Other liabilities
    
    
    133.4
    
    
    
    (3.3
    )Net Cash Provided by Operating Activities
    
    
    658.9
    
    
    
    495.5Investing ActivitiesAdditions of property and equipment, net
    
    
    (116.8
    )
    
    
    (114.6
    )Acquisitions, net of cash acquired
    
    
    (35.0
    )
    
    
    (99.7
    )Net purchases of short-term investments
    
    
    (254.5
    )
    
    
    (100.7
    )Purchases of equity investments
    
    
    (6.5
    )
    
    
    (22.1
    )Net Cash Used for Investing Activities
    
    
    (412.8
    )
    
    
    (337.1
    )Financing Activities(Decrease) increase in borrowings, net
    
    
    (303.1
    )
    
    
    6.1Issuance of common stock under stock plans and other capital
transactions
    
    
    290.8
    
    
    
    251.1Dividends paid
    
    
    (64.7
    )
    
    
    (62.2
    )Repurchase of common stock
    
    
    (26.1
    )
    
    
    (127.5
    )Net Cash (Used) Provided by Financing Activities
    
    
    (103.1
    )
    
    
    67.5Effect of Exchange Rate Changes on Cash
    
    
    (14.6
    )
    
    
    (3.7
    )Net Increase in Cash and Cash Equivalents
    
    
    128.4
    
    
    
    222.2Cash and Cash Equivalents at Beginning of Period
    
    
    1,894.2
    
    
    
    1,468.2Cash and Cash Equivalents at End of Period
    
    $
    2,022.6
    
    
    $
    1,690.4
 See Notes to Consolidated Financial Statements
 5




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GUIDANT CORPORATION
 Notes to Consolidated Financial Statements  (In millions, except per share data)
(unaudited)
 Note 1  Basis of Presentation
   Note 2  Pending Merger
  Note 3  New Accounting Pronouncements
 Share-Based Payment
 Accounting Changes and Error Corrections Accounting Changes Reporting Accounting
Changes in Interim Financial Statements
 6




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GUIDANT CORPORATION
 Notes to Consolidated Financial Statements
 Note 4  Stock-Based Compensation
 Accounting for Stock-Based
Compensation Accounting for Stock-Based CompensationTransition and
Disclosure Accounting for Stock Issued to Employees,
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Reported net income (1)
    
    $
    107.3
    
    
    $
    126.5
    
    
    $
    269.6
    
    
    $
    265.9Deduct: Stock-based compensation not reflected in
net income, net of tax (2)
    
    
    30.1
    
    
    
    17.6
    
    
    
    37.7
    
    
    
    28.0Pro forma net income
    
    $
    77.2
    
    
    $
    108.9
    
    
    $
    231.9
    
    
    $
    237.9Earnings per share:Basic-as reported
    
    $
    0.33
    
    
    $
    0.41
    
    
    $
    0.84
    
    
    $
    0.86Basic-pro forma
    
    $
    0.24
    
    
    $
    0.35
    
    
    $
    0.72
    
    
    $
    0.77Diluted-as reported
    
    $
    0.32
    
    
    $
    0.39
    
    
    $
    0.82
    
    
    $
    0.83Diluted-pro forma
    
    $
    0.23
    
    
    $
    0.34
    
    
    $
    0.70
    
    
    $
    0.74
  (1)
    
    Reported amounts include expense associated with restricted stock awards, including $33.6 million as a result of the Companys shareholders approval of the plan of merger with J&J on April 27, 2005.(2)
    
    All remaining pro forma stock-based compensation, including pro forma compensation expense of $21.9 million is reflected in the second quarter of 2005 as a result of the Companys
shareholders approval of the plan of merger with J&J on April 27, 2005, which accelerated the
vesting of these options.  Note 5  Inventories
  June 30,
    
    December 31,2005
    
    2004Finished products
    
    $
    196.9
    
    
    $
    181.2Work-in-process
    
    
    42.6
    
    
    
    64.5Raw materials and supplies
    
    
    105.7
    
    
    
    108.2$
    345.2
    
    
    $
    353.9
 7




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GUIDANT CORPORATION
 Notes to Consolidated Financial Statements
 Note 6  Product Warranties
    Six Months EndedJune 30,2005
    
    2004January 1
    
    $
    20.1
    
    
    $
    22.3Provisions for product warranties
    
    
    104.8
    
    
    
    4.5Settlements during the period
    
    
    (10.2
    )
    
    
    (7.9
    )June 30
    
    $
    114.7
    
    
    $
    18.9
 8




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GUIDANT CORPORATION
 Notes to Consolidated Financial Statements
 Note 7  Impairment Charge
 Accounting for the Impairment or Disposal of Long-Lived Assets
 Note 8  Earnings Per Share
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Income from continuing operations
    
    $
    116.1
    
    
    $
    135.6
    
    
    $
    292.8
    
    
    $
    288.6Loss from discontinued operations, net of income taxes
    
    
    (8.8
    )
    
    
    (9.1
    )
    
    
    (23.2
    )
    
    
    (22.7
    )Net income
    
    $
    107.3
    
    
    $
    126.5
    
    
    $
    269.6
    
    
    $
    265.9Earnings per share-basicIncome from continuing operations
    
    $
    0.36
    
    
    $
    0.44
    
    
    $
    0.91
    
    
    $
    0.93Loss from discontinued operations, net of income
taxes
    
    
    (0.03
    )
    
    
    (0.03
    )
    
    
    (0.07
    )
    
    
    (0.07
    )Net income
    
    $
    0.33
    
    
    $
    0.41
    
    
    $
    0.84
    
    
    $
    0.86Earnings per share-dilutedIncome from continuing operations
    
    $
    0.35
    
    
    $
    0.42
    
    
    $
    0.89
    
    
    $
    0.90Loss from discontinued operations, net of income
taxes
    
    
    (0.03
    )
    
    
    (0.03
    )
    
    
    (0.07
    )
    
    
    (0.07
    )Net income
    
    $
    0.32
    
    
    $
    0.39
    
    
    $
    0.82
    
    
    $
    0.83Weighted average common shares outstanding
    
    
    323.96
    
    
    
    310.91
    
    
    
    321.91
    
    
    
    309.70Effect of dilutive stock options and unvested restricted
stock awards
    
    
    7.94
    
    
    
    9.24
    
    
    
    8.77
    
    
    
    9.65Weighted average common shares outstanding
and assumed conversions
    
    
    331.90
    
    
    
    320.15
    
    
    
    330.68
    
    
    
    319.35
 Note 9  Comprehensive Income
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net income
    
    $
    107.3
    
    
    $
    126.5
    
    
    $
    269.6
    
    
    $
    265.9Other comprehensive income:Currency translation
    
    
    (22.9
    )
    
    
    (2.5
    )
    
    
    (59.5
    )
    
    
    (24.2
    )Unrealized gains on foreign exchange contracts
    
    
    19.7
    
    
    
    9.1
    
    
    
    43.8
    
    
    
    17.6Comprehensive income
    
    $
    104.1
    
    
    $
    133.1
    
    
    $
    253.9
    
    
    $
    259.3
 9




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GUIDANT CORPORATION
 Notes to Consolidated Financial Statements
 Note 10  Income Taxes
  Note 11  Segment Information
 Geographic Information:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net Sales(1):US
    
    $
    634.7
    
    
    $
    631.3
    
    
    $
    1,269.9
    
    
    $
    1,248.1International
    
    
    339.4
    
    
    
    307.5
    
    
    
    657.5
    
    
    
    624.8$
    974.1
    
    
    $
    938.8
    
    
    $
    1,927.4
    
    
    $
    1,872.9
 
 (1)
    
    Revenues are attributed to countries based on location of the customer. June 30,
    
    December 31,2005
    
    2004Property and Equipment, Net:US
    
    $
    738.8
    
    
    $
    721.6International
    
    
    108.3
    
    
    
    87.3$
    847.1
    
    
    $
    808.9
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,Classes of Similar Products:
    
    2005
    
    2004
    
    2005
    
    2004Net Sales:Implantable defibrillator systems
    
    $
    469.8
    
    
    $
    455.7
    
    
    $
    947.8
    
    
    $
    860.7Pacemaker systems
    
    
    173.6
    
    
    
    183.1
    
    
    
    341.7
    
    
    
    362.6Coronary stent systems
    
    
    117.6
    
    
    
    120.4
    
    
    
    232.8
    
    
    
    291.8Angioplasty systems
    
    
    115.5
    
    
    
    111.2
    
    
    
    215.6
    
    
    
    227.8Cardiac surgery and peripheral,
including carotid and biliary systems
    
    
    97.6
    
    
    
    68.4
    
    
    
    189.5
    
    
    
    130.0$
    974.1
    
    
    $
    938.8
    
    
    $
    1,927.4
    
    
    $
    1,872.9
 10




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GUIDANT CORPORATION
 Notes to Consolidated Financial Statements
 Note 12  Acquisitions
 AFx, inc.:
 Biosensors International (Biosensors):
 Bioabsorbable Vascular Solutions (BVS):
 Novartis Pharma AG and Novartis AG (Novartis):
   11




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GUIDANT CORPORATION
 Notes to Consolidated Financial Statements
 Note 13  Discontinued Operations
    Accounting for the Impairment or Disposal of Long-Lived Assets
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net sales(1)
    
    
    ($0.2
    )
    
    $
    4.1
    
    
    
    ($0.9
    )
    
    $
    15.4Loss from discontinued operations before income taxes
    
    
    (13.8
    )
    
    
    (15.0
    )
    
    
    (36.7
    )
    
    
    (36.1
    )Net loss from discontinued operations
    
    
    (8.8
    )
    
    
    (9.1
    )
    
    
    (23.2
    )
    
    
    (22.7
    )
 
 (1)
    
    Represents net product returns from customers in 2005. Note 14  Contingencies
  12




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Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition  (unaudited)
   
    
    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
    
    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
    
    Coronary stent systems for the treatment of coronary artery disease
    
    Angioplasty systems, including dilatation catheters, guidewires and related
accessories for the treatment of coronary artery disease
    
    Cardiac surgery systems to perform cardiac surgical ablation, endoscopic vessel
harvesting (EVH) and clampless beating-heart bypass surgery
    
    Peripheral systems, including those to treat biliary, peripheral vascular and
carotid artery disease
  Operating Results  Three and Six Months Ended June 30, 2005
 Sales
  13




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Sales SummaryThree Months Ended
 June 30, 2005
    
    % of
    
    June 30, 2004
    
    % of(In millions)
    
    US
    
    Intl.
    
    Total
    
    Total
    
    US
    
    Intl.
    
    Total
    
    Total
    
    GrowthImplantable defibrillator systems
    
    $
    348.0
    
    
    $
    121.8
    
    
    $
    469.8
    
    
    
    48
    %
    
    $
    363.7
    
    
    $
    92.0
    
    
    $
    455.7
    
    
    
    49
    %
    
    
    3
    %Pacemaker systems
    
    
    96.0
    
    
    
    77.6
    
    
    
    173.6
    
    
    
    18
    %
    
    
    111.2
    
    
    
    71.9
    
    
    
    183.1
    
    
    
    19
    %
    
    
    (5
    %)Coronary stent systems
    
    
    61.7
    
    
    
    55.9
    
    
    
    117.6
    
    
    
    12
    %
    
    
    51.2
    
    
    
    69.2
    
    
    
    120.4
    
    
    
    13
    %
    
    
    (2
    %)Angioplasty systems
    
    
    49.2
    
    
    
    66.3
    
    
    
    115.5
    
    
    
    12
    %
    
    
    51.5
    
    
    
    59.7
    
    
    
    111.2
    
    
    
    12
    %
    
    
    4
    %Cardiac surgery and peripheral,
including biliary and carotid
systems
    
    
    79.8
    
    
    
    17.8
    
    
    
    97.6
    
    
    
    10
    %
    
    
    53.7
    
    
    
    14.7
    
    
    
    68.4
    
    
    
    7
    %
    
    
    43
    %$
    634.7
    
    
    $
    339.4
    
    
    $
    974.1
    
    
    
    100
    %
    
    $
    631.3
    
    
    $
    307.5
    
    
    $
    938.8
    
    
    
    100
    %
 Sales SummarySix Months Ended
 June 30, 2005
    
    % of
    
    June 30, 2004
    
    % of(In millions)
    
    US
    
    Int'l.
    
    Total
    
    Total
    
    US
    
    Int'l.
    
    Total
    
    Total
    
    GrowthImplantable defibrillator systems
    
    $
    714.2
    
    
    $
    233.6
    
    
    $
    947.8
    
    
    
    49
    %
    
    $
    687.4
    
    
    $
    173.3
    
    
    $
    860.7
    
    
    
    46
    %
    
    
    10
    %Pacemaker systems
    
    
    191.0
    
    
    
    150.7
    
    
    
    341.7
    
    
    
    18
    %
    
    
    215.4
    
    
    
    147.2
    
    
    
    362.6
    
    
    
    19
    %
    
    
    (6
    %)Coronary stent systems
    
    
    119.0
    
    
    
    113.8
    
    
    
    232.8
    
    
    
    12
    %
    
    
    137.4
    
    
    
    154.4
    
    
    
    291.8
    
    
    
    16
    %
    
    
    (20
    %)Angioplasty systems
    
    
    91.6
    
    
    
    124.0
    
    
    
    215.6
    
    
    
    11
    %
    
    
    105.5
    
    
    
    122.3
    
    
    
    227.8
    
    
    
    12
    %
    
    
    (5
    %)Cardiac surgery and peripheral,
including biliary and carotid
systems
    
    
    154.1
    
    
    
    35.4
    
    
    
    189.5
    
    
    
    10
    %
    
    
    102.4
    
    
    
    27.6
    
    
    
    130.0
    
    
    
    7
    %
    
    
    46
    %$
    1,269.9
    
    
    $
    657.5
    
    
    $
    1,927.4
    
    
    
    100
    %
    
    $
    1,248.1
    
    
    $
    624.8
    
    
    $
    1,872.9
    
    
    
    100
    %
 Implantable Defibrillator Systems
  14




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
    
    ICD and cardiac resynchronization market growth based on the following:
 §
    
    Findings of two Guidant-sponsored clinical trialsMADIT II and COMPANION. MADIT II
demonstrated that a broader group of patients would benefit from ICD therapy. The
investigators for the COMPANION trial reported that for advanced heart failure patients
with desynchronized heart contractions, the addition of resynchronization therapy to
optimal drug treatment reduced the combination of death and hospitalization when
compared with optimal drug treatment alone. This trial demonstrated 20% reduction in
combined all-cause death and hospitalization by adding Guidants CRT-D systems to optimal
drug therapy and 36% reduction in all-cause mortality for Guidants CRT-D systems for patients
with advanced heart failure.§
    
    SCD-HeFT clinical trial and expanded national coverage. The National Heart, Lung
and Blood Institutes SCD-HeFT clinical trial was completed in 2003 with the clinical
trial results published in the New England Journal of Medicine in January 2005. The
results demonstrated positive benefits of implantable defibrillators (reducing death by
23% versus patients who did not receive defibrillators and only received standard drug
therapy) in patients with heart failure. Based on these results and other recent
clinical trials, CMS expanded national coverage to thousands of patients at risk for
sudden cardiac death in January 2005.
 
    
    RAPIDO® delivery system and EASYTRAK® 2 and EASYTRAK 3 leads, which received FDA
approval and were launched in August 2004. These products improve the physicians ability
to implant leads to the desired location.
    
    Strong market acceptance for CRT-D systems, specifically the CONTAK RENEWAL® family.
Sales also benefited from continued acceptance of the VITALITY® family of implantable
defibrillator systems, specifically the VITALITY 2.
 Pacemaker Systems
  15




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##### Table of Contents



Coronary Stent Systems
    Angioplasty Systems
  Cardiac Surgery and Peripheral, Including Biliary and Carotid Systems
  
    
    RX ACCULINK Carotid Stent System and the RX ACCUNET Embolic Protection System for
which Guidant was the first to receive FDA approval in August 2004
 16




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##### Table of Contents




    
    Continued growth in endoscopic vessel harvesting driven by the VASOVIEW® Endoscopic
Vessel Harvesting Systems
 Cost of Products Sold
  Research and Development
  
    
    XIENCE V Everolimus Eluting Coronary Stent System is currently being evaluated in the
SPIRIT family of clinical trials, which is expected to support filings to obtain regulatory
approval to market the product in the US and Europe
 §
    
    In June 2005, Guidant began enrollment in its SPIRIT III drug eluting stent trial.
SPIRIT III is a large-scale pivotal clinical trial evaluating XIENCE V, an
everolimus eluting coronary stent system utilizing Guidants cobalt chromium MULTI-LINK
VISION® Coronary Stent System platform.§
    
    In July 2005, Guidant began enrollment in its SPIRIT II drug eluting stent clinical
study. Results of the SPIRIT II study will provide additional clinical data to support
the launch of XIENCE V in several countries outside the US.
 
    
    Bioabsorbable and carotid stent systems
    
    Advanced Patient Management applications, designed to enable a physician to monitor
patient heart function remotely and automatically
    
    Clinical trials to further demonstrate the benefits of cardiac resynchronization therapy
devices for treating heart failure
    
    Development of next-generation devices for cardiac rhythm management, angioplasty,
peripheral systems  including carotid stenting systems and cardiac surgery products
 17




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In-Process Research and Development (IPRD)
  
    
    Biosensors International$50.0 million recorded during the second quarter of 2004 in
conjunction with clinical results related to the FUTURE II clinical trial
    
    Novartis Pharma AG and Novartis AG$15.0 million payment in April 2004 for
completion of SPIRIT FIRST clinical trial enrollment
    
    Bioabsorbable Vascular Solutions (BVS)$6.0 million payment in April 2004 to
purchase the remaining interest of BVS, an early-stage developer of bioabsorbable
stents. Bioabsorbable stents are designed to be absorbed by tissue following the
restoration of blood flow in patients with coronary artery disease.
    
    AFx, inc.$22.8 million associated with the February 2004 acquisition of AFx, inc.
  Sales, Marketing and Administrative (SM&A)
   Interest
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2005
    
    2004
    
    2005
    
    2004Interest income
    
    
    ($19.0
    )
    
    
    ($6.6
    )
    
    
    ($34.6
    )
    
    
    ($12.8
    )Interest expense
    
    
    7.0
    
    
    
    6.4
    
    
    
    15.0
    
    
    
    11.6Interest, net
    
    
    ($12.0
    )
    
    
    ($0.2
    )
    
    
    ($19.6
    )
    
    
    ($1.2
    )
 18




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Royalties
  Amortization
  Other
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2005
    
    2004
    
    2005
    
    2004Other expense
    
    $
    2.8
    
    
    $
    9.6
    
    
    $
    3.4
    
    
    $
    13.9Other income
    
    
    (2.9
    )
    
    
    (3.2
    )
    
    
    (10.6
    )
    
    
    (5.0
    )Other, net
    
    ($
    0.1
    )
    
    $
    6.4
    
    
    ($
    7.2
    )
    
    $
    8.9
 Impairment Charge
 Accounting for the Impairment or Disposal of Long-Lived Assets
 Income Tax
  19




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Discontinued Operations
    Accounting for the Impairment or Disposal of Long-Lived Assets
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In millions)
    
    2005
    
    2004
    
    2005
    
    2004Net sales (1)
    
    
    ($0.2
    )
    
    $
    4.1
    
    
    
    ($0.9
    )
    
    $
    15.4Loss from discontinued operations before income taxes
    
    
    (13.8
    )
    
    
    (15.0
    )
    
    
    (36.7
    )
    
    
    (36.1
    )Net loss from discontinued operations
    
    
    (8.8
    )
    
    
    (9.1
    )
    
    
    (23.2
    )
    
    
    (22.7
    )
 
 (1)
    
    Represents net product returns from customers in 2005. Liquidity and Capital Resources
 June 30,
    
    December 31,(Dollars in millions)
    
    2005
    
    2004Cash and cash equivalents and short-term investments (1)
    
    $
    2,597.2
    
    
    $
    2,214.3Working capital
    
    $
    2,922.4
    
    
    $
    2,679.2Current ratio (2)
    
    
    3.4:1.0
    
    
    
    3.6:1.0Net cash position (3)
    
    $
    2,241.4
    
    
    $
    1,555.1Days receivable outstanding
    
    
    77
    
    
    
    79
 
 (1)
    
    Short-term investments consist primarily of highly rated commercial paper and US Government
securities with maturities greater than three months. Similar investments with maturities of
less than three months are included in cash and cash equivalents.(2)
    
    Current ratio is lower at June 30, 2005 primarily due to $350.0 million of long-term notes
(due in February 2006), which were classified as long-term debt as of December 31, 2004.(3)
    
    Net cash position is the sum of cash and cash equivalents and short-term investments less
total debt. 20




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Summary of Cash Flows
 Six Months EndedJune 30,(In millions)
    
    2005
    
    2004
    
    ChangeNet cash provided by (used for):Operating activities
    
    $
    658.9
    
    
    $
    495.5
    
    
    $
    163.4Investing activities
    
    
    (412.8
    )
    
    
    (337.1
    )
    
    
    (75.7
    )Financing activities
    
    
    (103.1
    )
    
    
    67.5
    
    
    
    (170.6
    )Effect of exchange rate changes on cash
    
    
    (14.6
    )
    
    
    (3.7
    )
    
    
    (10.9
    )Net increase in cash and cash equivalents
    
    $
    128.4
    
    
    $
    222.2
    
    
    ($
    93.8
    )
  
    
    $52.6 million additional payments to vendors during the first six months of 2004
compared to the first six months of 2005
    
    $30.0 million additional bonus payouts during the first six months of 2004 compared to
the first six months of 2005
  
    
    $153.8 million increase in net purchases of short-term investments. The majority of
short-term investments are interest-bearing investments with maturities between three and
six months.
  
    
    $64.7 million additional cash used for acquisitions during the first six months of 2004
compared to the first six months of 2005.
 21




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
    
    $303.1 million net payments on borrowings during the first six months of 2005 compared
to an increase in borrowings of $6.1 million during the first six months of 2004
  
    
    $101.4 million additional repurchases of common stock during the first six months of
2004 compared to the first six months of 2005
    
    $39.7 million additional cash provided by issuances of common stock primarily for stock
option exercises in the first six months of 2005
    22




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Critical Accounting Estimates
  
    
    It requires assumptions to be made that were uncertain at the time the estimate was
made; and
    
    Changes in the estimate are reasonably likely to occur from period to period as new
information becomes available, or use of different estimates that Guidant reasonably
could have used in the current period, could have a material effect on Guidants
consolidated results of any one period.
    Field Actions
   23




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
    
    A subset of PRIZM® 2 DR ICDs related to the deterioration in a wire insulator which, in
conjunction with other factors, may result in a short, and thereby prevent the device
from delivering therapy. The FDA classified this action as a Class I recall. Guidant has
elected to provide supplemental warranty coverage for products impacted by this field
action. Sales of this product have been largely replaced by the VITALITY family of products since 2003.
    
    A subset of CONTAK RENEWAL 1 and 2 CRT-Ds related to the deterioration in a wire
insulator, which in conjunction with other factors, may result in a short and thereby
prevent the device from delivering therapy. The FDA classified this action as a Class I
recall. Guidant has elected to provide supplemental warranty coverage for products
impacted by this field action. These products manufactured after August 26, 2004 (unaffected by this field action) are currently available for sale.
    
    The AVT family of ICDs and CRT-Ds related to the potential for a rare memory latching
event. The Company notified physicians of a non-invasive programming change, which was
subsequently updated in another field action (see below). A non-invasive software solution
is expected to be available in the fourth quarter of 2005, pending regulatory approval. No
supplemental warranty coverage was required for this field action. The FDA classified this
action as a Class II recall.
    
    RENEWAL 3 and 4 CRT-Ds related to a magnetic switch component which in rare instances
may become stuck in the closed position, potentially inhibiting the devices ability to
deliver therapy when required, and can accelerate battery depletion. The Company
temporarily stopped selling these products and advised physicians of a non-invasive
programming change that can be completed at the next regularly scheduled patient follow-up
which would serve to mitigate the occurrence of this potential failure. This programming
change eliminates the need to provide supplemental warranty coverage for currently
implanted units; however, the Company requested that all unused inventory be returned to
the Company. The FDA classified this action as a Class II recall. The Company resumed
sales of the Renewal 3 and 4 CRT-D systems on August 2, 2005, following FDA and European
Community approval of product component modifications.
    
    Guidant learned of a Product Removal Notice issued by a manufacturer of introducers for
Guidant and one of Guidants suppliers. Guidant is replacing all affected hospital owned
inventory at no charge; however, because introducers are only used during the implant
process, Guidant recommends no changes to post-implant patient follow-up.
    
    A subset of the PDM family of pacemakers related to the potential failure of a hermetic
sealing component which may gradually degrade resulting in higher than normal moisture
content developing within the device late in the products life which could prevent the
device from performing properly. The FDA classified this action a Class I recall. Guidant
has elected to provide supplemental warranty coverage for products impacted by this field
action. Sales of this product family have been largely replaced by the INSIGNIA family of products since 2003.
    
    Notified physicians of an updated corrective action regarding the non-invasive
programming change for the AVT family of ICDs and CRT-Ds.
 24




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Cautionary Factors
  
    
    ICD system revenue growth driven by continued developments in future clinical
science, publication of clinical results, reimbursement decisions and new competition.
    
    Actual costs incurred related to the product field actions.
    
    Coronary stent business developments: Drug eluting stents present a significant
growth opportunity; however, the earlier introduction of drug eluting stents by the
Companys competitors has substantially affected metallic coronary stent sales and
will continue to impact the Companys financial results.
    
    The effects of operating in an industry subject to complex regulation, the
necessity for appropriate reimbursement of therapies and the significance of legal
claims in Guidants industry.
    
    Changes in the location or volume of production or changes in tax law.
    
    Progress in closing the pending transaction with J&J, including satisfaction of
conditions to closing, such as regulatory approvals in the US, Europe and elsewhere,
and other customary closing conditions.
    
    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 this report.
  
 Item 4. Controls and Procedures
   25




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PART II OTHER INFORMATION
 
 Item 1. Legal Proceedings
     26




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Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
  Total Number of
    
    ApproximateShares Purchased
    
    Dollar Value of SharesAverage
    
    as Part of Publicly
    
    That May Yet BeTotal Number of
    
    Price Per
    
    Announced
    
    Purchased UnderPeriod
    
    Shares Purchased (1)
    
    Share
    
    Program
    
    the Program04/01/05-
04/30/05
    
    
    353,962
    
    
    $
    74.00
    
    
    
    
    
    
    
    05/01/05-
05/31/05
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    06/01/05-
06/30/05
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Guidant repurchased 353,962 common shares to pay employee withholding taxes due upon the vesting of
restricted stock. 
 Item 4. Submission of Matters to a Vote of Security Holders
  For
    
    
    207,977,295
    sharesAgainst
    
    
    475,552
    sharesAbstain
    
    
    1,792,304
    shares
 
 Item 6. Exhibits
  31




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SIGNATURES
  GUIDANT CORPORATION(Registrant)Date: August 5, 2005
    
    /s/ Keith E. BrauerVice President, Finance andChief Financial OfficerDate: August 5, 2005
    
    /s/ Peter J. MarianiVice President, CorporateController and ChiefAccounting Officer
 32




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EXHIBIT INDEX
 Exhibit 31.1:
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of Ronald W. DollensExhibit 31.2:
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of Keith E. BrauerExhibit 32.1:
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of Ronald W. DollensExhibit 32.2:
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of Keith E. BrauerExhibit 99:
    
    Factors Possibly Affecting Future Operating Results
 33