##### 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 September 30, 2005
 Commission File Number 1-13388
 GUIDANT CORPORATION
  INDIANA
    
    35-1931722(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 111 MONUMENT CIRCLE, 29TH FLOOR
INDIANAPOLIS, INDIANA 46204-5129
 (317) 971-2000
  þ o
  þ o
  o þ
  Class
    
    
    
    Number of Shares OutstandingCommon
    
    
    

331,797,395




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TABLE OF CONTENTS  PART IItem 1. Financial StatementsItem 2. Managements Discussion and Analysis of Results of Operations and Financial ConditionItem 4. Controls and ProceduresPART IIItem 1. Legal ProceedingsItem 6. ExhibitsSIGNATURESEXHIBIT INDEXCertificationCertificationCertificationCertificationFactors Possibly Affecting Future Operating Results    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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net sales
    
    $
    795.0
    
    
    $
    924.5
    
    
    $
    2,722.4
    
    
    $
    2,797.4Cost of products sold
    
    
    170.2
    
    
    
    228.7
    
    
    
    741.7
    
    
    
    689.6Gross profit
    
    
    624.8
    
    
    
    695.8
    
    
    
    1,980.7
    
    
    
    2,107.8Research and development
    
    
    152.7
    
    
    
    124.4
    
    
    
    426.2
    
    
    
    398.8Purchased in-process research and development
    
    
    65.0
    
    
    
    
    
    
    
    75.0
    
    
    
    99.8Sales, marketing and administrative
    
    
    327.8
    
    
    
    282.1
    
    
    
    989.9
    
    
    
    894.9Interest, net
    
    
    (16.5
    )
    
    
    (2.5
    )
    
    
    (36.1
    )
    
    
    (3.7
    )Royalties, net
    
    
    10.9
    
    
    
    12.6
    
    
    
    35.9
    
    
    
    37.2Amortization
    
    
    4.8
    
    
    
    7.7
    
    
    
    17.4
    
    
    
    22.7Other, net
    
    
    2.7
    
    
    
    5.3
    
    
    
    (4.5
    )
    
    
    14.2Impairment charge
    
    
    
    
    
    
    
    
    
    
    60.0
    
    
    
    Restructuring charge
    
    
    
    
    
    
    66.0
    
    
    
    
    
    
    
    66.0Income from continuing operations before income taxes
    
    
    77.4
    
    
    
    200.2
    
    
    
    416.9
    
    
    
    577.9Income taxes
    
    
    12.0
    
    
    
    39.5
    
    
    
    58.7
    
    
    
    128.6Income from continuing operations
    
    
    65.4
    
    
    
    160.7
    
    
    
    358.2
    
    
    
    449.3Loss from discontinued operations, net of income taxes
    
    
    
    
    
    
    (7.1
    )
    
    
    (23.2
    )
    
    
    (29.8
    )Net income
    
    $
    65.4
    
    
    $
    153.6
    
    
    $
    335.0
    
    
    $
    419.5Earnings per share-basicIncome from continuing operations
    
    $
    0.20
    
    
    $
    0.51
    
    
    $
    1.11
    
    
    $
    1.45Loss from discontinued operations, net of income taxes
    
    
    
    
    
    
    (0.02
    )
    
    
    (0.07
    )
    
    
    (0.10
    )Net income
    
    $
    0.20
    
    
    $
    0.49
    
    
    $
    1.04
    
    
    $
    1.35Earnings per share-dilutedIncome from continuing operations
    
    $
    0.20
    
    
    $
    0.50
    
    
    $
    1.08
    
    
    $
    1.40Loss from discontinued operations, net of income taxes
    
    
    
    
    
    
    (0.02
    )
    
    
    (0.07
    )
    
    
    (0.09
    )Net income
    
    $
    0.20
    
    
    $
    0.48
    
    
    $
    1.01
    
    
    $
    1.31Dividends declared per common share
    
    $
    0.10
    
    
    $
    0.10
    
    
    $
    0.30
    
    
    $
    0.30
 See Notes to Consolidated Financial Statements
 2




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GUIDANT CORPORATION
Consolidated Balance Sheets  (In millions, except share data)
 September 30,
    
    
    December 31,2005
    
    
    2004(unaudited)AssetsCurrent AssetsCash and cash equivalents
    
    $
    1,995.1
    
    
    $
    1,894.2Short-term investments
    
    
    727.3
    
    
    
    320.1Accounts receivable, net of allowances
of $18.1 (2005) and $22.0 (2004)
    
    
    723.3
    
    
    
    845.9Inventories
    
    
    384.9
    
    
    
    353.9Deferred income taxes
    
    
    326.8
    
    
    
    215.1Prepaid expenses and other current assets
    
    
    112.5
    
    
    
    78.7Total Current Assets
    
    
    4,269.9
    
    
    
    3,707.9Other AssetsGoodwill
    
    
    512.3
    
    
    
    511.7Other intangible assets, net
    
    
    91.5
    
    
    
    168.8Deferred income taxes
    
    
    84.9
    
    
    
    36.2Investments
    
    
    86.3
    
    
    
    81.5Sundry
    
    
    56.9
    
    
    
    57.2Total Other Assets
    
    
    831.9
    
    
    
    855.4Property and equipment, net of accumulated depreciation of
$852.8 (2005) and $780.4 (2004)
    
    
    882.9
    
    
    
    808.9Total Assets
    
    $
    5,984.7
    
    
    $
    5,372.2
 See Notes to Consolidated Financial Statements
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GUIDANT CORPORATION
Consolidated Balance Sheets  (In millions, except share data)
 September 30,
    
    
    December 31,2005
    
    
    2004(unaudited)Liabilities and Shareholders EquityCurrent LiabilitiesAccounts payable
    
    $
    91.0
    
    
    $
    56.2Employee compensation
    
    
    109.8
    
    
    
    141.3Other liabilities
    
    
    303.7
    
    
    
    284.8Income taxes payable
    
    
    322.8
    
    
    
    220.5Short-term debt
    
    
    350.1
    
    
    
    302.0Current liabilities of discontinued operations
    
    
    29.2
    
    
    
    23.9Total Current Liabilities
    
    
    1,206.6
    
    
    
    1,028.7Noncurrent LiabilitiesLong-term debt
    
    
    5.0
    
    
    
    357.2Other
    
    
    240.2
    
    
    
    244.2Total Noncurrent Liabilities
    
    
    245.2
    
    
    
    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: 331,386,000 (2005) 320,692,000 (2004)
    
    
    998.5
    
    
    
    609.1Additional paid-in capital
    
    
    572.5
    
    
    
    344.6Retained earnings
    
    
    2,895.1
    
    
    
    2,657.6Deferred cost, ESOP
    
    
    (9.6
    )
    
    
    (12.6
    )Unearned compensation
    
    
    (88.5
    )
    
    
    (36.9
    )Accumulated other comprehensive income
    
    
    164.9
    
    
    
    180.3Total Shareholders Equity
    
    
    4,532.9
    
    
    
    3,742.1Total Liabilities and Shareholders Equity
    
    $
    5,984.7
    
    
    $
    5,372.2
 See Notes to Consolidated Financial Statements
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GUIDANT CORPORATION
Consolidated Statements of Cash Flows  (In millions)
(unaudited)
 Nine Months EndedSeptember 30,2005
    
    
    2004Operating ActivitiesNet income
    
    $
    335.0
    
    
    $
    419.5Adjustments to Reconcile Net Income to Cash
Provided by Operating ActivitiesDepreciation
    
    
    108.3
    
    
    
    105.2Amortization of other intangible assets
    
    
    17.4
    
    
    
    22.7Provision for inventory and accounts receivable
    
    
    35.8
    
    
    
    20.6Purchased in-process research and development
    
    
    75.0
    
    
    
    99.8Deferred income taxes
    
    
    (185.9
    )
    
    
    (28.4
    )Compensation associated with equity programs
    
    
    79.6
    
    
    
    70.4Impairment charge
    
    
    60.0
    
    
    
    Other noncash, net
    
    
    29.6
    
    
    
    37.6554.8
    
    
    
    747.4Changes in Operating Assets and LiabilitiesReceivables
    
    
    65.8
    
    
    
    (42.1
    )Inventories
    
    
    (80.6
    )
    
    
    13.7Prepaid expenses and other current assets
    
    
    (20.1
    )
    
    
    (10.2
    )Accounts payable and accrued liabilities
    
    
    (5.1
    )
    
    
    (44.4
    )Income taxes payable
    
    
    225.3
    
    
    
    121.0Other liabilities
    
    
    93.3
    
    
    
    (8.6
    )Net Cash Provided by Operating Activities
    
    
    833.4
    
    
    
    776.8Investing ActivitiesAdditions of property and equipment, net
    
    
    (189.7
    )
    
    
    (161.4
    )Acquisitions, net of cash acquired
    
    
    (80.0
    )
    
    
    (104.8
    )Net purchases of short-term investments
    
    
    (407.2
    )
    
    
    (470.8
    )Net purchases of equity investments
    
    
    (6.7
    )
    
    
    (26.3
    )Net Cash Used for Investing Activities
    
    
    (683.6
    )
    
    
    (763.3
    )Financing ActivitiesDecrease in borrowings, net
    
    
    (303.6
    )
    
    
    (171.2
    )Issuance of common stock under stock plans and other capital
transactions
    
    
    392.2
    
    
    
    360.8Dividends paid
    
    
    (97.5
    )
    
    
    (93.6
    )Repurchase of common stock
    
    
    (26.1
    )
    
    
    (128.0
    )Net Cash Used for Financing Activities
    
    
    (35.0
    )
    
    
    (32.0
    )Effect of Exchange Rate Changes on Cash
    
    
    (13.9
    )
    
    
    (8.7
    )Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    100.9
    
    
    
    (27.2
    )Cash and Cash Equivalents at Beginning of Period
    
    
    1,894.2
    
    
    
    1,468.2Cash and Cash Equivalents at End of Period
    
    $
    1,995.1
    
    
    $
    1,441.0
 See Notes to Consolidated Financial Statements
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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
  6




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GUIDANT CORPORATION
Notes to Consolidated Financial Statements
 Note 3  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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Reported net income (1)
    
    $
    65.4
    
    
    $
    153.6
    
    
    $
    335.0
    
    
    $
    419.5Deduct: Stock-based compensation not reflected in
net income, net of tax (2)
    
    
    1.8
    
    
    
    13.3
    
    
    
    39.5
    
    
    
    41.3Pro forma net income
    
    $
    63.6
    
    
    $
    140.3
    
    
    $
    295.5
    
    
    $
    378.2Earnings per share:Basic-as reported
    
    $
    0.20
    
    
    $
    0.49
    
    
    $
    1.04
    
    
    $
    1.35Basic-pro forma
    
    $
    0.19
    
    
    $
    0.45
    
    
    $
    0.91
    
    
    $
    1.22Diluted-as reported
    
    $
    0.20
    
    
    $
    0.48
    
    
    $
    1.01
    
    
    $
    1.31Diluted-pro forma
    
    $
    0.19
    
    
    $
    0.44
    
    
    $
    0.89
    
    
    $
    1.18
 (1)
    
    Reported amount for the nine months ended September 30, 2005 includes 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 Johnson & Johnson (J&J) on April 27, 2005,
which accelerated the vesting of these awards.(2)
    
    Pro forma compensation expense of $21.9 million is reflected in the nine months ended
September 30, 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 4  Inventories
  September 30,
    
    
    December 31,2005
    
    
    2004Finished products
    
    $
    229.8
    
    
    $
    181.2Work-in-process
    
    
    48.0
    
    
    
    64.5Raw materials and supplies
    
    
    107.1
    
    
    
    108.2$
    384.9
    
    
    $
    353.9
 7




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GUIDANT CORPORATION
Notes to Consolidated Financial Statements
 Note 5  Product Warranties
  Supplemental Warranty Programs
    Nine Months EndedSeptember 30,2005
    
    
    2004January 1
    
    $
    20.1
    
    
    $
    22.3Provisions for product warranties
    
    
    117.5
    
    
    
    8.4Change in estimate
    
    
    (28.0
    )
    
    
    Settlements during the period
    
    
    (49.9
    )
    
    
    (11.6
    )September 30
    
    $
    59.7
    
    
    $
    19.1
 Note 6  Impairment Charge
 Accounting for the Impairment or Disposal of Long-Lived Assets
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GUIDANT CORPORATION
Notes to Consolidated Financial Statements
 Note 7  Earnings Per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Income from continuing operations
    
    $
    65.4
    
    
    $
    160.7
    
    
    $
    358.2
    
    
    $
    449.3Loss from discontinued operations, net of income taxes
    
    
    
    
    
    
    (7.1
    )
    
    
    (23.2
    )
    
    
    (29.8
    )Net income
    
    $
    65.4
    
    
    $
    153.6
    
    
    $
    335.0
    
    
    $
    419.5Earnings per share-basicIncome from continuing operations
    
    $
    0.20
    
    
    $
    0.51
    
    
    $
    1.11
    
    
    $
    1.45Loss from discontinued operations, net of income
taxes
    
    
    
    
    
    
    (0.02
    )
    
    
    (0.07
    )
    
    
    (0.10
    )Net income
    
    $
    0.20
    
    
    $
    0.49
    
    
    $
    1.04
    
    
    $
    1.35Earnings per share-dilutedIncome from continuing operations
    
    $
    0.20
    
    
    $
    0.50
    
    
    $
    1.08
    
    
    $
    1.40Loss from discontinued operations, net of income
taxes
    
    
    
    
    
    
    (0.02
    )
    
    
    (0.07
    )
    
    
    (0.09
    )Net income
    
    $
    0.20
    
    
    $
    0.48
    
    
    $
    1.01
    
    
    $
    1.31Weighted average common shares outstanding
    
    
    327.62
    
    
    
    312.70
    
    
    
    323.67
    
    
    
    310.70Effect of dilutive stock options and unvested restricted
stock awards
    
    
    7.60
    
    
    
    7.98
    
    
    
    8.57
    
    
    
    9.10Weighted average common shares outstanding
and assumed conversions
    
    
    335.22
    
    
    
    320.68
    
    
    
    332.24
    
    
    
    319.80
 Note 8  Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    65.4
    
    
    $
    153.6
    
    
    $
    335.0
    
    
    $
    419.5Other comprehensive income:Currency translation
    
    
    (1.7
    )
    
    
    7.6
    
    
    
    (61.2
    )
    
    
    (16.6
    )Unrealized gains on foreign exchange contracts
    
    
    2.0
    
    
    
    4.9
    
    
    
    45.8
    
    
    
    22.5Comprehensive income
    
    $
    65.7
    
    
    $
    166.1
    
    
    $
    319.6
    
    
    $
    425.4
 Note 9  Segment Information
 Geographic Information:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net Sales(1):US
    
    $
    519.5
    
    
    $
    638.1
    
    
    $
    1,789.4
    
    
    $
    1,886.2International
    
    
    275.5
    
    
    
    286.4
    
    
    
    933.0
    
    
    
    911.2$
    795.0
    
    
    $
    924.5
    
    
    $
    2,722.4
    
    
    $
    2,797.4
 (1)
    
    Revenues are attributed to countries based on location of the customer.
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GUIDANT CORPORATION
Notes to Consolidated Financial Statements
 Note 9  Segment Information (continued)
 September 30,
    
    
    December 31,2005
    
    
    2004Property and Equipment, Net:US
    
    $
    758.4
    
    
    $
    721.6International
    
    
    124.5
    
    
    
    87.3$
    882.9
    
    
    $
    808.9
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,Classes of Similar Products:
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Net Sales:Implantable defibrillator systems
    
    $
    330.6
    
    
    $
    444.6
    
    
    $
    1,278.4
    
    
    $
    1,305.3Pacemaker systems
    
    
    153.3
    
    
    
    181.2
    
    
    
    495.0
    
    
    
    543.8Coronary stent systems
    
    
    112.2
    
    
    
    122.1
    
    
    
    345.0
    
    
    
    413.9Angioplasty systems
    
    
    107.5
    
    
    
    104.8
    
    
    
    323.1
    
    
    
    332.6Cardiac surgery and peripheral,
including carotid and biliary systems
    
    
    91.4
    
    
    
    71.8
    
    
    
    280.9
    
    
    
    201.8$
    795.0
    
    
    $
    924.5
    
    
    $
    2,722.4
    
    
    $
    2,797.4
 Note 10  Acquisitions
 AFx, inc.:
 Biosensors International (Biosensors):
 Bioabsorbable Vascular Solutions (BVS):
 Novartis Pharma AG and Novartis AG (Novartis):
 10




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GUIDANT CORPORATION
Notes to Consolidated Financial Statements
 Note 10  Acquisitions (continued)
   Note 11  Contingencies
  11




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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 Nine Months Ended September 30, 2005
 Sales
  12




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Sales SummaryThree Months Ended
 September 30, 2005
    
    
    % of
    
    
    September 30, 2004
    
    
    % of(In millions)
    
    US
    
    
    Intl.
    
    
    Total
    
    
    Total
    
    
    US
    
    
    Intl.
    
    
    Total
    
    
    Total
    
    
    GrowthImplantable defibrillator systems
    
    $
    245.8
    
    
    $
    84.8
    
    
    $
    330.6
    
    
    
    42
    %
    
    $
    356.9
    
    
    $
    87.7
    
    
    $
    444.6
    
    
    
    48
    %
    
    
    (26
    %)Pacemaker systems
    
    
    85.4
    
    
    
    67.9
    
    
    
    153.3
    
    
    
    19
    %
    
    
    112.1
    
    
    
    69.1
    
    
    
    181.2
    
    
    
    20
    %
    
    
    (15
    %)Coronary stent systems
    
    
    63.8
    
    
    
    48.4
    
    
    
    112.2
    
    
    
    14
    %
    
    
    60.0
    
    
    
    62.1
    
    
    
    122.1
    
    
    
    13
    %
    
    
    (8
    %)Angioplasty systems
    
    
    47.7
    
    
    
    59.8
    
    
    
    107.5
    
    
    
    14
    %
    
    
    50.4
    
    
    
    54.4
    
    
    
    104.8
    
    
    
    11
    %
    
    
    3
    %Cardiac surgery and peripheral,
including biliary and carotid
systems
    
    
    76.8
    
    
    
    14.6
    
    
    
    91.4
    
    
    
    11
    %
    
    
    58.7
    
    
    
    13.1
    
    
    
    71.8
    
    
    
    8
    %
    
    
    27
    %$
    519.5
    
    
    $
    275.5
    
    
    $
    795.0
    
    
    
    100
    %
    
    $
    638.1
    
    
    $
    286.4
    
    
    $
    924.5
    
    
    
    100
    %
 Sales SummaryNine Months Ended
 September 30, 2005
    
    
    % of
    
    
    September 30, 2004
    
    
    % of(In millions)
    
    US
    
    
    Intl.
    
    
    Total
    
    
    Total
    
    
    US
    
    
    Intl.
    
    
    Total
    
    
    Total
    
    
    GrowthImplantable defibrillator systems
    
    $
    960.0
    
    
    $
    318.4
    
    
    $
    1,278.4
    
    
    
    47
    %
    
    $
    1,044.3
    
    
    $
    261.0
    
    
    $
    1,305.3
    
    
    
    47
    %
    
    
    (2
    %)Pacemaker systems
    
    
    276.4
    
    
    
    218.6
    
    
    
    495.0
    
    
    
    18
    %
    
    
    327.5
    
    
    
    216.3
    
    
    
    543.8
    
    
    
    19
    %
    
    
    (9
    %)Coronary stent systems
    
    
    182.8
    
    
    
    162.2
    
    
    
    345.0
    
    
    
    13
    %
    
    
    197.4
    
    
    
    216.5
    
    
    
    413.9
    
    
    
    15
    %
    
    
    (17
    %)Angioplasty systems
    
    
    139.3
    
    
    
    183.8
    
    
    
    323.1
    
    
    
    12
    %
    
    
    155.9
    
    
    
    176.7
    
    
    
    332.6
    
    
    
    12
    %
    
    
    (3
    %)Cardiac surgery and peripheral,
including biliary and carotid
systems
    
    
    230.9
    
    
    
    50.0
    
    
    
    280.9
    
    
    
    10
    %
    
    
    161.1
    
    
    
    40.7
    
    
    
    201.8
    
    
    
    7
    %
    
    
    39
    %$
    1,789.4
    
    
    $
    933.0
    
    
    $
    2,722.4
    
    
    
    100
    %
    
    $
    1,886.2
    
    
    $
    911.2
    
    
    $
    2,797.4
    
    
    
    100
    %
 13




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##### Table of Contents



Implantable Defibrillator Systems
    
    
    VITALITY® HE implantable defibrillator; Guidants first high-energy product to
offer the advanced functionality of the VITALITY family.
    
    CONTAK RENEWAL® 3 RF CRT-D; this is Guidants first wireless and wandless device
and is designed to enhance the speed and convenience of patient care. RENEWAL 3 RF
is part of the LATITUDE® Patient Management system.
    
    ZOOM® LATITUDE programmer; this next generation programmer is designed to
interface with devices that include remote monitoring capability. This programmer
also works with most other implantable defibrillator and pacemaker systems.
    
    LATITUDE Communicator and secure data storage system. This system provides
patients and physicians with the ability to conduct wireless, automatic device data
uploads from the comfort and convenience of the patients home. Wireless,
automatic data uploads are designed to make the device and patient follow-up
process easy for the patients and more efficient and effective for physicians.
 14




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##### Table of Contents



Pacemaker Systems
  Coronary Stent Systems
   Angioplasty Systems
  15




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##### Table of Contents



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
    
    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. Guidant has enrolled more than 600 patients in its
SPIRIT II and SPIRIT III clinical trials. SPIRIT III is a large-scale US pivotal clinical
trial evaluating XIENCE V, an everolimus eluting coronary stent system utilizing Guidants
cobalt chromium rapid exchange MULTI-LINK VISION® Coronary Stent System platform. Results
of this trial are expected to support filings to obtain regulatory approval to market the
product in the US. Results of the SPIRIT II study will provide additional clinical data to
support the launch of XIENCE V in several countries outside the US.
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
    
    Bioabsorbable and next generation coronary drug eluting stent systems
    
    LATITUDE Patient Management system, designed to enable a physician to monitor implanted
devices and 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 pacemaker and implantable defibrillator systems,
angioplasty, biliary systems and cardiac surgery products
  In-Process Research and Development (IPRD)
  2005
 
    
    Novartis Pharma AG and Novartis AG (Novartis)-$40.0 million payment made to Novartis
for satisfaction of a clinical milestone  enrollment of more than 300 patients in the
SPIRIT II and SPIRIT III clinical trials. In addition,
$20.0 million was earned and accrued and
will be paid upon satisfaction of a future clinical milestone or December 31, 2006,
whichever is earlier.
    
    MediVas LLC-$5.0 million IPRD related to the acquisition of certain bioabsorbable
polymer technologies.
    
    AFx, inc.-$10.0 million associated with the acquisition of AFx, inc., a manufacturer
of microwave surgical cardiac ablation medical devices.
 2004
 
    
    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-$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.
 Sales, Marketing and Administrative (SM&A)
  17




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Interest
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Interest income
    
    $
    (24.1
    )
    
    $
    (9.0
    )
    
    $
    (58.7
    )
    
    $
    (21.8
    )Interest expense
    
    
    7.6
    
    
    
    6.5
    
    
    
    22.6
    
    
    
    18.1Interest, net
    
    $
    (16.5
    )
    
    $
    (2.5
    )
    
    $
    (36.1
    )
    
    $
    (3.7
    )
  Royalties
  Amortization
  Other
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Other expense
    
    $
    3.3
    
    
    $
    6.6
    
    
    $
    6.7
    
    
    $
    20.0Other income
    
    
    (0.6
    )
    
    
    (1.3
    )
    
    
    (11.2
    )
    
    
    (5.8
    )Other, net
    
    $
    2.7
    
    
    $
    5.3
    
    
    $
    (4.5
    )
    
    $
    14.2
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Impairment Charge
 Accounting for the Impairment or Disposal of Long-Lived Assets
 Income Tax
  Liquidity and Capital Resources
 September 30,
    
    
    December 31,(Dollars in millions)
    
    2005
    
    
    2004Cash and cash equivalents and short-term investments (1)
    
    $
    2,722.4
    
    
    $
    2,214.3Working capital
    
    $
    3,063.3
    
    
    $
    2,679.2Current ratio
    
    
    3.5:1.0
    
    
    
    3.6:1.0Net cash position (2)
    
    $
    2,367.3
    
    
    $
    1,555.1Days receivable outstanding(3)
    
    
    87
    
    
    
    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)
    
    Net cash position is the sum of cash and cash equivalents and short-term investments less
total debt.(3)
    
    Increase primarily relates to lower sales in the third quarter of 2005 due to the product
communications. 19




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##### Table of Contents



Summary of Cash Flows
 Nine Months EndedSeptember 30,(In millions)
    
    2005
    
    
    2004
    
    
    ChangeNet cash provided by (used for):Operating activities
    
    $
    833.4
    
    
    $
    776.8
    
    
    $
    56.6Investing activities
    
    
    (683.6
    )
    
    
    (763.3
    )
    
    
    79.7Financing activities
    
    
    (35.0
    )
    
    
    (32.0
    )
    
    
    (3.0
    )Effect of exchange rate changes on cash
    
    
    (13.9
    )
    
    
    (8.7
    )
    
    
    (5.2
    )Net increase (decrease) in cash and cash equivalents
    
    $
    100.9
    
    
    $
    (27.2
    )
    
    $
    128.1
   
    
    $63.6 million decrease in net purchases of short-term investments. The majority of
short-term investments are interest-bearing investments with maturities between three and
six months.
    
    $24.8 million additional cash used for acquisitions during the first nine months of 2004
compared to the first nine months of 2005
  
    
    $132.4 million increase in net payments on borrowings during the first nine months of
2005 compared to the first nine months of 2004
    
    $3.9 million increase in cash paid for dividends during the first nine months of 2005
compared to the first nine months of 2004
 20




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
    
    $101.9 million additional repurchases of common stock during the first nine months of
2004 compared to the first nine months of 2005
    
    $31.4 million additional cash provided by issuances of common stock primarily for stock
option exercises in the first nine months of 2005
    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.
  21




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Field Actions and Other Communications
   Field Actions
 
    
    INSIGNIA and NEXUS® pacemakers related to two separate failure modes, each occurring at
a low rate. The clinical behaviors associated with these failure modes can result in
serious health complications. The FDA classified both failure modes as Class II recalls.
    
    A small, well-bounded subset of 294 VITALITY ICD systems and CONTAK RENEWAL CRT-D
systems related to a battery weld that may have been performed at settings outside of
typical manufacturing specifications at the supplier on two specific days. To date, no
failures of this type have been reported from implanted devices. The FDA has indicated
they will classify this action as a Class III recall.
    
    Published advisory updates to the June 2005 letters to physicians regarding a subset of
CONTAK RENEWAL and CONTAK RENEWAL 2, 3 and 4 CRT-D systems, as well as a subset of PRIZM® 2
DR ICD systems.
 22




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##### Table of Contents




    
    Guidant announced its voluntary withdrawal of the OMNILINK .035 and .018 Biliary Stent
Systems as a result of increased customer observations regarding stents becoming dislodged
from their delivery systems. Patients who have received the stent are not affected by this
action. The FDA classified this action as a Class II recall.
    
    Guidant received a Product Removal Notice from one of its suppliers requesting the
removal of certain implantable lead introducer sets. 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.
 Other Communications
 
    
    In September, Guidant announced that the FDA had completed its inspection of Guidants
Cardiac Rhythm Management facilities in St. Paul, Minnesota, and had provided Guidant a
Form 483, noting several observations. Guidant has provided the FDA with a thorough
written response to the observations, describing the steps that Guidant has taken and will
be taking to address the FDAs observations. These steps include enhanced product
labeling, and the production of more frequent and more detailed product performance reports
and other product updates. Guidant has not received confirmation regarding the adequacy of
its responses. An example of a product update report is the Pacing Lead Product Update
published in November which provides Guidant experiences with a variety of lead products as
well as background information from published articles about other similar products on the
market.
  Cautionary Factors
  
    
    The pending transaction with J&J.
    
    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 supplemental warranty programs and product
field actions and the pace at which the Company regains implantable defibrillator and
pacemaker market share.
    
    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.
 23




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
    
    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, as
further described in Exhibit 99 to this report.
  
 Item 4. Controls and Procedures
   24




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PART II
 OTHER INFORMATION
 
 Item 1. Legal Proceedings
     25




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Item 6. Exhibits
  31




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SIGNATURES
  GUIDANT CORPORATION(Registrant)Date: November 7, 2005
    
    /s/ Keith E. BrauerVice President, Finance andChief Financial OfficerDate: November 7, 2005
    
    /s/ Peter J. MarianiVice President, CorporateController and ChiefAccounting Officer
 32




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##### Table of Contents



EXHIBIT INDEX
      33