10-K

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

FORM 10-K

    X     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________.

Commission File No. 0-8672
______________________________

ST. JUDE MEDICAL, INC.
(Exact name of Registrant as specified in its charter)

Minnesota	41-1276891
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

One Lillehei Plaza
St. Paul, Minnesota 55117
(Address of principal executive offices, including zip code)

(651) 483-2000
(Registrant’s telephone number, including area code)
______________________________

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

(Title of class)	(Name of exchange on which registered)
Common Stock ($.10 par value)	New York Stock Exchange
Preferred Stock Purchase Rights	New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
______________________________

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months; and (2) has been subject to such filing requirements for the past 90 days.   Yes      X      No            

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   [_]

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).   Yes      X      No            

The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant was approximately $13.1 billion at July 2, 2004 (the last trading day of the Registrant’s most recently completed second fiscal quarter), when the closing sale price of such stock, as reported on the New York Stock Exchange, was $36.96 per share.

The Registrant had 360,900,825 shares of its $0.10 par value Common Stock outstanding as of March 2, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s Annual Report to Shareholders for the fiscal year ended December 31, 2004, are incorporated by reference into Parts I and II. Portions of the Company’s definitive proxy statement for the Company’s 2005 Annual Meeting of Shareholders, are incorporated by reference into Part III.

TABLE OF CONTENTS

ITEM	DESCRIPTION	PAGE
PART I
1.	Business	1
2.	Properties	15
3.	Legal Proceedings	15
4.	Submission of Matters to a Vote of Security Holders	21
4A.	Executive Officers of the Registrant	22
PART II
5.	Market for Registrant’s Common Equity, Related Stockholder Matters
	and Issuer Purchases of Equity Securities	25
6.	Selected Financial Data	25
7.	Management’s Discussion and Analysis of Financial Condition and     Results of Operations	25
7A.	Quantitative and Qualitative Disclosures About Market Risk	25
8.	Financial Statements and Supplementary Data	25
9.	Changes in and Disagreements with Accountants on Accounting     and Financial Disclosure	26
9A.	Controls and Procedures	26
9B.	Other Information	26
PART III
10.	Directors and Executive Officers of the Registrant	26
11.	Executive Compensation	27
12.	Security Ownership of Certain Beneficial Owners and Management     and Related Stockholder Matters	27
13.	Certain Relationships and Related Transactions	27
14.	Principal Accountant Fees and Services	27
PART IV
15.	Exhibits and Financial Statement Schedules	28
	Signatures	34

PART I

Item 1.   BUSINESS

General
St. Jude Medical, Inc., together with its subsidiaries (collectively St. Jude, St. Jude Medical or the Company) develops, manufactures and distributes cardiovascular medical devices for the global cardiac rhythm management (CRM), cardiac surgery (CS) and cardiology and vascular access (C/VA) therapy areas. The Company’s principal products in each of these therapy areas are as follows:

CRM

o bradycardia pacemaker systems (pacemakers),

o tachycardia implantable cardioverter defibrillator systems (ICDs), and

o electrophysiology (EP) catheters

CS

o mechanical and tissue heart valves,

o valve repair products, and

o epicardial ablation systems

C/VA

o vascular closure devices,

o angiography catheters,

o guidewires, and

o hemostasis introducers

The Company markets and sells its products through both a direct sales force and independent distributors. The principal geographic markets for the Company’s products are the United States, Europe and Japan. St. Jude also sells its products in Canada, Latin America, Australia, New Zealand and the Asia-Pacific region.

Acquisitions
On February 15, 2005, the Company announced that it signed a definitive agreement to acquire the business of Velocimed, for $82.5 million less approximately $8.5 million of cash expected to be on hand at Velocimed at closing plus additional contingent payments tied to revenues in excess of minimum future targets, and a milestone payment upon U.S. Food and Drug Administration (FDA) approval of the Premere™ patent foramen ovale closure system. Velocimed is a privately held company which develops and manufactures specialty interventional cardiology devices.

On January 13, 2005, the Company completed its acquisition of Endocardial Solutions, Inc. (ESI) for $280.5 million, which includes closing costs less $8.2 million of cash acquired. ESI was publicly traded on the NASDAQ market under the ticker symbol ECSI. ESI develops, manufactures, and markets the EnSite® System used for the navigation and localization of diagnostic and therapeutic catheters used by physician specialists to diagnose and treat cardiac rhythm disorders.

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On October 7, 2004, the Company completed its acquisition of the remaining capital stock of Irvine Biomedical, Inc. (IBI), a privately held company that develops and sells electrophysiology (EP) catheter products used by physician specialists to diagnose and treat cardiac rhythm disorders. In April 2003, the Company acquired a minority investment of 14% in IBI through the Company’s acquisition of Getz Bros. Co., Ltd. (Getz Japan). The Company paid approximately $50.6 million to acquire the remaining 86% of IBI capital stock it did not already own.

On June 8, 2004, the Company completed its acquisition of the remaining capital stock of Epicor Medical, Inc. (Epicor), a company focused on developing products which use High Intensity Focused Ultrasound (HIFU) to ablate cardiac tissue. In May 2003, the Company made an initial $15.0 million minority investment in Epicor and acquired an option to purchase the remaining ownership of Epicor prior to June 30, 2004 for $185.0 million. Pursuant to the option, the Company paid $185.0 million in cash to acquire the remaining outstanding capital stock of Epicor on June 8, 2004. Net consideration paid for the total acquisition was $198.0 million, which includes closing costs less $2.4 million of cash acquired.

On April 1, 2003, we completed the acquisition of Getz Japan, a distributor of medical technology products in Japan and our largest volume distributor in Japan. We paid 26.9 billion Japanese Yen in cash to acquire 100% of the outstanding common stock of Getz Japan. Net consideration paid was $219.2 million, which includes closing costs less $12.0 million of cash acquired. We also acquired the net assets of Getz Bros. & Co. (Aust.) Pty. Limited and Medtel Pty. Limited (collectively referred to as Getz Australia) related to the distribution of our products in Australia for $6.2 million in cash, including closing costs.

Minority Investment
On January 12, 2005, we made an initial equity investment of $12.5 million pursuant to the Preferred Stock Purchase and Acquisition Option Agreement (the Purchase and Option Agreement) and an Agreement and Plan of Merger (the Merger Agreement), entered into with ProRhythm, Inc., (ProRhythm). The initial investment equated to a 9% ownership interest and is accounted for under the cost method. ProRhythm is developing a high intensity focused ultrasound (HIFU) catheter-based ablation system for the treatment of atrial fibrillation. Under the terms of the Purchase and Option Agreement, we have the option to make, or ProRhythm can require an additional $12.5 million equity investment through January 31, 2006, upon completion of specific clinical and regulatory milestones.

The Purchase and Option Agreement also provides that we have the exclusive right, but not the obligation, through March 31, 2007, to acquire ProRhythm for $125 million in cash consideration payable to the ProRhythm stockholders (other than us) pursuant to the terms and conditions set forth in the Merger Agreement (the Merger), with additional cash consideration payable to the ProRhythm stockholders (other than us) after the consummation of the Merger, if ProRhythm achieves certain performance-related milestones.

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Reportable Segments
The Company has two reportable segments, the Cardiac Rhythm Management/Cardiac Surgery (CRM/CS) segment and the Daig segment, which focus on the development and manufacture of the Company’s products. The primary products produced by each segment are: CRM/CS — pacemaker and implantable cardioverter defibrillator (ICD) systems, mechanical and tissue heart valves and other cardiac surgery products; Daig — electrophysiology catheters, vascular closure devices and other cardiology and vascular access products.

The Company’s reportable segments include end customer revenues from the sale of products they each develop and manufacture. The costs included in each of the reportable segments’ operating results include the direct costs of the products sold to end customers and operating expenses managed by each of the segments. Certain costs of goods sold and operating expenses managed by the Company’s selling and corporate functions are not included in segment operating profit. Consequently, segment operating profit presented below is not representative of the operating profit of the Company’s products in these segments.

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The following table presents certain financial information about the Company’s reportable segments (in thousands):

	CRM/CS		Daig		Other			Total
Fiscal Year Ended December 31, 2004
Net sales	$	1,729,862	$	470,720	$	93,591		$	2,294,173
Operating profit (a)		1,015,621		254,270		(733,933	)		535,958
Total assets (b)(c)		877,448		156,972		2,196,327			3,230,747
Fiscal Year Ended December 31, 2003
Net sales	$	1,499,425	$	366,433	$	66,656		$	1,932,514
Operating profit (a)		873,904		202,007		(619,966	)		455,945
Total assets (b)(c)		639,724		147,270		1,766,488			2,553,482
Fiscal Year Ended December 31, 2002
Net sales	$	1,305,750	$	284,179	$	—		$	1,589,929
Operating profit (a)		713,341		149,592		(492,978	)		369,955
Total assets (b)(c)		723,414		134,610		1,093,355			1,951,379

(a) Other operating profit includes certain costs of goods sold and operating expense managed by the Company’s selling and corporate functions. In fiscal year 2004, the Company recorded $40.9 million of special charges that are included in the Other operating profit. Additionally, the Company recorded $9.1 million of purchased in-process research and development in conjunction with the IBI acquisition that is included in the Daig operating profit.

(b) Other total assets include the assets managed by the Company’s selling and corporate functions, including end customer receivables, inventory, corporate cash and equivalents and deferred income taxes.

(c) The Company does not compile expenditures for long-lived assets by segment and, therefore, has not included this information as it is impracticable to do so.

Net sales by class of similar products were as follows (in thousands):

Net Sales	2004		2003		2002
Cardiac rhythm management	$	1,630,610	$	1,365,212	$	1,147,489
Cardiac surgery		274,979		270,933		250,957
Cardiology and vascular access		388,584		296,369		191,483
	$	2,294,173	$	1,932,514	$	1,589,929

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The following tables present certain geographical information (in thousands):

Net Sales (a)		2004		2003		2002
United States	$	1,264,756	$	1,129,055	$	1,042,766
International
Europe		577,058		465,369		347,936
Japan		267,723		207,431		95,813
Other (b)		184,636		130,659		103,414
Total International		1,029,417		803,459		547,163
	$	2,294,173	$	1,932,514	$	1,589,929
Long-Lived Assets (c)		2004		2003		2002
United States	$	1,042,690	$	744,445	$	674,119
International
Europe		102,172		96,520		88,194
Japan		163,736		152,772		267
Other		74,356		70,020		62,213
Total International		340,264		319,312		150,674
	$	1,382,954	$	1,063,757	$	824,793

(a)   Net sales are attributed to geographies based on location of the customer.
(b)   No one geographic market is greater than 5% of consolidated net sales.
(c)   Long-lived assets exclude deferred income taxes.

St. Jude was incorporated in Minnesota in 1976.

Principal Products
Cardiac Rhythm Management:   The Company’s pacemaker systems treat patients with hearts that beat too slowly, a condition known as bradycardia. Typically implanted pectorally, just below the collarbone, pacemakers monitor the heart’s rate and, when necessary, deliver low-level electrical impulses that stimulate an appropriate heartbeat. The pacemaker is connected to the heart by one to three leads that carry the electrical impulses to the heart and information from the heart back to the pacemaker. An external programmer enables the physician to retrieve diagnostic information from the pacemaker and reprogram the pacemaker in accordance with the patient’s changing needs. Single-chamber pacemakers sense and stimulate only one chamber of the heart (atrium or ventricle), while dual-chamber devices can sense and pace in both the upper atrium and lower ventricle chambers. Bi-ventricle pacemakers can sense and pace in three chambers: (atrium and both ventricle chambers).

St. Jude Medical’s current pacing products include the new Team ADx® pacemakers, a group comprised of the Identity® ADx, Integrity® ADx, and Verity™ ADx families of devices. The Identity® DR and Identity® XL DR devices were approved by the FDA in March 2003, with the rest of the Team ADx™ devices receiving FDA approval in May 2003. The Team ADx devices received European CE Mark in August 2003. The Identity® ADx family models maintain the therapeutic advancements of previous St. Jude Medical pacemakers, including the AF Suppression™ algorithm and the Beat-by-Beat™ AutoCapture™ Pacing System. This family offers new Atrial Tachycardia(AT)/Atrial Fibrillation(AF) arrhythmia diagnostics. The Integrity® ADx devices now offer programmable electrograms. These features are designed to help physicians better manage pacemaker patients suffering from AF—the world’s most common cardiac arrhythmia.

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St. Jude Medical also offers Identity^® pacemakers with enhanced electrograms; and Integrity^® and Integrity^® µ (Micro) pacemaker models, built on the Affinity^® platform with its Beat-by-Beat™ AutoCapture™ Pacing System. Other pacing products include the Affinity^® pacemakers, and the Entity^® family of pacemakers, containing the Omnisense^® activity-based sensor. These pacemaker families contain many advanced features and diagnostic capabilities to optimize cardiac therapy. All are small and physiologic in shape to enhance patient comfort. The Microny^® II SR+ and Microny^® K, are the world’s smallest pacemakers. The Microny^® SR+ and the Regency^® pacemaker families are available outside the United States.

The Identity^® ADx, Integrity^® ADx, Verity™ ADx, Identity^®, Integrity^®, Affinity^®, Entity^® and Microny^® and Regency^® families of pacemakers all offer the unique Beat-by-Beat™ AutoCapture™ Pacing System. The AutoCapture™ Pacing System enables the pacemaker to monitor every paced beat to verify that the heart has been stimulated (known as capture), delivers a back-up pulse in the event of noncapture, continuously measures threshold, and makes adjustments in energy output to match changing patient needs. In addition, the Identity^® ADx, Integrity® ADx, Identity^® and Integrity^® pacemakers include St. Jude Medical’s AF Suppression™ Algorithm, a therapy designed to suppress atrial fibrillation.

St. Jude Medical also markets low-voltage device-based ventricular resynchronization systems (bi-ventricular) designed for the treatment of heart failure and suppression of atrial fibrillation.  Within the United States, the Company’s pacemakers are the only bi-ventricular pacing devices indicated for use in patients with chronic atrial fibrillation who have been treated with AV nodal ablation.  These device systems include the Frontier™ and Frontier II™ (FDA approved in August 2004 and CE Mark approved in September 2004) bi-ventricular stimulation devices, designed to enhance cardiac function by synchronizing the contractions of the heart’s two ventricles, the Aescula® and QuickSite™ LV pacing leads, and the Alliance™, Seal-Away™ CS and Apeel™ Catheter Delivery Systems. 

St. Jude Medical’s current pacing leads include the Tendril® SDX (models 1688 and 1488), and Tendril® DX active-fixation lead families, and the IsoFlex® S and Passive Plus®DX passive-fixation lead families, all available worldwide. All these lead families feature steroid elution, which helps suppress the body’s inflammatory response to a foreign object. The passive fixation Membrane® EX lead family is also currently available outside the United States.

The Company’s ICD systems treat patients with hearts that beat inappropriately fast, a condition known as tachycardia. ICDs monitor the heartbeat and deliver higher energy electrical impulses, or “shocks,” to terminate ventricular tachycardia (VT) and ventricular fibrillation (VF). In VT, the lower chambers of the heart contract at an abnormally rapid rate and typically deliver less blood to the body’s tissues and organs. VT can progress to VF, in which the heart beats so rapidly and erratically that it can no longer pump blood. Like pacemakers, ICDs are typically implanted pectorally, connected to the heart by leads, and programmed non-invasively.

The Company’s full ICD product offering includes the Epic™+ VR/DR and Epic™ VR/DR ICDs, the Atlas®+ VR/DR and Atlas® VR/DR ICDs, Photon® µ (Micro) DR/VR ICD, Photon® DR ICD, and Contour® MD ICD. St. Jude Medical received FDA approval and European CE Mark of the Epic™+ VR/DR ICDs in April 2003, and FDA approval and European CE Mark of the Atlas®+ VR/DR ICDs in October 2003. The Epic™ ICD family devices are very small ICDs that deliver 30 joules of energy. The Atlas® ICD family devices offer high energy and small size without compromising charge times, longevity or feature set flexibility. The Epic™+ DR ICD and the Atlas®+ DR ICD both contain St. Jude Medical’s AF Suppression™ algorithm, which is clinically proven to reduce AF burden.

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The Company’s ICDs are used with the single and dual-shock electrode Riata® transvenous defibrillation leads. The Riatai® integrated bipolar single and dual-shock leads were FDA approved and launched in April 2004 and received European CE mark in May 2004, making the Riata® ICD leads the most complete ICD lead family currently available. The Riata® leads are an advanced family of small-diameter, steroid-eluting, active or passive fixation defibrillation leads.

In June 2004, St. Jude Medical received FDA approval for its line of products designed to treat heart failure. These products included the Atlas+ HF, the highest output cardiac resynchronization therapy device (CRT-D) in the industry at 36 joules delivered and 42 joules stored; the Epic HF, the smallest 30 joule CRT-D available; the Aescula Model 1055K left-ventricular lead; and the QuickSite Model 1056K, the most stable left-ventricular lead in the world with a less than 1% dislodgment rate.

In November 2004, St. Jude Medical received FDA approval for its Atlas+ HF and Epic HF ICDs with the ventricle to ventricle (V-V) timing feature. V-V timing allows the clinician to program the timing between the two ventricles to optimize ventricular function and cardiac output, which may further increase the number of responders to CRT. Full launch activities began in December 2004.

In December 2004, St. Jude Medical launched the QuickSite Bipolar Model 1056T left-ventricular lead in Europe. That same month, a pre-market approval (PMA) application to the FDA was made for the 1056T. St. Jude Medical expects FDA approval and full market launch for the 1056T by mid-year 2005.

The Company’s pacemakers and ICDs interact with an external device referred to as a programmer. A programmer has two general functions. First, a programmer is used at the time of pacemaker and ICD implants to establish the initial therapeutic settings of these devices as determined by the physician. A programmer is also used for follow-up patient visits, which usually occur every three to 12 months, to download stored diagnostic information from the implanted devices and to verify appropriate therapeutic settings.

Programmers are small and mobile and are maintained predominantly by the Company’s sales representatives at their homes and transported to the hospitals in their vehicles when either implants or follow-up visits are scheduled. In these cases, the Company’s sales representatives are on site at the hospitals to assist the physicians, nurses and technicians in operating the programmers at the time of patient implants or follow-up visits. Alternatively, programmers are stored at high-volume cardiac centers as a matter of convenience.

Since the introduction of programmable pacemakers in about 1977, all pacemaker manufacturers, including the Company, have retained title to their programmers which are used by their field sales force or by physicians and nurses or technicians. Although the Company derives no direct revenue from the use of its programmers, new pacemakers and ICDs generally require the use of the Company’s programmer at the time of implant and follow-up.

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St. Jude’s Model 3510 universal series pacemaker and ICD programmer is an easy-to-use programmer that supports the Company’s pacemakers and ICDs. The Model 3510 universal series programmer allows the physician to utilize the diagnostic and therapeutic capabilities of the Company’s pacemakers and ICDs.

Housecall Plus, approved for use in the United States and Canada, is a remote monitoring system for St. Jude Medical ICDs (Atlas, Atlas+, Atlas+ HF, Epic, Epic+, Epic HF) that works with standard analog telephone lines.  It consists of a dedicated receiver (mini desktop computer) and a small answering machine sized transmitter.  Physicians can better manage their increased number of ICD patients by conducting remote follow-up sessions efficiently, obtaining complete diagnostics in real time (similar to an in-office data interrogation), and choosing how they wish to use/operate the system.  Patients enjoy the comfort and convenience of their own home while interacting with a live technician to assist them in transmission.  

Electrophysiology is the study of the heart’s electrical activity, which controls how quickly and effectively the heart beats. EP catheters and introducers are placed into the human heart through blood vessels in order to diagnose and treat cardiac arrhythmias (abnormal heart rhythms).

St. Jude Medical offers a variety of EP products in multiple configurations. For diagnosing arrhythmias, the Company’s Supreme^™ and Response^™ fixed-curve catheters and Livewire^™ steerable diagnostic catheters provide options for physicians dealing with unique anatomical situations. Swartz™ Guiding Introducers and the Telesheath™ Left Atrial Introducer System provide a stable foundation in the left atrium, guiding catheters to precise locations. Finally, the Company’s Livewire TC™ Ablation Catheters apply therapeutic radiofrequency (RF) energy to cardiac tissue, helping to manage or cure many cardiac arrhythmias.

Cardiac Surgery:   Heart valve replacement or repair may be necessary because the natural heart valve has deteriorated due to congenital defects or disease. Heart valves facilitate the one-way flow of blood in the heart and prevent significant backflow of blood into the heart and between the heart’s chambers. St. Jude offers both mechanical and tissue replacement heart valves and valve repair products. The St. Jude Medical^® mechanical heart valve has been implanted in over 1.5 million patients worldwide. The SJM Regent® mechanical heart valve was approved for sale in Europe in December 1999 and received FDA approval for U.S. market release in March 2002. In the United States, the Company markets the Toronto SPV^® stentless tissue valve, which received FDA approval in 1997. Outside the United States, the Company markets the SJM Epic™ stented tissue heart valve, the SJM Biocor® stented tissue valve, the Toronto SPV^® stentless tissue valve and the Toronto Root™ tissue valve. The Toronto Root® tissue valve is a stentless aortic root bioprosthesis used when aortic root disease accompanies valve disease. The Toronto Root® tissue valve is currently in U.S. and Canadian clinical studies. The SJM Epic® stented tissue heart valves are also currently in U.S. clinical studies. St. Jude anticipates FDA approval of the SJM Biocor® tissue valve in the second half of 2005.

The Company also offers a line of heart valve repair products, including the semi-rigid SJM^® Séguin annuloplasty ring and the fully flexible SJM Tailor™ annuloplasty ring. Annuloplasty rings are prosthetic devices used to repair diseased or damaged mitral heart valves.

During the fourth quarter of 2004, the Company initiated a limited market release of its Epicor™ Cardiac Ablation System (Epicor System). This technology was acquired as part of the Company’s Epicor acquisition in June 2004. By applying HIFU to the outside of a beating heart, the Epicor System

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creates cardiac ablation lesions without the need to put the patient on a heart-lung bypass machine, leading to safe, effective, and reproducible therapy. The primary components of the Company’s Epicor System include the Ablation Control System™ (ACS) that generates and controls the ultrasound energy, the UltraCinch™ that wraps around the heart and creates a long linear lesion and the UltraWand™ that allows for additional linear lesions to be customized by the physician.

Cardiology and Vascular Access:   The Company produces specialized disposable cardiovascular devices, including vascular closure devices, angiography catheters, bipolar temporary pacing catheters, percutaneous catheter introducers and diagnostic guidewires.

The Company’s vascular closure devices are used to close femoral artery puncture sites following angioplasty, stenting and diagnostic procedures. St. Jude Medical’s newest vascular closure product, the Angio-Seal™ STS Plus, was launched globally in the third quarter of 2003. The Angio-Seal™ STS Plus model has incorporated improvements to the STS Platform device design to provide customers a device which provides optimal product performance, reliability and ease of use. The design changes include a newly designed arteriotomy locator that provides a smooth transition from locator to insertion sheath, newly positioned blood inlet holes that eliminate the insertion sheath tip from having to exit and re-enter the arteriotomy site and a new lock-in hub design. The design still incorporates many of the design features of the STS Platform, including the self-tightening suture, which eliminates the need for a post-placement spring, allowing for completion of the entire procedure in the catheterization lab. It also integrates the Secure-Cap™, which facilitates proper deployment through audible, tactile and visual confirmations during the closure process.

Angiography catheters, such as St. Jude’s Spyglass™ angiography catheters, are used in coronary angiography procedures to obtain images of coronary arteries to identify structural cardiac diseases. St. Jude’s bipolar temporary pacing catheters are inserted percutaneously for temporary use (ranging from less than one hour to a maximum of one week) with external pacemakers to provide patient stabilization prior to implantation of a permanent pacemaker, following a heart attack, or during surgical procedures. The Company produces and markets several designs of bipolar temporary pacing catheters, including its Pacel™ biopolar pacing catheters, which are available in both torque control and flow-directed models with a broad range of curve choices and electrode spacing options.

Percutaneous catheter introducers are used to create passageways for cardiovascular catheters from outside the human body through the skin into a vein, artery or other location inside the body. St. Jude’s percutaneous catheter introducer products consist primarily of peel-away and non peel-away sheaths, sheaths with and without hemostasis valves, dilators, guidewires, repositioning sleeves and needles. These products are offered in a variety of sizes and packaging configurations. Diagnostic guidewires, such as St. Jude’s GuideRight™ and HydroSteer™ guidewires, are used in conjunction with percutaneous catheter introducers to aid in the introduction of intravascular catheters. St. Jude’s diagnostic guidewires are available in multiple lengths and incorporate a surface finish for lasting lubricity.

Suppliers
St. Jude purchases raw materials and other products from numerous suppliers. The Company’s manufacturing requirements comply with the rules and regulations of the FDA, which mandates extensive testing and validation of materials prior to use in the Company’s products. St. Jude uses sole-sourced inventory items in certain products. St. Jude has been advised periodically by some suppliers that they may terminate sales of products to customers that manufacture implantable

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medical devices in an effort to reduce their potential product liability exposure. Some of these suppliers have modified their positions and have indicated a willingness to temporarily continue to provide product until an alternative vendor or product can be qualified, or to reconsider the supply relationship. While the Company believes that alternative sources of raw materials are available and that there is sufficient lead time in which to qualify other sources, any supply interruption could have a material adverse effect on the Company’s ability to manufacture its products.

Competition
The medical technology industry is highly competitive and is characterized by rapid product development and technological change. Within the medical technology industry, competitors range from small start-up companies to companies with significant resources. The Company’s customers consider many factors when choosing supplier partners, including product reliability, clinical outcomes, product availability, inventory consignment, price and product services provided by the manufacturer. St. Jude believes that it competes on the basis of all these factors. Market share can shift as a result of technological innovation, product recalls and safety alerts and other business factors. As a result, the Company has a need to provide the highest quality products and services. St. Jude expects the competition to continue to increase with the use of tactics such as consigned inventory, bundled product sales and reduced pricing.

St. Jude is one of the three principal manufacturers and suppliers in the global bradycardia pacemaker market, with strong bradycardia market share in all major developed geographies. The Company’s primary competitors in this market are Medtronic, Inc. and Guidant Corporation. St. Jude is also one of three principal manufacturers and suppliers in the highly competitive global ICD market. The Company’s other two competitors, Medtronic, Inc. and Guidant Corporation, account for more than 80% of the worldwide ICD sales. These two competitors are larger than St. Jude and have invested substantial amounts in ICD research and development.

St. Jude is the world’s leading manufacturer and supplier in the mechanical heart valve market, which includes two other principal manufacturers and suppliers (Carbomedics, a Sorin Group company, and ATS Medical, Inc.) and several smaller manufacturers. The Company also competes against two principal tissue heart valve manufacturers (Edwards Lifesciences Corporation and Medtronic, Inc.) and many other smaller manufacturers.

The global cardiology and vascular access therapy area is growing and has numerous competitors. Over 70% of the Company’s sales in this area are from vascular closure devices. St. Jude currently holds the number one market position in the highly competitive vascular closure device market. Other vascular closure device competitors include Abbott Laboratories and Datascope Corp. The Company anticipates other large companies will enter this market in the coming years, which will likely increase competition.

Marketing
The Company’s products are sold in more than 130 countries throughout the world. No distributor organization or single customer accounted for more than 10% of 2004, 2003 or 2002 consolidated net sales.

In the United States, St. Jude sells directly to hospitals primarily through a direct sales force. In Europe, the Company has direct sales organizations selling in 15 countries. In Japan, the Company sells directly to hospitals through a direct sales force due to its acquisition of Getz Japan on April 1, 2003, and also continues to use longstanding independent distributor relationships. Throughout the rest of the world, the Company uses a combination of independent distributors and direct sales forces.

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Group purchasing organizations (GPO) and independent delivery networks (IDN) and large single accounts such as the Veterans Administration in the United States continue to consolidate purchasing decisions for some of the Company’s hospital customers. The Company has contracts in place with many of these organizations. In some circumstances, the inability of the Company to obtain a contract with a GPO or IDN could adversely affect the Company’s efforts to sell its products to that organization’s hospitals.

Payment terms worldwide are consistent with local country practices. In some developed markets and in many emerging markets, payment terms are typically longer than those in the United States. Orders are shipped as they are received and, therefore, no material backlog exists.

Seasonality
The Company’s quarterly net sales are influenced by many factors, including new product introductions, acquisitions, regulatory approvals, patient holiday schedules and other factors. Net sales in the third quarter are typically lower than other quarters of the year as a result of patient tendencies to defer, if possible, cardiac procedures during the summer months and from the seasonality of the U.S. and European markets, where summer vacation schedules normally result in fewer procedures. Large orders may disrupt the net sales patterns.

Research and Development
The Company is focused on the development of new products and on improvements to existing products. Research and development expense reflects the cost of these activities, as well as the costs to obtain regulatory approvals of certain new products and processes and to maintain the highest quality standards with respect to existing products. The Company’s research and development expenses were $281.9 million (12.3% of net sales) in 2004, $241.1 million (12.5% of net sales) in 2003 and $200.3 million (12.6% of net sales) in 2002. Research and development expense for 2004 excludes $9.1 million of purchased in-process research and development charges relating to the acquisition of Irvine Biomedical, Inc. in October 2004.

Government Regulation
The medical devices manufactured and marketed by the Company are subject to regulation by the FDA and foreign governmental authorities or their designated representatives. Under the U.S. Federal Food, Drug and Cosmetic Act (FFDCA) and associated regulations, manufacturers of medical devices must comply with certain policies and procedures that regulate the composition, labeling, testing, manufacturing, packaging and distribution of medical devices. Medical devices are subject to different levels of government approval requirements. The most comprehensive level requires the completion of an FDA-approved clinical evaluation program and submission and approval of a pre-market approval (PMA) application before a device may be commercially marketed. The Company’s mechanical and tissue heart valves, ICDs, certain pacemakers and leads, and certain electrophysiology catheter applications are subject to this level of approval or as a supplement to a PMA. Other pacemakers and leads, annuloplasty ring products and other electrophysiology and cardiology products are currently marketed under the less rigorous 510(k) pre-market notification procedure of the FFDCA.

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In addition, the FDA may require testing and surveillance programs to monitor the effects of approved products that have been commercialized, and it has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs. The FDA also conducts inspections prior to approval of a PMA to determine compliance with the quality system regulations that cover manufacturing and design. At any time after approval of a PMA or granting of a 510(k), the FDA may conduct periodic inspections to determine compliance with both quality system regulations and/or current medical device reporting regulations. If the FDA were to conclude that St. Jude is not in compliance with applicable laws or regulations, it could institute proceedings to detain or seize products, issue a recall, impose operating restrictions, assess civil penalties and recommend criminal prosecution to the U.S. Department of Justice. Furthermore, the FDA could proceed to ban a device, or request recall, repair, replacement or refund of the cost of any device previously manufactured or distributed.

The FDA also regulates recordkeeping for medical devices and reviews hospital and manufacturers’ required reports of adverse experiences to identify potential problems with FDA-authorized devices. Regulatory actions may be taken by the FDA due to adverse experience reports.

Diagnostic-related groups (DRG) and Ambulatory Patient Classifications (APC) reimbursement schedules regulate the amount that the U.S. government, through the Centers for Medicare and Medicaid Services (CMS), will reimburse hospitals for care of persons covered by Medicare. In response to rising Medicare and Medicaid costs, several legislative proposals are under consideration that would restrict future funding increases for these programs. Changes in current DRG and APC reimbursement levels could have an adverse effect on the Company’s domestic pricing flexibility.

Federal and state laws protect the confidentiality of certain patient health information, including patient records, and restrict the use and disclosure of such information. In particular, in December 2000, the U.S. Department of Health and Human Services published patient privacy rules under the Health Insurance Portability and Accountability Act of 1996 (HIPAA privacy rule). This regulation was finalized in October 2002. The HIPAA privacy rule governs the use and disclosure of protected health information by “covered entities,” which are healthcare providers that submit electronic claims, health plans and healthcare clearinghouses. Other than to the extent the Company self-insures part of its employee health benefits plans, the HIPAA privacy rule affects the Company only indirectly. The Company’s policy is to maintain patients’ privacy and work with customers and business partners in their HIPAA compliance efforts.

St. Jude’s international business is subject to medical device laws in individual countries outside the United States. These laws range from extensive device approval requirements in some countries for all or some of the Company’s products, to requests for data or certifications in other countries. Generally, international regulatory requirements are increasing. In the European Union, the regulatory systems have been consolidated, and approval to market in all European Union countries (represented by the CE Mark) can be obtained through one agency. In addition, initiatives to limit the growth of healthcare costs, including price regulation, are also underway in other countries in which the Company does business. Implementation of healthcare reforms in significant markets such as Japan, Germany and other countries may limit the price of, or the level at which reimbursement is provided for the Company’s products.

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The United States Medicare-Medicaid Anti-kickback law generally prohibits payments to physicians or other purchasers of medical products under these government programs in exchange for the purchase of a product. Many foreign countries have similar laws. The Company subscribes to the AdvaMed Code (AdvaMed is a U.S. medical device industry trade association) which limits certain marketing and other practices in the Company’s relationship with product purchasers. The Company also adheres to many similar codes in countries outside the United States.

Some medical device regulatory agencies have begun considering whether to continue to permit the sale of medical devices that incorporate any bovine material because of concerns about Bovine Spongiform Encephalopathy (BSE), sometimes referred to as “mad cow disease.” It is believed that in some instances this disease has been transmitted to humans through the consumption of beef. There have been no reported cases of transmission of BSE through medical products. Some of the Company’s products (Angio-Seal™ and vascular grafts) use bovine collagen, which is derived from the bovine component scientifically rated as least likely to transmit the disease. Some of the Company’s tissue heart valves incorporate bovine pericardial material. The Company is cooperating with the regulatory agencies considering these issues.

Patents and Licenses
The Company’s policy is to protect its intellectual property rights related to its medical devices. Where appropriate, St. Jude applies for United States and foreign patents. In those instances where the Company has acquired technology from third parties, it has sought to obtain rights of ownership to the technology through the acquisition of underlying patents or licenses.

While the Company believes design, development, regulatory and marketing aspects of the medical device business represent the principal barriers to entry, it also recognizes that the Company’s patents and license rights may make it more difficult for competitors to market products similar to those produced by the Company. St. Jude can give no assurance that any of its patent rights, whether issued, subject to license, or in process, will not be circumvented or invalidated. Furthermore, there are numerous existing and pending patents on medical products and biomaterials. There can be no assurance that the Company’s existing or planned products do not or will not infringe such rights or that others will not claim such infringement. No assurance can be given that the Company will be able to prevent competitors from challenging the Company’s patents or entering markets currently served by the Company.

Insurance
The Company operates in an industry that is susceptible to significant product liability claims. These claims may be brought by individuals seeking relief for themselves or, increasingly, by groups seeking to represent a class. In addition, product liability claims may be asserted against the Company in the future, relative to events that are not known to management at the present time. As a result of the catastrophic events of September 11, 2001, enormous losses were sustained by property and casualty insurers which substantially reduced their capacity and/or willingness to provide future insurance coverage. Consequently, since 2001 the Company’s product liability insurance premiums have increased over 450%, and the total coverage has been reduced. The Company’s current product liability policy (for the period April 1, 2004 through April 1, 2005) provides $425 million of insurance coverage, with a $75 million deductible per occurrence. In light of the significant self-insured retention, St. Jude’s product liability insurance coverage is designed to help protect the Company against a catastrophic claim.

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California earthquake insurance is currently difficult to procure, extremely costly, and restrictive in terms of coverage. The Company’s earthquake and related business interruption insurance for its CRM operations located in Sylmar and Sunnyvale, California, provides $30 million of insurance coverage, with a deductible equal to 5% of the total value of the facility and contents involved in the claim. Several factors preclude the Company from determining the effect an earthquake may have on its business. These factors include, but are not limited to, the severity and location of the earthquake, the extent of any damage to the Company’s manufacturing facilities, the impact of an earthquake on the Company’s California workforce, and the infrastructure of the surrounding communities and the extent, if any, of damage to the Company’s inventory and work in process. While the Company’s exposure to significant losses from a California earthquake would be partially mitigated by its ability to manufacture some of its CRM products at its Swedish manufacturing facility, the losses could have a material adverse effect on the Company for a period of time that cannot be predicted. The Company has expanded the manufacturing capabilities at its Swedish facility and has constructed a pacemaker component manufacturing facility in Arizona. In addition, the Company has moved significant finished goods inventory to locations outside California. These facilities and inventory transfers would further mitigate the adverse impact of a California earthquake.

Employees
As of December 31, 2004, the Company had approximately 7,900 full-time employees. St. Jude’s employees are not represented by any labor organizations, with the exception of the Company’s employees in Sweden and certain employees in France. St. Jude has never experienced a work stoppage as a result of labor disputes. The Company believes that its relationship with its employees is generally good.

International Operations
The Company’s international business is subject to such special risks as currency exchange controls and fluctuations, the imposition or increase of import or export duties and surtaxes, and international credit, financial and political problems. Currency exchange rate fluctuations relative to the U.S. dollar can affect reported consolidated revenues and net earnings. The Company may hedge a portion of this exposure from time to time to reduce the effect of foreign currency rate fluctuations on net earnings. See the “Market Risk” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” incorporated herein by reference from the Financial Report included in the Company’s 2004 Annual Report to Shareholders. Operations outside the United States also present complex tax and cash management issues that necessitate sophisticated analysis and diligent monitoring to meet the Company’s financial objectives.

Availability of SEC Reports
The Company makes available free of charge its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practical after they are filed or furnished to the Securities and Exchange Commission. Such reports are available on the Company’s Web site (http://www.sjm.com) under the Investor Relations section or can be obtained by contacting the Company’s Investor Relations group at 1.800.552.7664 or at St. Jude Medical, Inc., One Lillehei Plaza, St. Paul, Minnesota 55117. Information included on the Company’s Web site is not deemed to be incorporated into this Annual Report on Form 10-K.

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Item 2.   PROPERTIES

St. Jude’s principal executive offices are located in St. Paul, Minnesota. These facilities are owned by the Company. Manufacturing facilities are located in California, Minnesota, Arizona, South Carolina, Canada, Brazil, Puerto Rico and Sweden. The Company owns approximately 52%, or 338,000 square feet, of its total manufacturing space. All of the owned manufacturing space is in the CRM/CS segment. The remaining manufacturing space is leased.

The Company also maintains sales and administrative offices in the United States at 18 locations in 10 states and outside the United States at 68 locations in 25 countries. With the exception of two locations, all of these locations are leased.

In management’s opinion, all buildings, machinery and equipment are in good condition, suitable for their purposes and are maintained on a basis consistent with sound operations. The Company believes that it has sufficient space for its current operations and for foreseeable expansion in the next few years.

Item 3.   LEGAL PROCEEDINGS

Silzone® Litigation:   In July 1997, the Company began marketing mechanical heart valves which incorporated a Silzone® coating. The Company later began marketing heart valve repair products incorporating a Silzone® coating. The Silzone® coating was intended to reduce the risk of endocarditis, a bacterial infection affecting heart tissue, which is associated with replacement heart valves.

In January 2000, the Company voluntarily recalled all field inventories of Silzone® devices after receiving information from a clinical study that patients with a Silzone® valve had a small, but statistically significant, increased incidence of explant due to paravalvular leak compared to patients in that clinical study with non-Silzone® heart valves.

Subsequent to the Company’s voluntary recall, the Company has been sued in various jurisdictions and now has cases pending in the United States, Canada, the United Kingdom, Ireland and France by some patients who received a Silzone® device. Some of these claims allege bodily injuries as a result of an explant or other complications, which they attribute to the Silzone® devices. Others, who have not had their device explanted, seek compensation for past and future costs of special monitoring they allege they need over and above the medical monitoring all replacement heart valve patients receive. Some of the lawsuits seeking the cost of monitoring have been initiated by patients who are asymptomatic and who have no apparent clinical injury to date. Some of the cases involving Silzone products have been settled, some have been dismissed and others are on going. Some of these cases, both in the United States and Canada, are seeking class-action status. A summary of the number of Silzone® cases by jurisdiction as of February 25, 2005 follows:

U.S. Cases

o Multi-District Litigation (MDL) and federal district court in Minnesota:

o Eight original class-action complaints have been consolidated into one case seeking certification of two separate classes. The first complaint seeking class-action status was served upon the Company on April 27, 2000 and all eight original complaints seeking

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class-action status were consolidated into one case on October 22, 2001. One proposed class in the consolidated complaint seeks injunctive relief in the form of medical monitoring. A second class in the consolidated complaint seeks an unspecified amount of monetary damages. A third class in the consolidated complaint seeks an unspecified amount of monetary damages under Minnesota’s Consumer Protection Statutes.

o Eighteen individual cases are pending as of February 25, 2005 in the MDL. The first individual complaint that was transferred to the MDL court was served upon the Company on November 28, 2000, and the most recent individual complaint that was transferred to the MDL court was served upon the Company on September 15, 2004. The complaints in these cases each request damages ranging from $10 thousand to $120.5 million and, in some cases, seek an unspecified amount.

o Twenty-six individual state court suits involving 34 patients are pending as of February 25, 2005. The cases are venued in the following states: Florida, Minnesota, Missouri, Texas and Wyoming. The first individual state court complaint was served upon the Company on March 1, 2000 and the most recent individual state court complaint was served upon the Company on January 13, 2005. The complaints in these cases each request damages ranging from $50 thousand to $100 thousand and, in some cases, seek an unspecified amount.

o A lawsuit seeking a class action for all persons residing in the European Economic Union member jurisdictions who have had a heart valve replacement and/or repair procedure using a product with Silzone® coating was filed in Minnesota state court and served upon the Company on February 11, 2004. The complaint seeks damages in an unspecified amount for the class, and in excess of $50 thousand for the representative plaintiff individually. The complaint also seeks injunctive relief in the form of medical monitoring.  The Company has filed motions in the state court seeking to have the claims dismissed, and these motions are presently under consideration by the judge handling this and other Silzone cases in Ramsey County, Minnesota.

o Two cases involving 70 patients were dismissed in Texas by the trial court on April 25, 2002 and February 14, 2003, respectively; the plaintiffs in these two cases have appealed. The first of these cases was served upon the Company on October 29, 2001, and the second case was served upon the Company on November 8, 2002. The complaints in these cases request damages in an unspecified amount.

Non-U.S. Cases

Canada:

o Four class-action cases involving five named plaintiffs and one individual case involving two named plaintiffs are pending as of February 25, 2005 (cases are venued in the provinces of British Columbia, Ontario and Quebec); in Ontario and Quebec the courts have certified class actions. The first complaint in Canada was served upon the Company on August 18, 2000, and the most recent Canadian complaint was served upon the Company on March 14, 2004. The complaints in these cases each request damages ranging from 1.5 million to 500 million Canadian dollars.

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UK:

o One case involving one plaintiff is pending as of February 25, 2005 and the Particulars of Claim in this case was served on December 21, 2004. The plantiff in this case requests damages of approximately $365 thousand.

Ireland:

o One case involving one plaintiff is pending as of February 25, 2005. The complaint in this case was served on December 30, 2004, and seeks an unspecified amount in damages.

France:

o One case involving one plaintiff is pending as of February 25, 2005. This case was initiated by way of an Injunctive Summons to Appear that was served on November 3, 2004. The plaintiff in this case is requesting damages in excess of 3 million Euros.

The Silzone® litigation reserves established by the Company are not based on the amount of the claims because, based on the Company’s experience in these types of cases, the amount ultimately paid, if any, often does not bear any relationship to the amount claimed by the plaintiffs and is often significantly less than the amount claimed.

In 2001, the U.S. Judicial Panel on Multi-District Litigation ruled that certain lawsuits filed in U.S. federal district court involving products with Silzone® coating should be part of Multi-District Litigation proceedings under the supervision of U.S. District Court Judge John Tunheim in Minnesota. As a result, actions in federal court involving products with Silzone® coating have been and will likely continue to be transferred to Judge Tunheim for coordinated or consolidated pretrial proceedings.

Judge Tunheim ruled against the Company on the issue of preemption and found that the plaintiffs’ causes of action were not preempted by the U.S. Food and Drug Act. The Company sought to appeal this ruling, but the Appellate Court determined that it would not review the ruling at this point in the proceedings.

Certain plaintiffs have requested Judge Tunheim to allow some cases to proceed as class actions. In response these requests, Judge Tunheim has issued several rulings concerning class action certification. Although more detail is set forth in the orders issued by the court, the result of these rulings is that Judge Tunheim declined to grant class-action status to personal injury claims, but granted class-action status for claimants from seventeen states to proceed with medical monitoring claims, so long as they do not have a clinical injury. The court also indicated that a class action could proceed under Minnesota’s Consumer Protection statutes.

The Company has sought appeal of Judge Tunheim’s class certification decisions, and in a September 2, 2004, order, the appellate court indicated it would accept the appeal of Judge Tunheim’s certification orders. The issues have been briefed and the parties are awaiting a date for oral argument concerning this appeal. It is not expected that the appellate court will complete its review and issue a decision concerning the appeal of Judge Tunheim’s rulings regarding class certification until sometime in 2006.

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In the meantime, the cases involving Silzone® products not seeking class-action status which are consolidated before Judge Tunheim are proceeding in accordance with the scheduling orders he has rendered. There are also other actions involving products with Silzone® coating in various state courts in the United States that may or may not be coordinated with the matters presently before Judge Tunheim.

On January 16, 2004, the court in Ontario, Canada, issued further rulings certifying a class of Silzone® patients in a class-action suit against the Company. The Company sought leave to appeal the Court’s decision in this regard, but in a decision issued on January 28, 2005, the request to appeal was rejected. As a result, the class action in Ontario will proceed pursuant to further scheduling orders that will be issued by the Ontario court. The Court in the Province of Quebec has also certified a class action in that jurisdiction.

The Company is not aware of any unasserted claims related to Silzone® devices. Company management believes that the final resolution of the Silzone® cases will take several years. While management reviews the claims that have been asserted from time to time and periodically engages in discussions about the resolution of claims with claimants’ representatives, management cannot reasonably estimate at this time the time frame in which any potential settlements or judgments would be paid out. The Company accrues for contingent losses when it is probable that a loss has been incurred and the amount can be reasonably estimated. The Company has recorded an accrual for probable legal costs that it will incur to defend the various cases involving Silzone® devices, and the Company has recorded a receivable from its product liability insurance carriers for amounts expected to be recovered (see Note 5 to the Consolidated Financial Statements). The Company has not accrued for any amounts associated with probable settlements or judgments because management cannot reasonably estimate such amounts. However, management believes that no significant claims will ultimately be allowed to proceed as class actions in the United States and, therefore, that all settlements and judgments will be covered under the Company’s remaining product liability insurance coverage (approximately $151.0 million as of February 25, 2005), subject to the insurance companies’ performance under the policies (see Note 5 to the Consolidated Financial Statements for further discussion on the Company’s insurance carriers). As such, management believes that any costs (the material components of which are settlements, judgments, legal fees and other related defense costs) not covered by its product liability insurance policies or existing reserves will not have a material adverse effect on the Company’s statement of financial position or liquidity, although such costs may be material to the Company’s consolidated results of operations of a future period.

Guidant 1996 Patent Litigation:   In November 1996, Guidant Corporation (Guidant) sued St. Jude Medical in federal district court for the Southern District of Indiana alleging that the Company did not have a license to certain patents controlled by Guidant covering ICD products and alleging that the Company was infringing those patents. St. Jude Medical’s contention was that it had obtained a license from Guidant to the patents in issue when it acquired certain assets of Telectronics in November 1996. In July 2000, an arbitrator rejected St. Jude Medical’s position, and in May 2001, a federal district court judge also ruled that the Guidant patent license with Telectronics had not transferred to St. Jude Medical.

Guidant’s suit originally alleged infringement of four patents by St. Jude Medical. Guidant later dismissed its claim on one patent and a court ruled that a second patent was invalid. This determination of invalidity was appealed by Guidant, and the Court of Appeals upheld the lower court’s invalidity determination. In a jury trial involving the two remaining patents (the ‘288 and ‘472 patents), the jury found that these patents were valid and that St. Jude Medical did not infringe the ‘288 patent. The jury also found that the Company did infringe the ‘472 patent, though such

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infringement was not willful. The jury awarded damages of $140.0 million to Guidant. In post-trial rulings, however, the judge overseeing the jury trial ruled that the ‘472 patent was invalid and also was not infringed by St. Jude Medical, thereby eliminating the $140.0 million verdict against the Company. The trial court also made other rulings as part of the post-trial order, including a ruling that the ‘288 patent was invalid on several grounds.

In August 2002, Guidant commenced an appeal of certain of the trial judge’s post-trial decisions pertaining to the ‘288 patent. Guidant did not appeal the trial court’s finding of invalidity and non-infringement of the ‘472 patent. As part of its appeal, Guidant requested that the monetary damages awarded by the jury pertaining to the ‘472 patent ($140 million) be transferred to the ‘288 patent infringement claim. The Company believes that such a request is not supported by the facts or law.

On August 31, 2004, a three judge panel of the Court of Appeals for the Federal Circuit (CAFC) issued a ruling on Guidant’s appeal of the trial court decision concerning the ‘288 patent. The CAFC reversed the decision of the trial court judge that the ‘288 patent was invalid. The court also ruled that the trial judge’s claim construction of the ‘288 patent was incorrect and, therefore, the jury’s verdict of non-infringement was set aside. Guidant’s request to transfer the $140 million to the ‘288 patent was rejected. The court also ruled on other issues that were raised by the parties. The Company’s request for a re-hearing of the matter by the panel and the entire CAFC court was rejected. The case was returned to the District Court in Indiana in November 2004, but the Company plans to request the U.S. Supreme Court to review certain aspects of the CAFC decision. It is not expected that the U.S. Supreme Court would rule on this request until sometime during the second quarter of 2005.

The ‘288 patent expired in December 2003. Accordingly, the final outcome of the appeal process cannot involve an injunction precluding the Company from selling ICD products in the future. Sales of the Company’s ICD products which Guidant asserts infringed the ‘288 patent were approximately 18% and 16% of the Company’s consolidated net sales during the fiscal years ended December 31, 2003 and 2002, respectively.

The Company has not accrued any amounts for legal settlements or judgments related to the Guidant 1996 patent litigation. Although the Company believes that the assertions and claims in these matters are without merit, potential losses arising from any legal settlements or judgments are possible, but not estimable, at this time. The range of such losses could be material to the operations, financial position and liquidity of the Company.

Guidant 2004 Patent Litigation:   In February 2004, Guidant sued the Company in federal district court in Delaware alleging that the Company’s Epic™ HF ICD, Atlas®+ HF ICD and Frontier™ devices infringe U.S Patent No. RE 38,119E (the ‘119 patent). Guidant also sued the Company in February 2004 alleging that the Company’s QuickSite® 1056K pacing lead infringes U.S. Patent No. 5,755,766 (the ‘766 patent). This second suit was initiated in federal district court in Minnesota. Guidant is seeking an injunction against the manufacture and sale of these devices by the Company in the United States and compensation for what it claims are infringing sales of these products up through the effective date of the injunction. At the end of the second quarter 2004, the Company received FDA approval to market these devices in the United States. The Company has not submitted a substantive response to Guidant’s claims at this time. Another competitor of the Company, Medtronic, Inc., which has a license to the ‘119 patent, is contending in a separate lawsuit with Guidant that the ‘119 patent is invalid.

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The Company has not accrued any amounts for legal settlements or judgments related to the Guidant 2004 patent litigation. Potential losses arising from this any legal settlements or judgments are possible, but not estimable, at this time. The range of such losses could be material to the operations, financial position and liquidity of the Company.

Symmetry™ Litigation:   As of February 25, 2005, there are sixteen lawsuits in the United States pending against the Company which allege that its Symmetry™ Bypass System Aortic Connector (Symmetry™ device) caused bodily injury or might cause bodily injury. In addition, a number of persons have made a claim against the Company involving the Symmetry™ device without filing a lawsuit. The first lawsuit involving the Symmetry™ device as filed against the Company on August 5, 2003, in federal district court for the Western District of Tennessee, and the most recently initiated lawsuit was served upon the Company on September 24, 2004. The sixteen cases are venued in state court in Minnesota, federal court for the District of Minnesota, federal court in the Western District of Tennessee, federal court in the Eastern District of Arkansas and federal court for the Eastern District of Pennsylvania. Each of the complaints in these cases request damages ranging from $50 thousand to $100 thousand and, in some cases, seek an unspecified amount. Four of the sixteen cases are seeking class-action status. One of the cases seeking class-action status has been dismissed, but the dismissal is being appealed by the plaintiff. In a second case seeking class action status, a Magistrate Judge has recommended that the matter not proceed as a class action, and the parties are presently awaiting the court to review the Magistrate’s decision. A third case seeking class action status has been indefinitely stayed by the court, and is presently inactive. It appears that the plaintiffs in those cases seeking class-action status seek or will seek damages for injuries and monitoring costs.

The Company’s Symmetry™ device was cleared through a 510(K) submission to the FDA, and therefore, is not eligible for the defense under the doctrine of federal preemption that such suits are prohibited. Given the Company’s self-insured retention levels under its product liability insurance policies, the Company expects that it will be solely responsible for these lawsuits, including any costs of defense, settlements and judgments. Company management believes that class-action status is not appropriate for the claims asserted based on the applicable facts and law.

During the third quarter of 2004, the number of lawsuits involving the Symmetry™ device increased, and the number of persons asserting claims outside of litigation increased as well. With this background, the Company determined that it was probable that legal costs to defend the cases will be incurred and the amount of such fees was reasonably estimable. As a result, the Company recorded a pretax charge of $21.0 million in the third quarter of 2004 to reflect this liability.

No lawsuits involving the product were initiated against the Company during the fourth quarter of 2004, and the number of claims asserted outside of the litigation has been minimal since the third quarter of 2004.

Potential losses arising from settlements or judgments are possible, but not estimable, at this time. The range of such losses could be material to the operations, financial position and liquidity of the Company. The Company has not accrued for any amounts associated with probable settlements or judgments because management cannot reasonably estimate such amounts. However, management believes that no significant claims will ultimately be allowed to proceed as class actions in the United States.

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Management currently believes that any costs (the material components of which are settlements, judgments, legal fees and other related defense costs) not covered by its reserves will not have a material adverse effect on the Company’s statement of financial position or liquidity, although such costs may be material to the Company’s consolidated results of operations of a future period.

Other Litigation Matters:   The Company is involved in various other product liability lawsuits, claims and proceedings that arise in the ordinary course of business.

Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the fourth quarter of 2004.

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Item 4A.   EXECUTIVE OFFICERS OF THE REGISTRANT

Name	Age	Position*
Daniel J. Starks	50	Chairman (2004), President (2001) and Chief Executive Officer (2004)
John C. Heinmiller	50	Executive Vice President and Chief Financial Officer (2004)
Paul R. Buckman	49	President, Cardiology (2004)
Michael J. Coyle	42	President, Cardiac Rhythm Management (2001)
George J. Fazio	45	President, Cardiac Surgery (2004)
Joseph H. McCullough	55	President, International (2001)
Michael T. Rousseau	49	President, US Sales (2001)
Jane J. Song	42	President, Atrial Fibrillation (2004)
David C. Fetah	44	Vice President, Human Resources (2005)
Peter L. Gove	57	Vice President, Corporate Relations (1994)
Jeri L. Lose	47	Vice President, Information Technology (1999) and Chief Information Officer (2000)
Thomas R. Northenscold	47	Vice President, Administration (2003)
Kevin T. O’Malley	53	Vice President, General Counsel and Secretary (1994)

        *Dates in parentheses indicate year during which each named executive officer began serving in such capacity.

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Executive officers serve at the pleasure of the Board of Directors.

Mr. Starks joined St. Jude in 1996 as a result of the Company’s acquisition of Daig Corporation, where he continued as Chief Executive Officer. In 1997, he was also appointed Chief Executive Officer of Cardiac Rhythm Management, and in April 1998, also became President of Cardiac Rhythm Management. He was appointed President and Chief Operating Officer of St. Jude in February 2001 and Chairman, President and Chief Executive Officer in May, 2004. Mr. Starks has also served on the Company’s Board of Directors since 1996. Mr. Starks serves on the Board of Directors of Urologix, Inc.

Mr. Heinmiller joined the Company in May 1996 as a part of the Company’s acquisition of Daig Corporation. Prior to joining the Company, Mr. Heinmiller was Vice President of Finance and Administration for Daig Corporation since 1995. In May 1998, he was named the Company’s Vice President of Corporate Business Development. In September 1998, he was appointed Vice President, Finance and Chief Financial Officer and in May 2004 was promoted to Executive Vice President. Mr. Heinmiller is also a former audit partner in the Minneapolis office of Grant Thornton LLP, a national public accounting firm.

Mr. Buckman joined the Company in 2004 as President of St. Jude’s Cardiology business. Prior to joining St. Jude Medical, he was Founder, Chairman, and CEO of ev3 LLC, a medical device company focused on endovascular therapies from 2001 to 2004. Mr. Buckman has worked in the medical device industry for over 30 years. Mr. Buckman worked for Scimed Life Systems, Inc. / Boston Scientific Corporation from 1991 to 2001, where he held several executive positions before becoming President of the Scimed Division in January 2000.

Mr. Coyle joined St. Jude in 1994 as Director, Business Development. He served as President and Chief Operating Officer of Daig from 1997 to 2001 and was appointed President, Cardiac Rhythm Management in February 2001. Prior to joining St. Jude, he spent nine years with Eli Lilly & Company, a pharmaceutical products company, in a variety of technical and business management roles in both its Pharmaceutical and Medical Device Divisions.

Mr. Fazio joined the Company in 1992 and served as the General Manager of St. Jude Medical Canada, Inc., based in Mississauga, Ontario, Canada, until being named President, Health Care Services May 1999. In July 2001, he was appointed President of SJM Europe and in August 2004 was named President, Cardiac Surgery. Prior to St. Jude Medical, Mr. Fazio spent eight years with the Davis & Geck Division of American Home Products, promoting their surgical products. He served in the roles of Marketing – Product Manager, Sales Management, Sales Training, and Sales Representative.

Mr. McCullough joined St. Jude in 1994 as a CRM Regional Sales Director. He became Director of CRM Marketing in 1996 and was named Vice President of CRM Marketing in January 1997. In December 1997, Mr. McCullough was appointed CRM Business Unit Director. He became Vice President, CRM Europe and Managing Director of the Company’s manufacturing operations in Veddesta, Sweden, in January 1999, and Senior Vice President, CRM Europe in August 1999. He was named President, International in July 2001. Prior to joining the Company, Mr. McCullough worked for several medical technology companies for more than 20 years.

Mr. Rousseau joined the Company in 1999 as Senior Vice President, CRM Global Marketing. In August 1999, CRM Marketing and Sales were combined under his leadership. In January 2001, he was named President, U.S. CRM Sales, and in July 2001 he was named President, US Sales. Prior to joining St. Jude, Mr. Rousseau worked for Sulzer Intermedics, Inc., a medical device company, for 11 years. At Sulzer, he served as Vice President, Tachycardia, in 1997 and was appointed Vice President, U.S. Sales and Marketing in 1998.

23

Ms. Song joined St. Jude in 1998 as Senior Vice President, CRM Operations. In May 2002 she was appointed President, Cardiac Surgery and in August 2004 was appointed President, Atrial Fibrillation. Prior to joining the Company, Ms. Song was employed by Perkin Elmer (formerly EG&G, Inc.), a global technology company, from 1992 to 1998 where she held executive positions in global operations and business development. Prior to her tenure at Perkin Elmer, she was employed by Coopers & Lybrand LLP, an international public accounting firm, and Texas Instruments Inc., a global semiconductor company.

Mr. Fetah joined the Company in February 2005 as Vice President, Human Resouces. Prior to joining the Company, Mr. Fetah was the Vice President, Human Resources at Western Digital Corporation from 2000 to 2005. Prior to joining the Western Digital Corporation, he served as Executive Director, Human Resources, for PeopleSoft, Inc from 1996 to 2000 and he was a Manager, Human Resources, for Fluor Corporation where he served from 1995 to 2000.

Mr. Gove joined the Company in 1994 as Vice President, Corporate Relations. Prior to joining the Company, Mr. Gove was Vice President, Marketing and Communications of Control Data Systems, Inc., a computer services company, from 1991 to 1994. From 1981 to 1990, Mr. Gove held various executive positions with Control Data Corporation. From 1970 to 1981, Mr. Gove held various management positions with the State of Minnesota and the U.S. Government. Mr. Gove serves on the Board of Directors of QRS Diagnostic, LLC and Information for Public Affairs, Inc.

Ms. Lose joined St. Jude in 1999 as Vice President, Information Technology, and was also appointed Chief Information Officer in 2000. Prior to joining the Company, Ms. Lose was Vice President of Systems Development at U.S. Bancorp, a multi-state financial services holding company, from 1993 to 1999. From 1990 to 1993, Ms. Lose was a Senior Manager in Information Technology Consulting with Ernst & Young LLP, an international public accounting firm. From 1979 to 1990, she held several positions in Accounting and then Information Technology with General Mills, Inc, a consumer food products company. Ms. Lose serves on the Board of Directors of Apria Healthcare, Inc.

Mr. Northenscold joined St. Jude in 2001 as Vice President, Finance and Administration of Daig. In March 2003, he was appointed Vice President, Administration. Prior to joining the Company, Mr. Northenscold worked at PPT Vision, Inc., an industrial technology and automation company, where he served as Chief Financial Officer from February 1995 to January 1999, and Division General Manager from January 1999 to September 2001. Prior to 1995, Mr. Northenscold worked for Cardiac Pacemakers, Inc., a medical technology company that is now part of Guidant Corporation, in various finance and operations positions.

Mr. O’Malley joined the Company in 1994 as Vice President and General Counsel. Since December 1996, he has also served as the Company’s Corporate Secretary. Prior to joining St. Jude, Mr. O’Malley was employed by Eli Lilly & Company, a pharmaceutical products company, for 15 years in various positions, including General Counsel of the Medical Device and Diagnostics Division.

24

PART II

Item 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES

The information set forth under the captions “Dividends” and “Stock Exchange Listings” in the Financial Report included in the Company’s 2004 Annual Report to Shareholders is incorporated herein by reference.

Item 6.   SELECTED FINANCIAL DATA

The information set forth under the caption “Five-Year Summary Financial Data” in the Financial Report included in the Company’s 2004 Annual Report to Shareholders is incorporated herein by reference.

Item 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information set forth under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Financial Report included in the Company’s 2004 Annual Report to Shareholders is incorporated herein by reference.

Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information appearing under the caption “Market Risk” in the Financial Report included in the Company’s 2004 Annual Report to Shareholders is incorporated herein by reference.

Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following Consolidated Financial Statements of the Company and Report of Independent Registered Public Accounting firm set forth in the Financial Report included in the Company’s 2004 Annual Report to Shareholders are incorporated herein by reference:

Reports of Independent Registered Public Accounting Firm

Consolidated Statements of Earnings – Fiscal Years ended December 31, 2004, 2003 and 2002

Consolidated Balance Sheets – December 31, 2004 and 2003

Consolidated Statements of Shareholders’ Equity – Fiscal Years ended December 31, 2004, 2003 and 2002

Consolidated Statements of Cash Flows – Fiscal Years ended December 31, 2004, 2003 and 2002

Notes to Consolidated Financial Statements

25

Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A.   CONTROLS AND PROCEDURES

As of December 31, 2004, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2004 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

During the fiscal quarter ended December 31, 2004, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The annual report of the Company’s management on internal control over financial reporting is provided on page 26 of Exhibit 13. The attestation report of Ernst & Young LLP, the Company’s independent accountant, regarding the Company’s internal control over financial reporting is provided on page 27 of Exhibit 13.

Item 9B.   OTHER INFORMATION

None.

PART III

Item 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information set forth under the captions “Board of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Director Independence and Audit Committee Financial Expert” in the Company’s definitive proxy statement dated March 30, 2005, is incorporated herein by reference. Information on executive officers under Item 4A of this Form 10-K is incorporated herein by reference.

The Company has adopted a Code of Business Conduct for its Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer and all other employees. The Company has made its Code of Business Conduct available on its Web site (http://www.sjm.com) under the Company Information section “About Us” and is available in print to any shareholder who submits a request to St. Jude Medical, Inc., One Lillehei Plaza, St. Paul, Minnesota 55117, Attention: Corporate Secretary. The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of its Code of Business Conduct by posting such information on its website at the address and location specified above.

26

The Company has also made available on its website its Principles of Corporate Governance and the charters for each Committee of its Board of Directors. Such materials are also available in print to any shareholder who submits a request to St. Jude Medical, Inc., One Lillehei Plaza, St. Paul, Minnesota 55117, Attention: Corporate Secretary.

Information included on the Company’s Web site is not deemed to be incorporated into this Annual Report on Form 10-K.

Item 11.   EXECUTIVE COMPENSATION

The information set forth under the captions “Executive Compensation” and “Compensation of Directors” (except for information under the “Report of the Compensation Commottee on Executive Compensation”) in the Company’s definitive proxy statement dated March 30, 2005, is incorporated herein by reference.

Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

EQUITY COMPENSATION PLAN INFORMATION

        The following table provides information as of December 31, 2004 about the Company’s common stock that may be issued under all of its existing equity compensation plans, including the St. Jude Medical, Inc. 1991 Stock Plan, the St. Jude Medical, Inc. 1994 Stock Option Plan, the St. Jude Medical, Inc. 1997 Stock Option Plan, the St. Jude Medical, Inc. 2000 Stock Plan, the St. Jude Medical, Inc. 2000 Employee Stock Purchase Savings Plan, and the St. Jude Medical, Inc. 2002 Stock Plan, as Amended. All of these plans have been approved by the Company’s shareholders.

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a)) (c)
Equity compensation
plans approved by
shareholders	50,019,260	$ 19.11	5,476,232(1)
Equity compensation
plans not approved by
shareholders	—	—	—
Total	50,019,260	$ 19.11	5,476,232

⁽¹⁾   The shares available for future issuance as of December 31, 2004 included the following:

– 1,833,028 shares available for purchase by employees under the St. Jude Medical, Inc. 2000 Employee Stock Purchase Savings Plan; and

– 133,296 shares available under the St. Jude Medical, Inc. 2000 Stock Plan for restricted stock grants

Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information set forth under the caption “Related Party Transactions” in the Company’s definitive Proxy Statement dated March 30, 2005, is incorporated herein by reference.

Item 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information set forth under the caption “Proposal to Ratify the Appointment of Auditors – Independent Accountant’s Fees” in the Company’s definitive proxy statement dated March 30, 2005, is incorporated herein by reference.

27

PART IV

Item 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)     List of documents filed as part of this Report

(1) Financial Statements

The following Consolidated Financial Statements of the Company and Report of Independent Registered Public Accounting Firm as set forth in the Financial Report included in the Company’s 2004 Annual Report to Shareholders are incorporated herein by reference from Exhibit 13 attached hereto:

Reports of Independent Registered Public Accounting Firm

Consolidated Statements of Earnings – Fiscal Years ended December 31, 2004, 2003 and 2002

Consolidated Balance Sheets – December 31, 2004 and 2003

Consolidated Statements of Shareholders’ Equity – Fiscal Years ended December 31, 2004, 2003 and 2002

Consolidated Statements of Cash Flows – Fiscal Years ended December 31, 2004, 2003 and 2002

Notes to Consolidated Financial Statements

(2) Financial Statement Schedule

Schedule II, Valuation and Qualifying Accounts, is filed as part of this Annual Report on Form 10-K (see Item 15(c)).

The Report of Independent Registered Public Accounting Firm with respect to this financial statement schedule is incorporated herein by reference from Exhibit 13 attached hereto.

All other financial statements and schedules not listed above have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or is not applicable.

(3) Exhibits

Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of certain instruments defining the rights of holders of certain long-term debt of the Company are not filed, and in lieu thereof, the Company agrees to furnish copies thereof to the Securities and Exchange Commission upon request.

28

   Exhibit Exhibit Index

2.1 Stock Purchase Agreement among St. Jude Medical, Inc., St. Jude Medical Japan K.K., Getz Bros. & Co. Zug Inc., Getz International, Inc. and Muller & Phipps (Japan) Ltd. dated as of September 17, 2002 (USA) is incorporated by reference from Exhibit 2.1 of the Company’s Annual Report on Form 10-K from the year ended December 31, 2003.

2.2 Amendment, dated as of February 20, 2003, to Stock Purchase Agreement among St. Jude Medical, Inc., St. Jude Medical Japan K.K., Getz Bros. & Co. Zug Inc., Getz International, Inc. and Muller & Phipps (Japan) Ltd. dated as of September 17, 2002 (USA) is incorporated by reference from Exhibit 2.1 of the Company’s Annual Report on Form 10-K from the year ended December 31, 2003.

2.3 Amended and Restated Agreement and Plan of Merger, dated as of September 29, 2004, among the Company, Dragonfly Merger Corp., and Endocardial Solutions, Inc. is incorporated by reference from Exhibit 99.1 of the Company’s Current Report on Form 8-K filed dated September 29, 2004.

2.4 Stock Purchase Agreement between St. Jude Medical, Inc. and Velocimed, LLC, dated as of February 14, 2005. #

3.1 Articles of Incorporation, as restated as of February 25, 2005. #

3.2 Bylaws, as amended and restated as of February 25, 2005, are incorporated by reference from Exhibit 3.1 of the Company’s Current Report on Form 8-K dated March 2, 2005.

29

   Exhibit Exhibit Index

4.1 Rights Agreement dated as of June 16, 1997, between the Company and American Stock Transfer and Trust Company, as Rights Agent, including the Certificate of Designation, Preferences and Rights of Series B Junior Preferred Stock is incorporated by reference from Exhibit 4 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.

4.2 Amendment, dated as of December 20, 2002, to Rights Agreement, dated as of June 16, 1997, is incorporated by reference from Exhibit 1 of the Company’s Current Report on Form 8-K filed on March 21, 2003.

4.3 Multi-Year $350,000,000 Credit Agreement, dated as of September 11, 2003, among St. Jude Medical, Inc., as the Borrower, Bank of America, N.A., as Administrative Agent, L/C Issuer and Lender, the Bank of Tokyo-Mitsubishi, Ltd. and ABN Amro Bank N.V., as Co-Syndication Agents, Bank One, N.A. and Wells Fargo Bank, National Association, as Co-Documentation Agents, and the Other Lenders Party Hereto is incorporated by reference from Exhibit 4.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.

4.4 Multi-Year $400,000,000 Credit Agreement, dated as of September 28, 2004, among the Company, as the Borrower, Bank of America, N.A., as Administrative Agent, L/C Issuer and Lender, the Bank of Tokyo-Mitsubishi, Ltd., as Syndication Agents, Bank One, NA, Wells Fargo Bank, N.A. and Suntrust Bank, as Co-Documentation Agents, and the other lenders party thereto. Hereto is incorporated by reference from Exhibit 4.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.

10.1 Form of Indemnification Agreement that the Company has entered into with officers and directors is incorporated by reference from Exhibit 10(d) of the Company’s Annual Report on Form 10-K for the year ended December 31, 1986. *

10.2 St. Jude Medical, Inc. Management Incentive Compensation Plan is incorporated by reference from Exhibit 10.2 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. *

30

   Exhibit Exhibit Index

10.3 Management Savings Plan dated February 1, 1995, is incorporated by reference from Exhibit 10.7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 1994. *

10.4 Retirement Plan for members of the Board of Directors, as amended on March 15, 1995, is incorporated by reference from Exhibit 10.6 of the Company’s Annual Report on Form 10-K for the year ended December 31, 1994. *

10.5 St. Jude Medical, Inc. 1991 Stock Plan is incorporated by reference from the Company’s Registration Statement on Form S-8 filed June 28, 1991 (Commission File No. 33-41459). *

10.6 St. Jude Medical, Inc. 1994 Stock Option Plan is incorporated by reference from Exhibit 4(a) of the Company’s Registration Statement on Form S-8 filed July 1, 1994 (Commission File No. 33-54435). *

10.7 St. Jude Medical, Inc. 1997 Stock Option Plan is incorporated by reference from Exhibit 4.1 of the Company’s Registration Statement on Form S-8 filed December 22, 1997 (Commission File No. 333-42945). *

10.8 St. Jude Medical, Inc. 2000 Stock Plan is incorporated by reference from Exhibit 10.9 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. *

10.9 St. Jude Medical, Inc. 2000 Employee Stock Purchase Savings Plan is incorporated by reference from Exhibit 10.10 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. *

10.10 Amended and Restated Employment Agreement dated as of March 25, 2001, between the Company and Daniel J. Starks is incorporated by reference from Exhibit 10.17 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2000. *

31

   Exhibit Exhibit Index

10.11 Form of Severance Agreement that the Company has entered into with officers relating to severance matters in connection with a change in control is incorporated by reference from Exhibit 10.18 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. *

10.12 Amended and Restated Employment Agreement dated as of March 25, 2001, between the Company and Terry L. Shepherd is incorporated by reference from Exhibit 10.19 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2000. *

10.13 St. Jude Medical, Inc. 2002 Stock Plan, as Amended, is incorporated by reference from Exhibit 10.14 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002. *

10.14 St. Jude Medical, Inc. Non-Qualified Stock Option Agreement. *#

13 Portions of the Company’s 2004 Annual Report to Shareholders. #

21 Subsidiaries of the Registrant. #

23 Consent of Independent Registered Public Accounting Firm. #

24 Power of Attorney. #

31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. #

31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. #

32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. #

32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. #

_________________

* Management contract or compensatory plan or arrangement.
# Filed as an exhibit to this Annual Report on Form 10-K.

32

(b) Exhibits:   Reference is made to Item 15(a)(3).

(c) Schedules:

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(In thousands)

Description	Balance at Beginning of Year		Additions				Deductions
					Charged to Expense		Other (1)		Write-offs (2)			Other (1)			Balance at End of Year
Allowance for doubtful accounts
Fiscal Year Ended:
December 31, 2004	$	31,905	$	4,380	$	—	$	(2,477	)	$	(2,525	)	$	31,283
December 31, 2003	$	24,078	$	5,497	$	4,564	$	(2,234	)	$	—		$	31,905
December 31, 2002	$	17,210	$	9,188	$	1,752	$	(4,072	)	$	—		$	24,078

(1)    In 2004, $640 of this amount represents the effects of changes in foreign currency translation, and the remainder represents a reduction in the allowance for doubtful accounts. In 2003, $3,622 of this amount represents the balance recorded as part of our 2003 acquisition of Getz Japan, and the remainder represents the effects of changes in foreign currency translation. In 2002 all amounts represent the effects of changes in foreign currency translation.

(2)    Uncollectible accounts written off, net of recoveries.

33

SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ST. JUDE MEDICAL, INC.
Date: March 11, 2005	By /s/ DANIEL J. STARKS
	Daniel J. Starks
	Chairman, President and Chief Executive Officer
	(Principal Executive Officer)
	By /s/ JOHN C. HEINMILLER
	John C. Heinmiller
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on the 11th day of March, 2005.

/s/ DANIEL J. STARKS	Director
Daniel J. Starks
/s/ KEVIN T. O’MALLEY	Directors
Kevin T. O’Malley
as attorney-in-fact for:
Richard R. Devenuti,	Director
Stuart M. Essig,	Director
Thomas H. Garrett III,	Director
Michael A. Rocca,	Director
David A. Thompson,	Director
Wendy L. Yarno, and	Director
Frank C-P Yin	Director

34

EX-2.4

                                                                     EXHIBIT 2.4












                            STOCK PURCHASE AGREEMENT



                                     BETWEEN



                             ST. JUDE MEDICAL, INC.,


                                       AND


                                 VELOCIMED, LLC,



                          DATED AS OF FEBRUARY 14, 2005



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

                            STOCK PURCHASE AGREEMENT
                            ------------------------

                                                                            PAGE
                                                                            ----

RECITALS:           1


ARTICLE I - PURCHASE AND SALE.................................................1

       Section 1.1         Purchase and Sale of the Shares....................1
       Section 1.2         Holdback Amount....................................2
       Section 1.3         Contingent Consideration...........................2
       Section 1.4         Further Assurances.................................8
       Section 1.5         Closing............................................9

ARTICLE II - REPRESENTATIONS AND WARRANTIES OF BUYER..........................9

       Section 2.1         Organization, Standing and Power...................9
       Section 2.2         Authority..........................................9
       Section 2.3         Consents and Approvals; No Violation..............10

ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE COMPANY..................11

       Section 3.1         Organization, Standing and Power..................11
       Section 3.2         Capital Structure.................................12
       Section 3.3         Authority.........................................13
       Section 3.4         Consents and Approvals; No Violation..............13
       Section 3.5         Financial Statements..............................14
       Section 3.6         No Default........................................15
       Section 3.7         Absence of Certain Changes or Events..............15
       Section 3.8         Permits and Compliance............................16
       Section 3.9         Tax Matters.......................................18
       Section 3.10        Actions and Proceedings...........................19
       Section 3.11        Certain Agreements................................19
       Section 3.12        ERISA.............................................21
       Section 3.13        Compliance with Worker Safety Laws................23
       Section 3.14        Products..........................................23
       Section 3.15        Labor Matters.....................................23
       Section 3.16        Intellectual Property.............................24
       Section 3.17        Business Combination..............................28
       Section 3.18        Accounts Receivable...............................28
       Section 3.19        Inventories.......................................28
       Section 3.20        Environmental Matters.............................28
       Section 3.21        Suppliers and Distributors........................30
       Section 3.22        Insurance.........................................30

                                       i



                                TABLE OF CONTENTS
                                   (CONTINUED)

                                                                            Page
                                                                            ----

       Section 3.23        Transactions with Affiliates......................30
       Section 3.24        Accuracy of Information...........................31
       Section 3.25        Title to and Sufficiency of Assets................31
       Section 3.26        Brokers...........................................32
       Section 3.27        Controls and Procedures...........................32
       Section 3.28        Certain Business Practices........................32

ARTICLE IV - COVENANTS RELATING TO CONDUCT OF BUSINESS.......................32

       Section 4.1         Conduct of Business by the Company Pending
                           the Closing.......................................32
       Section 4.2         Conduct of the Business During the Contingent
                           Consideration Period..............................37

ARTICLE V - ADDITIONAL AGREEMENTS............................................43

       Section 5.1         Access to Information.............................43
       Section 5.2         Fees and Expenses.................................44
       Section 5.3         No Solicitation or Negotiation....................45
       Section 5.4         Cooperation.......................................45
       Section 5.5         Intercompany Accounts; Indebtedness...............46
       Section 5.6         Intercompany Arrangements.........................46
       Section 5.7         Public Announcements..............................47
       Section 5.8         Notification of Certain Matters...................47
       Section 5.9         Company Option Plans..............................47
       Section 5.10        Non Compete Agreement.............................49
       Section 5.11        Warrant Agreement.................................49
       Section 5.12        Member Agreement..................................49
       Section 5.13        Assignment by the Company.........................49
       Section 5.14        Invoices Received by the Company after the
                           Closing...........................................50

ARTICLE VI - INDEMNIFICATION.................................................50

       Section 6.1         General Survival..................................50
       Section 6.2         Indemnification in General........................51
       Section 6.3         Manner of Indemnification.........................52
       Section 6.4         Notice of Claims..................................52
       Section 6.5         Third-Party Claims................................53
       Section 6.6         Waiver of Defenses................................53
       Section 6.7         Treatment of Indemnity Payments...................53
       Section 6.8         Limits on Indemnification.........................53

                                       ii



                                TABLE OF CONTENTS
                                   (CONTINUED)

                                                                            Page
                                                                            ----

ARTICLE VII - CONDITIONS PRECEDENT TO THE CLOSING............................54

       Section 7.1         Conditions to Each Party's Obligation to Effect
                           the Closing.......................................54
       Section 7.2         Conditions to Obligation of the Company to Effect
                           the Closing.......................................55
       Section 7.3         Conditions to Obligations of Buyer and Sub to
                           Effect the Closing................................55

ARTICLE VIII - TERMINATION, AMENDMENT AND WAIVER.............................57

       Section 8.1         Termination.......................................57
       Section 8.2         Effect of Termination.............................58
       Section 8.3         Amendment.........................................58
       Section 8.4         Waiver............................................58

ARTICLE IX - GENERAL PROVISIONS..............................................59

       Section 9.1         Notices...........................................59
       Section 9.2         Interpretation....................................60
       Section 9.3         Counterparts; Facsimile Signatures................61
       Section 9.4         Entire Agreement; No Third-Party Beneficiaries....61
       Section 9.5         Governing Law.....................................61
       Section 9.6         Dispute Resolution................................61
       Section 9.7         Waivers...........................................62
       Section 9.8         Assignment........................................63
       Section 9.9         Severability......................................63
       Section 9.10        Descriptive Headings..............................63
       Section 9.11        Defined Terms.....................................63












                                      iii



                                LIST OF EXHIBITS
                                ----------------

Exhibit A - Form of Contingent Consideration Confidentiality
            Agreement.............................................Section 4.2(d)


Exhibit B - Form of Opinion of General Counsel of Buyer...........Section 7.2(b)


Exhibit C - Form of Opinion of Oppenheimer, Wolff & Donnelly LLP..Section 7.3(c)































                                       iv


                            STOCK PURCHASE AGREEMENT
                            ------------------------

            This Stock Purchase Agreement, dated as of February 14, 2005 (this
"Agreement"), is between St. Jude Medical, Inc., a Minnesota corporation
("Buyer") and Velocimed, LLC, a Delaware limited liability company (the
"Company").

                                    RECITALS:

         A. The Company owns 100% of the issued and outstanding capital stock of
each of: (i) Velocimed, Inc., a Delaware corporation ("INC"), (ii) Velocimed
PFO, Inc., a Delaware corporation ("PFO"), and (iii) Velocimed DMC, Inc., a
Delaware corporation ("DMC" and together with INC and PFO, collectively the
"Company Subs" and each individually a "Company Sub"). Such capital stock is
herein collectively referred to as the "Shares".

         B. The Company wishes to sell to Buyer and Buyer wishes to purchase
from the Company, the Shares.

         C. As an essential inducement for Buyer and Sub to enter into this
Agreement, certain employees of the Company have entered into employment
agreements (the "Employment Agreements") and certain consultants of the Company
have entered into consulting agreements concurrently herewith (the "Consulting
Agreements").

         D. The parties acknowledge that they have different views on the
potential for future revenues of the Company Products and therefore have agreed
to use the Contingent Consideration that is potentially payable on the terms set
forth herein as a means of agreeing on a value for the Company Subs and their
future revenue potential.

            NOW, THEREFORE, in consideration of the premises, representations,
warranties and agreements herein contained, the parties agree as follows:

                                   ARTICLE I -
                                PURCHASE AND SALE

            SECTION 1.1 PURCHASE AND SALE OF THE SHARES. Upon the terms and
subject to the conditions hereof, the Company shall sell, assign, transfer,
convey and deliver the Shares to Buyer, free and clear of all Encumbrances, and
Buyer, in reliance on the representations, warranties and covenants of the
Company contained herein, shall purchase the Shares from the Company in exchange
for:

                  (a) an amount of cash equal to $82,500,000, subject to
adjustment pursuant to Section 4.1(b)(viii), (the "Cash Purchase Price"), plus

                  (b) future payments of up to an aggregate of $180,000,000 in
cash, upon achievement of certain milestones as set forth in Section 1.3 hereof
(the



"Contingent Consideration" and together with the Cash Purchase Price, the "Total
Consideration").

            SECTION 1.2 HOLDBACK AMOUNT. On the Closing Date, Buyer shall
withhold $5,000,000 of the Cash Purchase Price that would have otherwise been
payable to the Company pursuant to the terms of this Agreement (the "Holdback
Amount") to be held by Buyer in accordance with the terms of this Section in
order to satisfy any claims pursuant to Article VI hereof. After full
satisfaction of any claims for Indemnification made in accordance with Article
VI, Buyer shall pay and distribute to the Company the remaining Holdback Amount
plus interest thereon at the rate of 3.5% percent per annum, if any, by the
forty-fifth day following the Holdback Termination Date (subject to any
extension for any pending claims as provided in Article VI).

            SECTION 1.3 CONTINGENT CONSIDERATION.

                    (a) Contingent Consideration Generally.

                        (i) Contingent Consideration as part of Total
Consideration. The parties acknowledge and agree that the Company's achievement
of certain revenue and product development targets are material factors in
determining the valuation of the Company by Buyer. The Contingent Consideration
payable pursuant to this Section 1.3 does not constitute payment for services,
but rather constitutes part of the Total Consideration and shall be treated as
such for all purposes, including for tax purposes. Payment of the Contingent
Consideration shall be subject to achievement of the revenue targets set forth
in Section 1.3(c) and/or the Premere Approval milestones set forth in Section
1.3(d).

                        (ii) Forfeited Amounts. Any Contingent Consideration
that is not earned pursuant to this Section 1.3 will be cancelled and deemed
forfeited and retained permanently by Buyer.

                        (iii) Contingent Consideration Not Transferable. The
Company may not sell, exchange, transfer or otherwise dispose of its right to
receive any portion of the Contingent Consideration. Any purported transfer in
violation of this Section 1.3(a)(iii) shall be null and void and shall not be
recognized.

                        (iv) Support from Buyer. During the period from the
Closing to the end of the Target Periods (such period, the "Contingent
Consideration Period"), Buyer shall provide support in connection with the
Company Products in accordance with the provisions of Section 4.2 hereof.

                    (b) Definitions. For purposes of this Agreement:

                        (i) "Buyer Licensing" means the revenue attributable to
the licensing by Buyer of any Velocimed Intellectual Property calculated in
accordance with the provisions of Section 4.2(c)(iv) hereof.


                                       2


                        (ii) "Company Products" means (A) the Premere Product,
(B) the Proxis Product, and (C) the Venture Product.

                        (iii) "Contingent Consideration Distribution Date"
means, (A) with respect to any Contingent Consideration due and payable pursuant
to Section 1.3(c), the ninetieth day following the end of the applicable Fiscal
Year, and (B) with respect to any Contingent Consideration due and payable
pursuant to Section 1.3(d), the thirtieth day after Buyer has received written
notice from the FDA of obtaining the Premere Approval.

                        (iv) "Contingent Consideration Notice" means either a
Revenue Notice or a Premere Approval Notice, as applicable.

                        (v) "Distal Device" means a device designed for distal
embolic protection unless such device is specifically labeled for carotid use
only.

                        (vi) "FDA" means the United States Food and Drug
Administration.

                        (vii) "Fiscal Year" means any of FY 2006, FY 2007, or
FY 2008.

                        (viii) "FY 2006" means Buyer's 2006 fiscal year.

                        (ix) "FY 2006 Target" means $30,000,000.

                        (x) "FY 2007" means Buyer's 2007 fiscal year.

                        (xi) "FY 2007 Target" means $50,000,000.

                        (xii) "FY 2008" means Buyer's 2008 fiscal year.

                        (xiii) "FY 2008 Target" means $70,000,000.

                        (xix) "Premere Product" means the device designed for
transcatheter closure of a PFO (patent foramen ovale) currently being developed
by the Company Subs, together with all improvements and modifications thereof
that, but for the ownership of any Velocimed Intellectual Property, would
infringe on such Velocimed Intellectual Property.

                        (xv) "Premere Approval" means the approval for marketing
by the FDA under valid pre-market approval applications in accordance with 21
U.S.C. ss. 360e and 21 C.F.R. Part 814 ("PMA's") of the Premere Product.

                        (xvi) "Premere First Target Period" means the period
from the Closing until June 30, 2009.


                                       3


                        (xvii) "Premere Second Target Period" means the period
from and including July 1, 2009 to and including December 31, 2009.

                        (xviii) "Premere Third Target Period" means the period
from and including January 1, 2010 to and including December 31, 2010.

                        (xix) "Proxis Product" means either or both of the two
devices designed for flow control or embolic protection currently being
developed by the Company Subs, together with all improvements and modifications
thereof that would, but for the ownership of any Velocimed Intellectual
Property, would infringe on such Velocimed Intellectual Property.

                        (xx) "Revenue" means revenue of Buyer or its
Subsidiaries derived from (A) any of the Company Products, (B) any other product
manufactured or sold by Buyer that, but for the ownership of any Velocimed
Intellectual Property, would infringe on such Velocimed Intellectual Property
(other than a Distal Device), (C) any Distal Device sold by Buyer (calculated in
accordance with Section 4.2(c)(v)), less, in all cases, (X) transportation,
insurance and handling expenses if separately stated on the invoice, (Y) any
credits or allowances granted with respect to such Company Product in the
ordinary course of business to customers, including, without limitation, credits
and allowances on account of price adjustments, returns, discounts, and
charge-backs, and (Z) any sales, excise, value-added, turnover or similar Taxes
and any duties and other governmental charges imposed on the importation, use or
sale of a Company Product; PROVIDED, HOWEVER, that revenue from Bundled Sales or
sales made through distributors in foreign jurisdictions shall be calculated in
accordance with the provisions of Section 4.2(c) hereof, or (D) Buyer Licensing
(calculated in accordance with Section 4.2(c)(iv)).

                        (xxi) "Target Periods" shall refer to the Premere First
Target Period, the Premere Second Target Period, and the Premere Third Target
Period, collectively, and a "Target Period" shall refer to any one of them
individually.

                        (xxii) "Velocimed Intellectual Property" means the
Company Registered IP, both in the U.S. and in foreign jurisdictions, except
that that no element of Intellectual Property will be considered Velocimed
Intellectual Property if it is determined to be invalid, provided that any issue
of invalidity must be based upon claims asserted by a third party. In the event
such a third party claim is asserted and the parties cannot agree upon such
determination, such determination solely for purposes of this Agreement shall be
resolved pursuant to Section 9.6 hereof. On the question of validity of
Velocimed Intellectual Property, the arbitrator will be bound by the decision of
any court.

                        (xxiii) "Venture Product" means the deflectable
intra-vascular catheter currently being developed by the Company Subs, together
with all improvements and modifications thereof that would, but for the
ownership of any Velocimed Intellectual Property, would infringe on such
Velocimed Intellectual Property.

                                       4


                    (c) Revenue-Based Contingent Consideration. The Company
shall become entitled to the applicable Contingent Consideration specified below
upon Buyer's achievement of the Revenue targets set forth below in Section
1.3(c)(i) and (ii) as may be limited by Section 1.3(c)(iii). Any such payments
are referred to herein as "Revenue-Based Contingent Consideration".

                        (i) Revenue-Based Payments:

                            (A) An amount equal to 50% of the Revenue in FY 2006
that is in excess of the FY 2006 Target shall become earned in respect of FY
2006.

                            (B) An amount equal to 50% of the Revenue in FY 2007
that is in excess of the FY 2007 Target shall become earned in respect of FY
2007.

                            (C) An amount equal to 50% of the Revenue in FY 2008
that is in excess of the FY 2008 Target shall become earned in respect of FY
2008; PROVIDED, HOWEVER, that if an Alternate Payment is determined to be due
and payable, that no Contingent Consideration shall be due and payable pursuant
to this Section 1.3(c)(i)(C) and instead shall be calculated in accordance with
Section 1.3(c)(ii).

                        (ii) Alternate Payment. If an amount equal to 50% of
Revenue in FY 2008 in excess of $30,000,000 exceeds the sum of (A) all payments
previously made pursuant to Sections 1.3(c)(i)(A) and 1.3(c)(i)(B) plus (B) the
payment that would, but for the operation of this 1.3(c)(ii), be payable
pursuant to Section 1.3(c)(i)(C), then an Alternate Payment shall be earned in
respect of FY 2008 in lieu of any amount that would otherwise be due and payable
pursuant to Section 1.3(c)(i)(C). The "Alternate Payment" shall be in an amount
equal to (X) 50% of Revenue in FY 2008 in excess of $30,000,000, less (Y) the
sum of all payments previously made pursuant to Sections 1.3(c)(i)(A) and
1.3(c)(i)(B).

                        (iii) Limitations on Revenue-Based Contingent
Consideration. The amount of all payments made pursuant to this Section 1.3(c)
shall not exceed $100,000,000.

                    (d) Premere Approval-Based Contingent Consideration. The
Company shall become entitled to the applicable Contingent Consideration
specified below upon Buyer's attainment of any of the specified milestones as
follows:

                        (i) An amount equal to $80,000,000 shall become earned
pursuant to this Section 1.3(d) if the Premere Approval is obtained during the
Premere First Target Period.

                        (ii) An amount equal to $65,000,000 shall become earned
pursuant to this Section 1.3(d) if the Premere Approval is obtained during the
Premere Second Target Period and an amount equal to $15,000,000 of the
Contingent Consideration shall be cancelled and deemed forfeited by the Company.

                                       5


                        (iii) An amount equal to $50,000,000 shall become earned
pursuant to this Section 1.3(d) if the Premere Approval is obtained during the
Premere Third Target Period and an amount equal to $30,000,000 of the Contingent
Consideration shall be cancelled and deemed forfeited by the Company.

                        (iv) If the Premere Approval is not achieved prior to
the end of the Premere Third Target Period, then no Contingent Consideration
shall ever become earned or become due and payable with respect to the Premere
Approval and an amount equal to $80,000,000 of the Contingent Consideration
shall be cancelled and deemed forfeited by the Company.

Any Contingent Consideration that becomes due and payable pursuant to this
Section 1.3(d) is referred to herein as "Premere Approval-Based Contingent
Consideration".

                    (e) Contingent Consideration Distributions; Company
Objections.

                        (i) Distribution of Contingent Consideration. Subject to
the rights of set-off set forth in Section 1.3(e)(vi) and Article VI, Buyer
shall pay and distribute to the Company the Contingent Consideration to which
the Company is entitled pursuant to Section 1.3(c) or Section 1.3(d), if any, by
the applicable Contingent Consideration Distribution Date.

                        (ii) Revenue-Based Contingent Consideration Notice.
Within forty-five days after the end of any Fiscal Year, Buyer shall deliver to
the Company a notice (a "Revenue Notice") specifying (A) the amount of Revenue
(listed by product or revenue source) earned in the preceding Fiscal Year, (B)
whether any Contingent Consideration is due and payable pursuant to Section
1.3(c) related to such preceding Fiscal Year, (C) if applicable, any proposed
setoff for Losses in accordance with Section 1.3(e)(vi) or Article VI, and (D)
the net amount, if any, to be distributed to the Company with respect to such
Revenue-Based Contingent Consideration on the relevant Contingent Consideration
Distribution Date, if applicable. Following receipt of the Revenue Notice, the
Company and its advisors shall have the right to review the accounting and
financial records reflecting unit sales by Company Product and unit sales by
country that comprise the basis for the Revenue determination and to meet and
discuss such Revenue determination with the persons who prepared the Revenue
Notice. Buyer shall provide such records to the Company within 5 days of any
written request by the Company for such records and shall arrange for such a
meeting with the persons who prepared the Revenue Notice within 10 days of any
written request therefor.

                        (iii) Premere Approval-Based Contingent Consideration
Notice. Within ten days after Buyer has received written notice from the FDA of
obtaining the Premere Approval, Buyer shall deliver to the Company a notice (the
"Premere Approval Notice") specifying (A) the amount of Contingent Consideration
due and payable pursuant to Section 1.3(d), (B) if applicable, any proposed
setoff for Losses in accordance with Section 1.3(e)(vi) or Article VI, and (C)
the net amount, if any, to be


                                       6


distributed to the Company with respect to the Premere Approval on the relevant
Contingent Consideration Distribution Date.

                        (iv) Company Objection. The Company shall have thirty
days after the giving of any Contingent Consideration Notice to make an
objection (in writing) to any item in a Contingent Consideration Notice,
specifying in reasonable detail the item objected to and the basis for such
objection (the "Notice of Objection"). If a timely Notice of Objection is not
received or to the extent an item is not objected to in the Notice of Objection,
the Contingent Consideration Notice and the portion of the Contingent
Consideration to be paid shall be deemed to have been accepted and final and
binding on the parties, absent manifest error. If the Company delivers a timely
Notice of Objection to the Contingent Consideration Notice, Buyer and the
Company shall resolve such conflict in accordance with the procedures set forth
in Section 1.3(e)(v). The Company may also, within such thirty-day period,
provide Buyer with a written request that an audit be performed with regard to
the calculation of the Revenue in the Revenue Notice. If the Company requests
such an audit, the Company will be permitted to engage an independent auditing
firm of national standing, with no conflict of interest with Buyer, to conduct
an audit of the Revenue calculation, provided that such audit firm enters into a
customary form of confidentiality agreement with Buyer with respect to the
information furnished to them in such audit. The Company will pay for the costs
and expenses of such audit, provided, however, that if the amount of
Revenue-based Contingent Consideration ultimately determined hereunder to be due
exceeds the amount thereof set forth in the Revenue Notice by more than 5% of
the amount ultimately determined to be due, the Buyer will reimburse the Company
for the reasonable costs and expenses of such audit. In the event of any dispute
related to the amount of Contingent Consideration payable, Buyer will remit the
amount due promptly following the resolution of any such dispute.

                        (v) Resolution of Objection. If the Company shall have
provided a Notice of Objection, the Company and Buyer will attempt in good faith
to agree upon the rights of the respective parties with respect to each of such
claims. If the Company and Buyer should so agree, a memorandum setting forth
such agreement will be prepared and signed by Buyer and the Company, and Buyer
will retain or distribute Contingent Consideration as provided therein. In the
event the parties shall fail to reach an agreement as set forth in the preceding
sentence within thirty days after the date on which the Company provided a
Notice of Objection, the dispute shall be submitted to arbitration in accordance
with the provisions of Section 9.6; PROVIDED, HOWEVER, that if such dispute
relates solely to accounting matters related to the calculation of Revenue, then
such dispute shall be submitted for resolution to the Minneapolis/St. Paul
office of an impartial certified public accountant of national standing (the
"Auditor") selected by the Company and Buyer. The Company and Buyer shall use
reasonable efforts to cause the report of the Auditor to be rendered within
thirty days of its appointment and the Auditor's determination as to the
resolution of all such disputed objections will be final and binding. The
Auditor will determine which party is the substantially prevailing party, and
any and all costs and expenses associated with the Auditor's review and
determination or the related audit shall be borne by the party that is not the
substantially prevailing party.

                                       7


                        (vi) Intellectual Property Setoffs. In addition to
claims for Losses pursuant to Article VI hereof, Buyer shall be permitted to
reduce any Contingent Consideration that becomes earned, due and payable by an
amount equal to 50% of any Intellectual Property Losses. "Intellectual Property
Losses" means any Losses incurred in connection with claims made by third
parties related to Intellectual Property and the Company Products, including
payments of royalties or license fees and including any amounts incurred or paid
pursuant to Section 6.2(b) in respect of Intellectual Property; PROVIDED,
HOWEVER, that

                        (A) for purposes of this Section 1.3(e)(vi), Losses
shall not include claims arising out of the Company's dispute with Formacoat
referenced in Section 3.10 of the Company Letter, and

                        (B) to the extent there are Losses to be setoff under
this Section 1.3(e)(vi) related to Patents issued to unrelated third parties
that have an issue date after the Closing Date (a "Post Closing Patent"), the
unused Deductible set forth in Section 6.8(c) shall apply to any such Losses so
that Buyer shall not be entitled to any setoff pursuant to this Section
1.3(e)(vi) for a Loss related to a Post Closing Patent until the Deductible has
been satisfied (whether by Losses indemnified under Article VI or by application
of setoffs under this Section 1.3(e)(vi)). For purposes of Article VI, any such
Losses that would be setoff under this section 1.3(e)(vi) but for the foregoing
limitation shall be included in the calculation of the Deductible under Article
VI regardless of whether indemnification would otherwise be available for such
setoff Losses in accordance with Article VI. For purposes of clarification and
by way of example only, if Buyer incurs a Loss related to a Post Closing Patent
in the amount of $1,000,000 and no other Losses have been claimed against the
Deductible, then $500,000 of such Loss will be attributed to the Deductible. If
Buyer thereafter incurs a second Loss related to a Post Closing Patent in the
amount of $1,000,000, then $175,000 of such second Loss will be attributable to
the Deductible and Buyer will be entitled to reduce any Contingent Consideration
that becomes due and payable by $325,000. Except for the foregoing application
of the Deductible to Losses related to Post Closing Patents, no provisions of
Article VI shall apply to Losses to be setoff under this Section 1.3(e)(vi), it
being the intention that Losses may be offset under this Section 1.3(e)(vi)
regardless of whether indemnification would be available under Article VI for
breach of a representation or warranty, both before and after expiration of the
Holdback Termination Date, and without regard to the limits set forth in the
last sentence of Section 6.8(c).

            SECTION 1.4 FURTHER ASSURANCES. If at any time after the Closing
Buyer shall consider or be advised that any deeds, bills of sale, assignments or
assurances or any other acts or things are necessary, desirable or proper (a) to
vest, perfect or confirm, of record or otherwise, in Buyer its right, title or
interest in, to or under any of the Shares or any of the rights, privileges,
powers, franchises, properties or assets of the Company Subs, (b) to vest,
perfect, assign, or otherwise transfer to Buyer any right, contract, interest,
or asset (other than cash or cash equivalents) owned, held or licensed by the
Company that are necessary or desirable for the development, use, manufacture,
marketing, distribution or sale of the Company Products, or (c) otherwise to
carry out the purposes of this Agreement, Buyer and its proper officers and
directors or


                                       8


their designees shall be authorized to execute and deliver, in the name and on
behalf of the Company, all such deeds, bills of sale, assignments and assurances
and to do, in the name and on behalf of the Company, all such other acts and
things as may be necessary, desirable or proper to vest, perfect or confirm
Buyer's right, title or interest in, to or under the Shares or right, title or
interest in, to or under any of the rights, privileges, powers, franchises,
properties or assets of any Company Sub and otherwise to carry out the purposes
of this Agreement.

            SECTION 1.5 CLOSING.

                        (a) The closing of the transactions contemplated by
this Agreement (the "Closing") and all actions specified in this Agreement to
occur at the Closing shall take place at the offices of Buyer at 10:00 a.m.
local time, no later than the second business day following the day on which the
last of the conditions set forth in Article VII shall have been fulfilled or
waived (if permissible) (the "Closing Date") or at such other time and place as
Buyer and the Company shall agree.

                        (b) At the Closing:

                            (i) Buyer shall deliver to the Company, by wire
transfer to a bank account designated in writing by the Company to Buyer at
least two business days prior to the Closing Date, an amount equal to the Cash
Purchase Price less the Holdback Amount in immediately available funds in United
States dollars, and

                            (ii) the Company shall deliver or cause to be
delivered to Buyer certificates representing the Shares, duly endorsed in blank
or accompanied by stock powers duly endorsed in blank in proper form for
transfer with appropriate transfer stamps, if any, affixed.

                                  ARTICLE II -
                         REPRESENTATIONS AND WARRANTIES
                         ------------------------------
                                    OF BUYER
                                    --------

            Buyer represents and warrants to the Company as follows:

            SECTION 2.1 ORGANIZATION, STANDING AND POWER. Buyer is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Minnesota and has the requisite corporate power and authority to carry
on its business as now being conducted. Buyer is duly qualified to do business,
and is in good standing, in each jurisdiction where the character of its
properties owned or held under lease or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified or in good
standing would not have a Material Adverse Effect on Buyer.

            SECTION 2.2 AUTHORITY. On or prior to the date of this Agreement,
the Board of Directors of Buyer has approved and adopted this Agreement in
accordance with the Minnesota Business Corporation Act. Buyer has all requisite
corporate power and authority to enter into this Agreement and to consummate the


                                       9


transactions contemplated hereby. The execution and delivery of this Agreement
by Buyer and the consummation by Buyer of the transactions contemplated hereby
have been duly authorized by all necessary corporate action (including all Board
action) on the part of Buyer. This Agreement has been duly executed and
delivered by Buyer, and (assuming the valid authorization, execution and
delivery of this Agreement by the Company) this Agreement constitutes the valid
and binding obligation of Buyer enforceable against it in accordance with its
terms, except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws of general applicability
relating to or affecting creditors' rights generally and by the application of
general principles of equity, whether such proceeding is considered in equity or
at law.

            SECTION 2.3 CONSENTS AND APPROVALS; NO VIOLATION. Assuming that all
consents, approvals, authorizations and other actions described in this Section
2.3 have been obtained and all filings and obligations described in this Section
2.3 have been made, the execution and delivery of this Agreement does not, and
the consummation of the transactions contemplated hereby and compliance with the
provisions hereof will not, result in any violation of, or default (with or
without notice or lapse of time, or both) under, or give to others a right of
termination, cancellation or acceleration of any obligation or result in the
loss of a benefit under, or result in the creation of any Lien upon any of the
properties or assets of Buyer under, any provision of (a) the Articles of
Incorporation or the By-laws of Buyer, each as amended to date, (b) any loan or
credit agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise or license applicable to Buyer or any
of its Subsidiaries, or (c) any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Buyer or any of its properties or
assets, other than, in the case of clauses (b) or (c), any such violations,
defaults, rights, losses, Liens that, individually or in the aggregate, would
not materially impair the ability of Buyer to perform its obligations hereunder
or prevent the consummation of any of the transactions contemplated hereby or
thereby. No filing or registration with, or authorization, consent or approval
of, any domestic (federal and state), foreign or supranational court,
commission, governmental body, regulatory agency, authority or tribunal (a
"Governmental Entity") is required by or with respect to Buyer in connection
with the execution and delivery of this Agreement by Buyer or is necessary for
the consummation of the transactions contemplated by this Agreement, except for
(i) in connection, or in compliance, with the provisions of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), (ii) such filings and consents as may be required under any
environmental, health or safety law or regulation pertaining to any
notification, disclosure or required approval triggered by consummation of the
transactions contemplated by this Agreement, (iii) such filings, authorizations,
orders and approvals as may be required by state takeover laws (the "State
Takeover Approvals"), (iv) any of such items as may be required under foreign
laws, and (v) such other consents, orders, authorizations, registrations,
declarations, approvals and filings the failure of which to be obtained or made
would not, individually or in the aggregate, have a Material Adverse Effect on
Buyer, materially impair the ability of Buyer to perform its obligations
hereunder or prevent the consummation of any of the transactions contemplated
hereby or thereby. For purposes of this Agreement, "Material Adverse Effect" and
"Material Adverse Change" mean,


                                       10


when used with respect to Buyer, any change or effect that is or could
reasonably be expected (as far as can be foreseen at the time) to be materially
adverse to the business, operations, properties, assets, liabilities, employee
relationships, customer or supplier relationships, earnings or results of
operations, financial projections or forecasts, or the business prospects and
condition of Buyer and its Subsidiaries taken as a whole.

                                  ARTICLE III -
                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY
                  ---------------------------------------------

         Each representation and warranty set forth below is qualified by any
exception or disclosures set forth in the letter dated the date hereof and
delivered on the date hereof by the Company to Buyer, which relates to this
Agreement and is designated therein as the Company Letter (the "Company
Letter"), which exceptions specifically reference the Sections to be qualified.
In all other respects, each representation and warranty set out in this Article
III is not qualified in any way whatsoever, will not merge on the Closing, or by
reason of the execution and delivery of any agreement, document or instrument at
the Closing, will remain in force on and after the Closing Date, is given with
the intention that liability is not confined to breaches discovered before
Closing, is separate and independent and is not limited by reference to any
other representation or warranty or any other provision of this Agreement, and
is made and given with the intention of inducing Buyer to enter into this
Agreement. Any item, information or facts disclosed in one section or subsection
of the Company Letter will be deemed to be disclosed in all other sections or
subsections of the Company Letter where such disclosure would be appropriate and
reasonably apparent on its face without any additional information or where
specifically cross referenced. For purposes of this Agreement, the "Company's
Knowledge" or "to the Knowledge of the Company" means the actual knowledge of
George Harter, David Kressler, Sew-Wah Tay, Dennis Wahr, Peter Keith, Tom
Resseman, Steve Hackett, Peggy Holland, Jim Pavliska, Dave Blaeser, and, for
purposes of Section 3.20 only, Tom Heiland. The Company represents and warrants
to Buyer as follows:

            SECTION 3.1 ORGANIZATION, STANDING AND POWER.

                        (a) The Company is a limited liability company duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the requisite power and authority to carry on its business as
now being conducted. The Company is duly qualified to do business, and is in
good standing, in each jurisdiction where the character of its properties owned
or held under lease or the nature of its activities makes such qualification
necessary, except where the failure to be so qualified or in good standing would
not have a Material Adverse Effect on the Company or the Company Subs. The
Company has previously delivered to Buyer accurate and complete copies of the
Certificate of Formation of the Company and the Fourth Amended and Restated
Limited Liability Company Agreement of the Company as currently in full force
and effect (together, the "Company Charter"). There are no other governing or
organizational documents of the Company other than the Company Charter. Except
as listed in Section 3.1 of the Company Letter, there are no agreements between


                                       11


holders of Company Membership Units in their capacity as such. There have been
no predecessor entities of the Company.

                        (b) Each Company Sub is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has the requisite corporate power and authority to carry on its business as
now being conducted. Each Company Sub is duly qualified to do business, and is
in good standing, in each jurisdiction where the character of its properties
owned or held under lease or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified or in good
standing would not have a Material Adverse Effect on the Company Subs. The
Company has previously delivered to Buyer accurate and complete copies of the
articles of incorporation and bylaws of each Company Sub. There have been no
predecessor entities of any of the Company Subs.

            SECTION 3.2 CAPITAL STRUCTURE.

                        (a) INC. The authorized capital stock of INC consists
of 1,500,000 shares of Common Stock, of which 1,200,000 shares of Common Stock
are issued and outstanding on the date hereof (the "INC Shares"). The INC Shares
are all duly authorized, validly issued, fully paid and nonassessable.

                        (b) PFO. The authorized capital stock of PFO consists of
100 shares of Common Stock, of which 100 shares of Common Stock are issued and
outstanding on the date hereof (the "PFO Shares"). The PFO Shares are all duly
authorized, validly issued, fully paid and nonassessable.

                        (c) DMC. The authorized capital stock of DMC consists of
100 shares of Common Stock, of which 100 shares of Common Stock are issued and
outstanding on the date hereof (the "DMC Shares"). The DMC Shares are all duly
authorized, validly issued, fully paid and nonassessable.

                        (d) Subsidiaries. Other than INC, PFO and DMC, the
Company has no Subsidiaries.

                        (e) The Shares. The INC Shares, the PFO Shares and the
DMC Shares constitute all of the shares of capital stock that comprise the
Shares. The Company is the record and beneficial owner of the Shares, free and
clear of any Encumbrance. The Company has the right, authority and power to
sell, assign and transfer the Shares to Buyer. Upon delivery to Buyer of
certificates for the Shares at the Closing, the Buyer shall acquire good, valid
and marketable title to the Shares, free and clear of any Encumbrance other than
Encumbrances created by Buyer. Other than the Shares, no Company Sub has issued
or agreed to issue any: (i) share of capital stock or other equity or ownership
interest, (ii) option, warrant or interest convertible into, exchangeable for or
exercisable for shares of capital stock or other equity or ownership interests,
(iii) stock appreciation right, phantom stock, interest in the ownership or
earnings of any Company Sub or other equity equivalent or equity-based award or
right; or (iv) bond, debenture or other indebtedness having the right to vote or
convertible or


                                       12


exchangeable for securities having the right to vote. Except for the rights
granted to Buyer under this Agreement, there are no outstanding obligations of
any Company Sub to issue, sell or transfer or repurchase, redeem or otherwise
acquire or that relate to the holding, voting or disposition of or that restrict
the transfer of the Shares. All of the Shares have been offered, sold and
delivered in compliance with all applicable federal and state securities laws.
No Shares have been issued in violation of any rights, agreements, arrangements
or commitments under any provision of Applicable Law, the certificate of
incorporation or bylaws of the relevant Company Sub or any Contract to which the
Company or any Company Sub is a party or by which any of them are bound.

                        (f) Except for the Shares, neither the Company nor any
Company Sub owns any equity, partnership, membership or similar interest in, or
any interest convertible into or exchangeable therefor, or is under any current
or prospective obligation to form or participate in, provide funds to, make any
loan, capital contribution or other investment in or assume or guarantee any
liability or obligation of, any Person.

            SECTION 3.3 AUTHORITY. The Company has all requisite power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by the Company
and the consummation by the Company of the transactions contemplated hereby have
been duly authorized by all necessary action on the part of the Company,
including approval of this agreement by a majority of the holders of membership
units of the Company (the "Company Membership Units"). No further approval of
the holders of Company Membership Units is required in connection with the
consummation of the transactions contemplated by this Agreement. This Agreement
has been duly and validly executed and delivered by the Company and (assuming
the valid authorization, execution and delivery of this Agreement by Buyer and
the validity and binding effect of the Agreement on Buyer) constitutes the valid
and binding obligation of the Company enforceable against the Company in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium and other similar laws of
general applicability relating to or affecting creditors' rights generally and
by the application of general principles of equity, whether such proceeding is
considered in equity or at law.

            SECTION 3.4 CONSENTS AND APPROVALS; NO VIOLATION. Except as set
forth in Section 3.4 of the Company Letter, assuming that all consents,
approvals, authorizations and other actions described in this Section 3.4 have
been obtained and all filings and obligations described in this Section 3.4 have
been made and any waiting periods thereunder have terminated or expired, the
execution and delivery of this Agreement does not, and the consummation of the
transactions contemplated hereby and compliance with the provisions hereof and
thereof will not, result in any violation of, or default (with or without notice
or lapse of time, or both) under, or give to others a right of termination,
cancellation or acceleration of any obligation or result in the loss of a
benefit under, or result in the creation of any lien, security interest, charge
or encumbrance upon any of the properties or assets of the Company or any of its
Subsidiaries under, any provision of (a) the Company Charter, (b) any provision
of comparable charter or organizational documents of any of the Company Subs,
(c) any Material Contract, or (d)


                                       13


any judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to the Company or any Company Sub or any of their respective
properties or assets. No filing or registration with, or authorization, consent
or approval of, any Governmental Entity is required by or with respect to the
Company or any of its Subsidiaries in connection with the execution and delivery
of this Agreement by the Company or is necessary for the consummation of the
transactions contemplated by this Agreement, except for (i) in connection, or in
compliance, with the provisions of the HSR Act, (ii) such filings and consents
as may be required under any environmental, health or safety law or regulation
pertaining to any notification, disclosure or required approval triggered by the
consummation of the transactions contemplated by this Agreement, and (iii) any
of such items as may be required under foreign laws.

            SECTION 3.5 FINANCIAL STATEMENTS.

                        (a) The Company has furnished Buyer with copies of the
following (collectively, the "Financial Statements"): (i) an audited
consolidated balance sheet of the Company as of December 31, 2003, (ii) an
unaudited consolidated balance sheet for the Company as of September 30, 2004,
and (iii) the related statements of income and of changes in financial position
for such periods. The balance sheet of the Company as of September 30, 2004 is
referred to herein as the "Company Balance Sheet" and the date thereof is
referred to herein as the "Company Balance Sheet Date". The Financial Statements
are included as Section 3.5 of the Company Letter.

                        (b) The Financial Statements: (i) are correct and
complete in all material respects and have been prepared in accordance with the
books and records of the Company and the Company Subs; (ii) have been prepared
in accordance with GAAP consistently applied throughout the periods covered,
except as noted in the Financial Statements and except with respect to the
Financial Statements as of and for the period ended September 30, 2004, which do
not include all information and footnotes required by GAAP and do not reflect
the adjustments set forth in Section 3.5(b) of the Company Letter, but
nevertheless reflect all adjustments (other than those set forth in Section 3.5
of the Company Letter), which are of a normal recurring nature, necessary for a
fair presentation of the Company's financial position and the results of its
operations; (iii) reflect and provide in accordance with GAAP adequate reserves
in respect of all known liabilities of the Company and the Company Subs,
including all known contingent liabilities, as of such dates; (iv) do not
contain any items of a special or nonrecurring income or any other income not
earned in the ordinary course of business except as expressly specified therein;
and (v) present fairly in all material respects the consolidated financial
condition of the Company and the Company Subs at such dates and the consolidated
results of their operations for the fiscal periods then ended.

                        (c) The Company and each Company Sub keeps books,
records and accounts that, in reasonable detail, accurately and fairly reflect
(i) the transactions and dispositions of assets of such entities and (ii) the
value of inventory calculated in accordance with GAAP.

                                       14


                        (d) Except as set forth in Section 3.5(d) of the Company
Letter, there are no intra-company amounts payable or accounts receivable
between the Company on the one hand and the Company Subs on the other hand.

                        (e) Except as reflected or reserved against in the
Financial Statements (which reserves have been established in accordance with
GAAP), or disclosed in the footnotes thereto and except as set forth in Section
3.5(e) of the Company Letter, the Company and its Subsidiaries had no
liabilities (including Tax liabilities) at the Balance Sheet Date, absolute or
contingent, of a type required to be recorded on a balance sheet or disclosed in
the notes thereto under GAAP. As of the date hereof, the Company and the Company
Subs had no indebtedness for borrowed money.

            SECTION 3.6 NO DEFAULT. Except as set forth in Section 3.6 of the
Company Letter, neither the Company or any of its Subsidiaries is in breach,
default or violation (and no event has occurred that with notice or the lapse of
time or both would constitute a breach, default or violation) of any term,
condition or provision of (a) its charter or organizational documents, (b) any
Material Contract, (c) any order, writ, injunction, decree, law, statute, rule,
or regulation applicable to the Company or any of its Subsidiaries or any of
their respective properties or assets.

            SECTION 3.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set
forth in Section 3.7 of the Company Letter, since the Company Balance Sheet
Date, (a) the Company and its Subsidiaries have not incurred any liability or
obligation (indirect, direct or contingent), or entered into any oral or written
agreement or other transaction, that is not in the ordinary course of business,
(b) the Company and its Subsidiaries have not sustained any loss or interference
with their business or properties from fire, flood, windstorm, accident or other
calamity (whether or not covered by insurance), (c) there has been no change in
the capitalization of the Company except for the issuance of Company Membership
Units pursuant to Company Options, (d) there has been no change in the
capitalization of any of the Company Subs, (e) there has been no dividend or
distribution of any kind declared, paid or made by the Company on any class of
Company Membership Units, (f) there has been no dividend or distribution of any
kind declared, paid or made by any of the Company Subs on the Shares, (g) there
has not been (i) any adoption of a new Company Plan (as hereinafter defined),
(ii) any amendment to a Company Plan increasing benefits thereunder, (iii) any
granting by the Company or any of its Subsidiaries to any executive officer or
other key employee of the Company or any of its Subsidiaries of any increase in
compensation, except in the ordinary course of business consistent with prior
practice or as was required under employment agreements in effect as of the date
of the Company Balance Sheet Date, (iv) any granting by the Company or any of
its Subsidiaries to any such executive officer or other key employee of any
increase in severance or termination agreements in effect as of the Company
Balance Sheet Date, or (v) any entry by the Company or any of its Subsidiaries
into any employment, severance or termination agreement with any such executive
officer or other key employee, (h) there have not been any changes in the amount
or terms of the indebtedness for borrowed money or guarantees of indebtedness
for borrowed money of the Company and its Subsidiaries from the Balance Sheet
Date (including capitalized leases), and (i) there has been no event causing a
Material Adverse Effect on the


                                       15


Company Subs, nor any development that would, individually or in the aggregate,
reasonably be expected to result in a Material Adverse Effect on the Company
Subs. For purposes of this Agreement, "Material Adverse Change" or "Material
Adverse Effect" mean, when used with respect to the Company or the Company Subs,
any change or effect that is or could reasonably be expected (as far as can be
foreseen at the time) to be materially adverse to the business, operations,
properties, assets, liabilities, employee relationships, customer or supplier
relationships, earnings or results of operations, or the financial condition of
the Company Subs, taken as a whole, other than such changes, effects or
circumstances reasonably attributable to: (i) economic conditions generally in
the United States or foreign economies in any locations where the Company Subs
have operations or sales; (ii) conditions generally affecting the industries in
which the Company Subs participate, provided, with respect to clauses (i) and
(ii) the changes, effects or circumstances do not have a materially
disproportionate effect (relative to other industry participants) on the Company
Subs; (iii) the payment of any amounts due to, or the provision of any other
benefits to, any officers or employees under employment contracts,
non-competition agreements, employee benefit plans, severance arrangements or
other arrangements in existence on the date of this Agreement and disclosed in
the Company Letter; (iv) any action taken by the Company or the Company Subs
with Buyer's express written consent (except that consent to action taken to
respond to a Material Adverse Effect or a Material Adverse Change shall not be
deemed any waiver by Buyer as to the event or circumstance giving rise to such
Material Adverse Effect or Material Change); or (v) the announcement or pendency
of the transactions contemplated by this Agreement to the extent the same causes
cancellation or delay in placing customer orders or potential customer orders.

            SECTION 3.8 PERMITS AND COMPLIANCE.

                        (a) Each of the Company and its Subsidiaries is and at
all times has been in possession of all material franchises, grants,
authorizations, licenses, permits, easements, variances, exceptions, consents,
certificates, approvals and orders of any Governmental Entity necessary for the
Company or any of its Subsidiaries to own, lease and operate its properties or
to carry on its business as it is now being conducted (the "Company Permits"),
and no suspension or cancellation of any of the Company Permits is pending or,
to the Knowledge of the Company or the Company Subs, threatened. Neither the
Company nor any of its Subsidiaries is nor has been in violation in any material
respect of (i) any Company Permits, or (ii) any other Applicable Law, including
any consumer protection, equal opportunity, customs, export control, foreign
trade, foreign corrupt practices (including the Foreign Corrupt Practices Act),
patient confidentiality, health, health care industry regulation and third-party
reimbursement laws including under any Federal Health Care Program (as defined
in Section 1128B(f) of the U.S. Federal Social Security Act (together with all
regulations promulgated thereunder, the "SSA")).

                        (b) Neither the Company nor any of its Subsidiaries is
subject to any consent decree from any Governmental Entity. Neither the Company
nor any of its Subsidiaries has received any warning letter from the FDA during
the last three years. Neither the Company nor any of its Subsidiaries has
received a communication from any


                                       16


regulatory agency or been notified during the last three years that any product
approval is withdrawn or modified or that such an action is under consideration.
Without limiting the foregoing, the Company and its Subsidiaries are in
compliance, in all material respects, with all current applicable statutes,
rules, regulations, guidelines, policies or orders administered or issued by the
FDA or comparable foreign Governmental Entity including FDA's Quality System
Regulation, 21 CFR Part 820; the Company has no Knowledge of any facts which
furnish any reasonable basis for any Form FDA-483 observations or regulatory or
warning letters from the FDA, Section 305 notices, or other similar
communications from the FDA or comparable foreign entity; and since April 30,
1999, there have been no recalls, field notifications, alerts or seizures
requested or threatened relating to the Company Products, except set forth in
Section 3.8 of the Company Letter. The Company Products, where required, are
being marketed under valid pre market notifications under Section 510 (k) of the
Federal Food, Drug and Cosmetic Act, 21 U.S.C. ss.360(k), and 21 C.F.R. Part
807, Subpart E ("510(k)'s") or PMA's. All 510(k)'s and PMA's for the Company
Products are exclusively owned by the Company Subs, and to the Knowledge of the
Company there is no reason to believe that FDA is considering limiting,
suspending, or revoking any such 510(k)'s or PMA's or changing the marketing
classification or labeling of any such products. To the Knowledge of the
Company, there is no false information or significant omission in any product
application or product-related submission to the FDA or comparable foreign
Governmental Entity. The Company Subs have obtained all necessary regulatory
approvals from any foreign regulatory agencies related to the products
distributed and sold by the Company Subs. Neither the Company, nor its
Subsidiaries, nor any of their respective officers, directors, managing
employees or agents (as those terms are defined in 42 C.F.R. ss.1001.1001): (i)
have engaged in any activities which are prohibited under, or are cause for
civil penalties or mandatory or permissive exclusion from, any Federal Health
Care Program under Sections 1128, 1128A, 1128B, or 1877 of SSA or related state
or local statutes, including knowingly and willfully offering, paying,
soliciting or receiving any remuneration (including any kickback, bribe or
rebate), directly or indirectly, overtly or covertly, in cash or in kind in
return for, or to induce, the purchase, lease, or order, or the arranging for or
recommending of the purchase, lease or order, of any item or service for which
payment may be made in whole or in part under any such program; (ii) have had a
civil monetary penalty assessed against them under Section 1128A of SSA; (iii)
have been excluded from participation under any Federal Health Care Program; or
(iv) have been convicted (as defined in 42 C.F.R. ss. 1001.2) of any of the
categories of offenses described in Sections 1128(a) or 1128(b)(1), (b)(2), or
(b)(3) of SSA.

                        (c) Except as set forth in Section 3.8(c) of the Company
Letter, there are no contracts or agreements of the Company or its Subsidiaries
having terms or conditions which would have a Material Adverse Effect on the
Company Subs or having covenants not to compete that impair the ability of the
Company or its Subsidiaries to conduct the business of the Company Subs as
currently conducted or would reasonably be expected to impair Buyer's ability to
conduct the business of the Company Subs as it is currently being conducted
(other than as a result of facts or circumstances related solely to Buyer).

                                       17


            SECTION 3.9 TAX MATTERS. Except as otherwise set forth in Section
3.9 of the Company Letter, (a) the Company Subs have timely filed (taking
account of extensions to file that have been properly obtained) all Tax Returns
(as hereinafter defined) required to have been filed by them, and such Tax
Returns are correct and complete in all respects; (b) the Company Subs have
timely paid (taking account of extensions to pay that have been properly
obtained) all Taxes (as hereinafter defined) required to have been paid by them
that have been due; (c) the Company Subs have complied in all respects with all
rules and regulations relating to the withholding of Taxes and the remittance of
withheld Taxes; (d) none of the Company Subs has waived any statute of
limitations in respect of their Taxes, which remains open; (e) no federal,
state, local, or foreign audits or administrative proceedings are pending with
regard to any Taxes or Tax Returns of any of the Company Subs and none of the
Company Subs has received a written notice of any proposed audit or proceeding
from the Internal Revenue Service ("IRS") or any other taxing authority; (f)
none of the Company Subs has engaged in any transaction that would constitute a
"reportable transaction" within the meaning of Section 6111 or a "tax shelter"
within the meaning of Section 6662 of the Internal Revenue Code of 1986, as
amended (the "Code") and that has not been disclosed on an applicable Tax
Return; (g) none of the Company Subs has submitted a request for a ruling to the
IRS or any other taxing authority; (h) none of the Company Subs has at any time
changed any of its methods of reporting income or deductions for Tax purposes
from those employed in the preparation of its Tax Returns; (i) none of the
Company Subs has been a member of an affiliated group of corporations (within
the meaning of Section 1504(a)) filing a consolidated federal income tax return
(or a group of corporations filing a consolidated, combined, or unitary income
tax return under comparable provisions of state, local, or foreign tax law) for
any taxable period; (j) none of the Company Subs has any obligation under any
agreement or arrangement with any other Person with respect to Taxes of such
other Person (including pursuant to Treasury Regulations Section 1.1502-6 or
comparable provision of state, local or foreign tax law) including any liability
for Taxes of any predecessor entity; (k) the unpaid Taxes of the Company Subs do
not exceed the reserve for Tax liability (excluding any reserve for deferred
Taxes established to reflect temporary differences between book and Tax income)
set forth or included in the Company Balance Sheet as adjusted for the passage
of time through the Closing Date, and (l) Section 3.9 of the Company Letter sets
forth all jurisdictions outside of the United States in which any of the Company
Subs is subject to Tax, is engaged in business, or has a permanent
establishment. For purposes of this Agreement: (i) "Taxes" means any federal,
state, local, foreign or provincial income, gross receipts, property, sales,
use, license, franchise, employment, payroll, withholding, alternative or added
minimum, ad valorem, value-added, transfer, excise, capital, or net worth tax,
or other tax, custom, duty, governmental fee or other like assessment or charge
of any kind whatsoever, together with any interest thereon or penalty imposed
with respect thereto by any Governmental Entity, whether computed on a separate,
consolidated, unitary, combined, or any other basis, and shall include any
transferee or secondary liability in respect of any tax (whether imposed by law,
contractual agreement, or otherwise), and (ii) "Tax Return" means any return,
report or similar statement (including the attached schedules) required to be
filed with respect to any Tax, including any information return, claim for
refund, amended return or declaration of estimated Tax.

                                       18


            SECTION 3.10 ACTIONS AND PROCEEDINGS. Except as set forth in Section
3.10 of the Company Letter, there are no outstanding orders, judgments,
injunctions, awards or decrees of any Governmental Entity against or involving
the Company or any of its Subsidiaries, or against or involving any of the
present or former directors, officers, employees, consultants, agents or members
of the Company or any of its Subsidiaries, in their capacities as such, any of
its or their properties, assets or business or any Company Plan (as hereinafter
defined). Except as set forth in Section 3.10 of the Company Letter, there are
no actions, suits or claims or legal, administrative or arbitrative proceedings
or investigations (including claims for workers' compensation) pending or, to
the Knowledge of the Company, threatened against or involving the Company or any
of its Subsidiaries or any of its present or former directors, officers,
employees, consultants, agents or members, in their capacities as such, or any
of the Company's or any Subsidiary's properties, assets or business or any
Company Plan.

            SECTION 3.11 CERTAIN AGREEMENTS.

                        (a) Except as set forth in Section 3.11(a) of the
Company Letter, neither the Company nor any of the Company Subs is a party to
any oral or written agreement, program, plan or other arrangement relating to
the compensation of employees of the Company or the Company Subs, including any
employment agreement, severance agreement, option plan, appreciation rights
plan, restricted membership unit plan or membership unit purchase plan, pension
plan (as defined in Section 3(2) of ERISA) or welfare plan (as defined in
Section 3(1) of ERISA) (collectively the "Compensation Agreements"), any of the
benefits of which will be increased, or the vesting of the benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement. Section 3.11(a) of the Company Letter sets forth (i) for each
officer, director or employee who is a party to, or will receive benefits under,
any Compensation Agreement as a result of the transactions contemplated herein,
the total amount that each such Person may receive, or is eligible to receive,
assuming that the transactions contemplated by this Agreement are consummated on
the date hereof, and (ii) the total amount of indebtedness owed to the Company
or the Company Subs from each officer, director or employee of the Company and
the Company Subs.

                        (b) Set forth in Section 3.11(b) of the Company Letter
is a list of all Material Contracts to which any of the Company Subs is a party
as of the date hereof or to which any of its assets are bound. Prior to the date
hereof, the Company has provided true and complete copies of all such Material
Contracts to Buyer. "Material Contracts" means any of the following contracts,
agreements or arrangements (other than purchase or sales orders entered into in
the ordinary course), whether written or oral, currently in effect:

                            (i) any contract or commitment that involves a
dollar amount in excess of $50,000 or extends for a period of 12 months or more;

                                       19


                            (ii) any employment contracts with employees, agents
or consultants;

                            (iii) any contract with sales or other agents,
brokers, franchisees, distributors or dealers;

                            (iv) any partnership or joint venture agreement;

                            (v) any lease or other occupancy or use agreements
related to Real Estate, or any options, rights of first refusal or security or
other interests in Real Estate;

                            (vi) any agreements giving any party the right to
renegotiate or require a reduction in price or refund of payments previously
made in connection with the business of the Company or its Subsidiaries;

                            (vii) any agreements for the borrowing or lending of
money with respect to the business of the Company or its Subsidiaries and any
guaranty agreement or other evidence of indebtedness;

                            (viii) any material agreements that contain any
provisions requiring the Company or any of its Subsidiaries to indemnify any
other party thereto;

                            (ix) any agreement for the sale of goods or services
to any Governmental Entity;

                            (x) any agreement granting any Person a Lien (other
than a Permitted Lien) on any of the assets of the Company or any of its
Subsidiaries;

                            (xi) any bonus, executive or deferred compensation,
profit sharing, pension or retirement, option or membership unit purchase,
hospitalization, insurance, medical reimbursement or other plan, agreement or
arrangement or practice providing employee or executive benefits to any officer
or employee or former officer or former employee;

                            (xii) any non-competition, secrecy or
confidentiality agreement relating to the business of the Company or its
Subsidiaries or the Assets or any other contract restricting its right to
conduct the business of the Company or its Subsidiaries at any time, in any
manner or at any place in the world, or the expansion thereof to other
geographical areas, customers, suppliers or lines of business; or

                            (xiii) any license agreement granting to any Company
Sub any right to use or practice any rights under any Intellectual Property
(other than commercially available software applications used generally in the
Company's or Company Subs' operations and that are licensed for a license fee of
no more than $50,000 in the aggregate) and any license agreement under which any
Company Subs grants licenses or other rights in or to use or practice any rights
under any Intellectual Property.

                                       20


                         (c) Except as set forth on Section 3.11(c) of the
Company Letter, each Material Contract is a legal, valid and binding agreement
of one of the Company Subs, as applicable; no Company Sub (or to the Knowledge
of the Company, any other party thereto) is in default under any Material
Contract in any material respect; and none of such Material Contracts has been
canceled by the other party thereto. Each Material Contract is in full force and
effect and no event has occurred which, with the passage of time or the giving
of notice or both, would constitute a material default, event of default or
other material breach by the applicable Company Sub which would entitle the
other party to such Material Contract to terminate the same or declare a default
or event of default thereunder. The Company and its Subsidiaries are not in
receipt of any claim of default under any such agreement.

            SECTION 3.12 ERISA.

                         (a) Each Company Plan is listed in Section 3.12(a) of
the Company Letter. With respect to each Company Plan, the Company has made
available to Buyer a true and correct copy of (i) the three most recent annual
reports (Form 5500) filed with the applicable government agency, (ii) each such
Company Plan that has been reduced to writing and all amendments thereto, (iii)
each trust agreement, insurance contract or administration agreement relating to
each such Company Plan, (iv) a written summary of each unwritten Company Plan,
(v) the most recent summary plan description or other written explanation of
each Company Plan provided to participants, (vi) the most recent actuarial
report or valuation relating to a Company Plan subject to Title IV of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), (vii) the
most recent determination letter or opinion letter and request therefor, if any,
issued by the IRS with respect to any Company Plan intended to be qualified
under section 401(a) of the Code, (viii) any request for a determination
currently pending before the IRS, (ix) all correspondence with the IRS, the
Department of Labor, or Pension Benefit Guaranty Corporation relating to any
outstanding controversy or with respect to any matter that has been resolved in
the previous three years and (x) all forms and certificate samples used to
comply with Sections 4980, 9801 and 9802 of the Code. Except as disclosed in
Section 3.12(a) of the Company Letter, each Company Plan complies in form and
has complied in operation in all respects with ERISA, the Code and all other
Applicable Law. Except as set forth in Section 3.12(a) of the Company Letter, no
"reportable event" (within the meaning of Section 4043 of ERISA) has occurred
with respect to any Company Plan for which the 30-day notice requirement has not
been waived. Except as disclosed in Section 3.12(a) of the Company Letter,
neither the Company nor any Company Sub or ERISA Affiliates (as hereinafter
defined) has ever contributed to or had any obligation to contribute to any
multiemployer plan (as defined in Section 3(37) of ERISA). Except as disclosed
in Section 3.12(a) of the Company Letter, no Company Plan is subject to Title IV
of ERISA or Section 412 of the Code, nor does the Company or any ERISA Affiliate
have any liability (contingent or otherwise) pursuant to Title IV of ERISA.

                         (b) Except as listed in Section 3.12(b) of the
Company Letter and except for routine contributions due and owing, with respect
to the Company Plans, no event has occurred and there exists no condition or set
of circumstances in connection


                                       21


with which the Company, the Company Subs, or ERISA Affiliate or Company Plan
fiduciary could be subject to any material liability under the terms of such
Company Plans, ERISA, the Code or any other Applicable Law. Except as disclosed
in Section 3.12(a) of the Company Letter, all Company Plans that are intended to
be qualified under Section 401(a) of the Code have been determined by the IRS to
be so qualified, or a timely application for such determination is now pending
and the Company is not aware of any reason why any such Company Plan is not so
qualified in operation. Except as disclosed in Section 3.12(b) of the Company
Letter, neither the Company nor any of its ERISA Affiliates has any liability or
obligation under any welfare plan to provide benefits after termination of
employment to any employee or dependent other than as required by Section 4980B
of the Code.

                         (c) As used herein, (i) "Company Plan" means a "pension
plan" (as defined in Section 3(2) of ERISA (including a multiemployer plan)), a
"welfare plan" (as defined in Section 3(1) of ERISA), and any other written or
oral bonus, profit sharing, deferred compensation, incentive compensation,
membership unit ownership, membership unit purchase, option, phantom unit,
restricted unit, unit appreciation right, holiday pay, vacation, severance,
medical, dental, vision, disability, death benefit, sick leave, fringe benefit,
personnel policy, insurance or other plan, program, agreement, arrangement or
understanding, in each case established or maintained by the Company, the
Company Subs or ERISA Affiliates or as to which the Company or any of its
Subsidiaries or ERISA Affiliates has contributed or otherwise may have any
liability, and (ii) "ERISA Affiliate" means any trade or business (whether or
not incorporated) which would be considered a single employer with the Company
or any Company Sub pursuant to Section 414(b), (c), (m) or (o) of the Code and
the regulations promulgated under those sections or pursuant to Section 4001(b)
of ERISA and the regulations promulgated thereunder.

                         (d) Section 3.12(d) of the Company Letter contains a
list of all (i) severance and employment agreements with employees of the
Company, the Company Subs and each ERISA Affiliate, (ii) severance programs and
policies of the Company, the Company Subs, and each ERISA Affiliate with or
relating to its employees and (iii) plans, programs, agreements and other
arrangements of the Company, the Company Subs and each ERISA Affiliate with or
relating to its employees containing change of control or similar provisions.

                         (e) Except as set forth in Section 3.12(e) of the
Company Letter, neither the Company nor any of the Company Subs is a party to
any agreement, contract or arrangement that could result, separately or in the
aggregate, in the payment, acceleration or enhancement of any benefit as a
result of the transactions contemplated hereby including, without limitation,
the payment of any "excess parachute payments" within the meaning of Section
280G of the Code.

                         (f) Except as disclosed in Section 3.12(a) of the
Company Letter, there is no Company Plan that is subject to the laws of a
foreign government or jurisdiction.

                                       22


            SECTION 3.13 COMPLIANCE WITH WORKER SAFETY LAWS. The properties,
assets and operations of the Company and the Company Subs are in material
compliance with all applicable federal, state, local and foreign laws, rules and
regulations, orders, decrees, judgments, permits and licenses relating to public
and worker health and safety (collectively, "Applicable Worker Safety Laws").
With respect to such properties, assets and operations, including any previously
owned, leased or operated properties, assets or operations, there are no past or
present events, conditions, circumstances, activities, practices, incidents,
actions or plans of the Company or any of the Company Subs that may interfere
with or prevent material compliance or continued material compliance with
Applicable Worker Safety Laws.

            SECTION 3.14 PRODUCTS.

                         (a) Since December 31, 1999, neither the Company nor
any of its Subsidiaries has received a claim for or based upon breach of product
or service warranty or guaranty or similar claim, strict liability in tort,
negligent design of product, negligent provision of services or any other
allegation of liability, including or arising from the materials, design,
testing, manufacture, packaging, labeling (including instructions for use), or
sale of its products or from the provision of services; and there is no basis
for any such claim.

                         (b) The Company has provided in Section 3.14(b) of the
Company Letter a schedule of the Company Subs' products in development and
planned introductions. The product and service engineering, development,
manufacturing and quality control processes which have been and are being
followed by the Company and the Company Subs are reasonably designed to produce
products and services which (i) are consistent with the claims made about them
in the sales brochures and other statements made about them by or on behalf of
the Company or the Company Subs, (ii) comply with applicable regulatory
requirements, and (iii) avoid claims of the type described in Section 3.14(a).

            SECTION 3.15 LABOR MATTERS. Neither the Company nor any of the
Company Subs is a party to any collective bargaining agreement or labor
contract, nor, to the Knowledge of the Company, is there any current effort to
organize any employees of the Company or any Company Sub. Neither the Company
nor any Company Sub has engaged in any unfair labor practice with respect to any
persons employed by or otherwise performing services primarily for the Company
or any of the Company Subs (the "Company Business Personnel"), and there is no
unfair labor practice complaint or grievance against the Company or by any
Person pursuant to the National Labor Relations Act or any comparable state
agency or foreign law pending or, to the Knowledge of the Company, threatened in
writing with respect to the Company Business Personnel. There is no labor
strike, slowdown or stoppage pending or, to the Knowledge of the Company,
threatened against or affecting the Company or any Company Sub that may
interfere with the respective business activities of the Company and the Company
Subs. The Company and the Company Subs have complied in all material respects
with all Applicable Laws relating to employment and labor.

                                       23


            SECTION 3.16 INTELLECTUAL PROPERTY.

                         (a) As used herein, the term "Intellectual Property"
means all intellectual property rights arising from or associated with the
following, whether protected, created or arising under the laws of the United
States or any other jurisdiction with respect to the following: (i) trade names,
trademarks and service marks (registered and unregistered), domain names and
other Internet addresses or identifiers, trade dress and similar rights and
applications (including intent to use applications) to register any of the
foregoing (collectively, "Marks"); (ii) patents and patent applications and
rights with respect to utility models or industrial designs (collectively,
"Patents"); (iii) copyrights (whether registered or unregistered) and
registrations and applications therefor (collectively, "Copyrights"); and (iv)
know-how, inventions, discoveries, methods, processes, techniques,
methodologies, formulae, algorithms, technical data, specifications, research
and development information, technology, data bases and other proprietary or
confidential information, including customer lists, in each case that derives
economic value (actual or potential) from not being generally known to other
persons who can obtain economic value from its disclosure, but excluding any
Copyrights or Patents that cover or protect any of the foregoing (collectively,
"Trade Secrets").

                         (b) Section 3.16(b)(1) of the Company Letter sets forth
an accurate and complete list of all registered Marks and applications for
registration of Marks owned by or exclusively licensed to the Company Subs
(collectively the "Company Registered Marks"), Section 3.16(b)(2) of the Company
Letter sets forth an accurate and complete list of all Patents owned by or
exclusively licensed to the Company Subs (these Patents, as well as divisional,
continuation, continuation-in-part, reissue, reexamination, and any other
applications that claim priority to one or more of the Patents and any Patents
issuing from any such applications, both in the U.S. and in foreign
jurisdictions will be collectively referred to as collectively the "Company
Patents"), and Section 3.16(b)(3) of the Company Letter sets forth an accurate
and complete list of all registered Copyrights and all pending applications for
registration of Copyrights owned by or exclusively licensed to the Company Subs
(collectively the "Company Registered Copyrights" and, together with the Company
Registered Marks and the Company Patents, the "Company Registered IP"). No
Company Registered IP has been or is now involved in any interference, reissue,
reexamination, opposition or cancellation proceeding and, to the Knowledge of
the Company, no such action is or has been threatened with respect to any of the
Company Registered IP. To the Company's Knowledge, all Company Registered IP has
been registered or obtained in accordance with all applicable legal requirements
and is currently in compliance in all material respects with all legal
requirements (including the timely post-registration filing of affidavits of use
and incontestability and renewal applications) other than any requirement that,
if not satisfied, would not result in a cancellation of any such Company
Registered IP or otherwise materially affect the priority, validity and
enforceability of such Company Registered IP. To the Company's Knowledge, the
Company Registered IP is valid, subsisting and enforceable, and no notice or
claim challenging the validity or enforceability or alleging the misuse of any
of the Company Registered IP has been received by the Company or any of its
Subsidiaries. Except as may be set forth in Section 3.16(b) of the Company
Letter and to the Company's Knowledge, (i) neither the


                                       24


Company nor any of its Subsidiaries has taken any action or failed to take any
action that could reasonably be expected to result in the abandonment,
cancellation, forfeiture, relinquishment, invalidation or unenforceability of
any of the Company Registered IP, and (ii) all filing, examination, issuance,
post registration and maintenance fees, annuities and the like associated with
or required with respect to any of the Company Registered IP have been timely
paid.

                         (c) Trademarks. To the Company's Knowledge, there has
been no prior use of any Company Registered Mark or any material unregistered
Mark adopted by the Company Subs (collectively, "Company Marks") by any third
party that would confer upon such third party superior rights in such Company
Mark. The Company is not aware of any infringement of the Company Marks. To the
Company's Knowledge, all Company Registered Marks have been continuously used by
the Company Subs in the form appearing in, and in connection with, the goods and
services listed in their respective registration certificates and applications
therefor, respectively.

                         (d) Actions to Protect Trade Secrets. To the Company's
Knowledge, each of the Company Subs has taken reasonable steps to protect its
rights in its Intellectual Property and to maintain the confidentiality of all
information that constitutes or that at any time constituted a Trade Secret of
the Company Subs. Without limiting the generality of the foregoing, all current
and former employees, consultants and contractors of the Company Subs who have
participated in the creation of any Intellectual Property that is used by the
Company Subs in the conduct of their respective businesses have entered into
proprietary information, confidentiality and assignment agreements substantially
in the Company's standard forms.

                         (e) Ownership. The Company does not own or license any
Intellectual Property. Except as set forth in Section 3.16(e) of the Company
Letter, the Company Subs own exclusively all right, title and interest to the
Company Registered IP and all other Intellectual Property used by the Company
Subs that is not licensed to the Company Subs pursuant to a written license
agreement, free and clear of any Lien or other adverse claims or interests, and
neither the Company nor any of its Subsidiaries has received any written notice
or claim challenging the Company Subs' ownership of any of such Intellectual
Property. None of such Intellectual Property owned by the Company Subs is
subject to any outstanding order, judgment, or stipulation restricting the use
thereof by the Company Subs.

                         (f) License Agreements. Section 3.16(f)(1) of the
Company Letter sets forth a complete and accurate list of all agreements
granting to the Company Subs any right under or with respect to any Intellectual
Property owned by a third party that is used in connection with the business of
the Company Subs other than commercially available standard desktop software
applications used generally in the Company's or any such Company Subs'
operations and that are licensed for a license fee of no more than $50,000 in
the aggregate (collectively, the "Inbound License Agreements"), indicating for
each the title and the parties thereto. Section 3.16(f)(2) of the Company Letter
sets forth a complete and accurate list of all license agreements under which
any Company Sub grants any rights under any Intellectual Property, excluding


                                       25


non-exclusive, end user licenses granted by the Company Subs in the ordinary
course of business to purchasers of the Company Products in which any software
is embedded. Section 3.16(f)(3) of the Company Letter lists the amount of any
future royalty, license fee or other payments that may become payable by the
Company Subs under each such Inbound License Agreements by reason of the use or
exploitation of the Intellectual Property licensed thereunder. To the Company's
Knowledge, no loss or expiration of any material Intellectual Property licensed
to the Company Subs under any Inbound License Agreement is pending or reasonably
foreseeable or threatened. To the Company's Knowledge, there is no outstanding
or threatened dispute or disagreement with respect to any Inbound License
Agreement or any license agreements under which any Company Subs grants any
rights under any Intellectual Property (collectively, the "Outbound License
Agreements") that could materially affect any of the respective rights and
obligations of the parties thereunder. To the Company's Knowledge, the
execution, delivery and performance by the Company of this Agreement, and the
consummation of the transactions contemplated hereby, will not result in the
loss or impairment of, or give rise to any right of any third party to terminate
or re-price or otherwise modify any of the Company Subs' rights or obligations
under any Inbound License Agreement or any Outbound License Agreement.

                         (g) Sufficiency of IP Assets. The Intellectual Property
owned by the Company Subs or licensed under the Inbound License Agreements to
the Company Subs constitutes all the material Intellectual Property rights
necessary for the conduct of the businesses of the Company Subs as each is
currently conducted and proposed to be conducted, excluding commercially
available standard desktop software applications used generally in the Company
Subs' operations and that are licensed for a license fee of no more than $50,000
in the aggregate.

                         (h) No Infringement. Except as set forth in Section
3.16(h) of the Company Letter, to the Company's Knowledge, none of the products
or services distributed, sold or offered by the Company Subs, nor any
technology, materials or other Intellectual Property used, displayed, published,
sold, distributed or otherwise commercially exploited by or for the Company
Subs, has infringed upon, misappropriated, or violated, or does infringe upon,
misappropriate or violate any Intellectual Property of any third party in any
material respect, and no Company Sub has received any notice or claim asserting
that any such infringement, misappropriation or violation is occurring or has
occurred. To the Company's Knowledge, no third party is misappropriating or
infringing any material Intellectual Property owned by the Company Subs in any
material respect.

                         (i) Software. No source code of any computer software
owned by the Company Subs has been licensed or otherwise provided to another
person other than an escrow agent pursuant to the terms of a source code escrow
agreement in customary form, and to the Company's Knowledge the Company has
taken reasonable steps to protect all such source code as a Trade Secret of one
or more of the Company Subs. Except as disclosed in Section 3.16(i) of the
Company Letter and to the Company's Knowledge, no software embedded in any
Company Products (i) contains any code that is owned by any third party,
including any code that is licensed pursuant to


                                       26


the provisions of any "open source" license agreement, or any other license
agreement that requires source code be distributed or made available in
connection with the distribution of the licensed software in object code form or
that limits the amount of fees that may be charged in connection with
sublicensing or distributing such licensed software (each, an "Open Source
License"). None of the Company Products in which Software is embedded, as a
result of the intermingling or integration of code owned by the Company Subs
with any "open source" software licensed under any Open Source License is, in
whole or in part, subject to the provisions of any Open Source License.

                         (j) Performance of Existing Products. Each of the
Company Products performs, in all material respects, free of defects or errors
that adversely affect the functionality of such products, the functions
described in any applicable specifications or end user documentation provided to
customers of the Company Subs on which such customers relied when acquiring such
products.

                         (k) Documentation. To the Company's Knowledge, the
Company and each of its Subsidiaries has taken all actions customary in the
medical device industry to document the Company Products and their operation,
such that the materials comprising the Company Products, including source code
and documentation, have been written in a clear and professional manner.

                         (l) Export Restrictions. Neither the Company nor any of
its Subsidiaries has exported or transmitted products or other materials to any
country to which such export or transmission is restricted by any applicable
law, without first having obtained all necessary and appropriate United States
or foreign government licenses or permits.

                         (m) Employee Confidentiality Agreements. To the
Company's Knowledge, no employee of or consultant to the Company or any Company
Sub is obligated under any agreement or subject to any judgment, decree or order
of any court or administrative agency, or any other restriction that would
interfere with the use of his or her best efforts to carry out his or her duties
for the Company or any Company Sub or to promote the interests of the Company
Subs. To the Company's Knowledge, at no time during the conception of or
reduction to practice of any Intellectual Property owned or developed by the
Company Subs was any developer, inventor or other contributor to such
Intellectual Property operating under any grants from any Governmental Authority
or private source, performing research sponsored by any Governmental Authority
or private source or subject to any employment agreement or invention assignment
or nondisclosure agreement or other obligation with any third party that could
adversely affect the Company Subs' rights in such Intellectual Property. To the
Company's Knowledge, there exist no inventions by current and former employees
or consultants of any Company Sub, made or otherwise conceived prior to their
beginning employment or consultation with such Company Sub that have been or
will be incorporated into any of the Company's Intellectual Property or
products.

                         (n) Intellectual Property Opinions. Set forth in
Section 3.16(n) of the Company Letter is a list of all written opinions of
counsel related to Intellectual


                                       27


Property that the Company or any Company Sub has ever received. A true and
correct copy of each such opinion has been provided to Buyer.

            SECTION 3.17 BUSINESS COMBINATION. No "fair price," "interested
shareholder," "business combination" or similar provision of any state takeover
law is applicable to the transactions contemplated by this Agreement.

            SECTION 3.18 ACCOUNTS RECEIVABLE. All of the accounts and notes
receivable of the Company Subs set forth on the books and records of the Company
Subs (net of the applicable reserves reflected on the books and records of the
Company and in the Financial Statements) (i) represent sales actually made or
transactions actually effected in the ordinary course of business for goods or
services delivered or rendered to unaffiliated customers in bona fide arm's
length transactions and (ii) except as set forth on Section 3.18(ii) of the
Company Letter, constitute valid claims.

            SECTION 3.19 INVENTORIES. Except as set forth in Section 3.19 of the
Company Letter, all inventories of the Company Subs consist of items of
merchantable quality and quantity usable or saleable (free of any material
defect or deficiency) in the ordinary course of business, are saleable at
prevailing market prices that are not less than the book value amounts thereof
or the price customarily charged by the Company Subs therefor, conform to the
specifications established therefor, and have been manufactured in all material
respects in accordance with applicable regulatory requirements. Except as set
forth in Section 3.19 of the Company Letter, the quantities of all inventories,
materials, and supplies of the Company Subs (net of the obsolescence reserves
therefor shown in the Financial Statements and determined in the ordinary course
of business consistent with past practice) are not obsolete, damaged,
slow-moving, defective, or excessive.

            SECTION 3.20 ENVIRONMENTAL MATTERS.

                         (a) For purposes of this Agreement, the following terms
shall have the following meanings: (i) "Hazardous Substances" means (A)
petroleum and petroleum products, by-products or breakdown products, radioactive
materials, asbestos-containing materials and polychlorinated biphenyls, and (B)
any other chemicals, materials or substances regulated as toxic or hazardous or
as a pollutant, contaminant or waste under any applicable Environmental Law;
(ii) "Environmental Law" means any law, past, present or future (up until the
Closing) and as amended, and any judicial or administrative interpretation
thereof, including any judicial or administrative order, consent decree or
judgment, or common law, relating to pollution or protection of the environment,
health or safety or natural resources, including those relating to the use,
handling, transportation, treatment, storage, disposal, release or discharge of
Hazardous Substances; and (iii) "Environmental Permit" means any permit,
approval, identification number, license or other authorization required under
any applicable Environmental Law.

                         (b) The Company and its Subsidiaries are and have been
in material compliance with all applicable Environmental Laws, have obtained all
Environmental Permits and are in material compliance with their requirements,
and have


                                       28


resolved all past non-compliance with Environmental Laws and Environmental
Permits without any pending, on-going or future obligation, cost or liability,
except in each case for the notices set forth in Section 3.20 of the Company
Letter.

                         (c) Except as set forth in Section 3.20 of the Company
Letter, neither the Company nor any of its Subsidiaries has (i) placed, held,
located, released, transported or disposed of any Hazardous Substances on,
under, from or at any of the Company's or any of its Subsidiaries' properties or
any other properties, (ii) Company Knowledge of any Hazardous Substances on,
under, emanating from, or at any of the Company's or any of its Subsidiaries'
properties or any other property but arising from the Company's or any of its
Subsidiaries' current or former properties or operations, or (iii) Company
Knowledge or any written notice (A) of any violation of or liability under any
Environmental Laws, (B) of the institution or pendency of any suit, action,
claim, proceeding or investigation by any Governmental Entity or any third party
in connection with any such violation or liability, (C) requiring the
investigation of, response to or remediation of Hazardous Substances at or
arising from any of the Company's or any of its Subsidiaries' current or former
properties or operations or any other properties, (D) alleging noncompliance by
the Company or any of its Subsidiaries with the terms of any Environmental
Permit in any manner reasonably likely to require significant expenditures or to
result in liability or (E) demanding payment for response to or remediation of
Hazardous Substances at or arising from any of the Company's or any of its
Subsidiaries' current or former properties or operations or any other
properties, except in each case for the notices set forth in Section 3.20 of the
Company Letter.

                         (d) There are no environmental assessments or audit
reports or other similar studies or analyses in the possession or control of the
Company or any of its Subsidiaries relating to any real property currently or
formerly owned, leased or occupied by the Company or any of its Subsidiaries.

                         (e) Neither the Company nor any of its Subsidiaries has
exposed any employee or third party to any Hazardous Substances or condition
that has subjected or may subject the Company or any of its Subsidiaries to
liability under any Environmental Law.

                         (f) To the Company's Knowledge, no underground storage
tanks, asbestos-containing material, or polychlorinated biphenyls have ever been
located on property or properties presently or formerly owned or operated by the
Company or any of its Subsidiaries.

                         (g) Except as set forth in Section 3.20 of the Company
Letter, neither the Company nor any of its Subsidiaries has agreed to assume,
undertake or provide indemnification for any liability of any other person under
any Environmental Law, including any obligation for corrective or remedial
action.

                         (h) Neither the Company nor any of its Subsidiaries is
required to make any capital or other expenditures to comply with any
Environmental Law nor is


                                       29


there any reasonable basis on which any Governmental Entity could take action
that would require such capital or other expenditures.

            SECTION 3.21 SUPPLIERS AND DISTRIBUTORS.

                         (a) Except as set forth in Section 3.21(a) of the
Company Letter, to the Company's Knowledge, neither the Company nor any of its
Subsidiaries has received any notice, oral or written, or has any reason to
believe that any significant supplier, including without limitation any sole
source supplier, will not sell raw materials, supplies, merchandise and other
goods to the Company Subs at any time after the Closing on terms and conditions
substantially similar to those used in its current sales to the Company and its
Subsidiaries, subject only to general and customary price increases, unless
comparable raw materials, supplies, merchandise, or other goods are readily
available from other sources on comparable terms and conditions.

                         (b) Except as set forth in Section 3.21(b) of the
Company Letter, neither the Company nor any of its Subsidiaries has received any
notice, oral or written, or to the Company's Knowledge has any reason to believe
that any distributors, sales representatives, sales agents, or other third party
sellers, will not sell or market the products or services of the Company or any
of its Subsidiaries at any time after the Closing (without giving effect to the
transactions contemplated hereby) on terms and conditions substantially similar
to those used in the current sales and distribution contracts of the Company and
its Subsidiaries.

            SECTION 3.22 INSURANCE. Section 3.22 of the Company Letter contains
a list of all policies of title, property, fire, casualty, liability, life,
business interruption, product liability, sprinkler and water damage, workmen's
compensation, libel and slander, and other forms of insurance of any kind
relating to the business and operations of the Company Subs in each case which
are in force as of the date hereof (the "Insurance Policies"). Except for the
Insurance Policies listed in Section 3.22(a) of the Company Letter, all of the
Insurance Policies are in the name of, in favor of, and for the benefit of, the
Company Subs, rather than the Company. All of the Insurance Policies are
maintained with reputable insurance carriers and provide adequate coverage for
all normal risks incident to the business of the Company Subs and their
respective properties and assets. The Company or one of its Subsidiaries has
made any and all payments required to maintain the Insurance Policies in full
force and effect. The Company and its Subsidiaries have not received notice of
default under any Insurance Policy, and has not received written notice or, to
the Knowledge of the Company, oral notice of any pending or threatened
termination or cancellation, coverage limitation or reduction or premium
increase with respect to any Insurance Policy.

            SECTION 3.23 TRANSACTIONS WITH AFFILIATES.

                         (a) For purposes of this Section 3.23, the term
"Affiliated Person" means (i) any holder of more than 5% of the Company
Membership Units, (ii) any director, officer or senior executive of the Company
or any Subsidiary of the


                                       30


Company, (iii) any member of the immediate family of any of such persons, or
(iv) any Person that is controlled by any of the foregoing.

                         (b) Except as set forth in Section 3.23(b) of the
Company Letter, since the Company Balance Sheet Date, the Company and its
Subsidiaries have not, in the ordinary course of business or otherwise, (i)
purchased, leased or otherwise acquired any property or assets or obtained any
services from, (ii) sold, leased or otherwise disposed of any property or assets
or provided any services to (except with respect to remuneration for services
rendered in the ordinary course of business as director, officer or employee of
the Company or any of its Subsidiaries), (iii) entered into or modified in any
manner any contract with, or (iv) borrowed any money from, or made or forgiven
any loan or other advance (other than expenses or similar advances made in the
ordinary course of business) to, any Affiliated Person.

                         (c) Except as set forth in Section 3.23 of the Company
Letter, (i) the contracts of the Company and its Subsidiaries do not include any
obligation or commitment between the Company and any Affiliated Person, (ii) the
assets of the Company and its Subsidiaries do not include any receivable or
other obligation or commitment from an Affiliated Person to the Company or any
Subsidiary and (iii) the liabilities of the Company and its Subsidiaries do not
include any payable or other obligation or commitment from the Company or any
Subsidiary to any Affiliated Person.

                         (d) No Affiliated Person of any of the Company or any
Subsidiary is a party to any contract with any customer or supplier of the
Company or any Subsidiary that affects in any manner the business, financial
condition or results of operation of the Company or any Subsidiary.

            SECTION 3.24 ACCURACY OF INFORMATION. Neither this Agreement nor the
Company Letter contains an untrue statement of a material fact or omits to state
a material fact necessary in order to make the statements contained herein and
therein, in light of the circumstances under which they are made, not
misleading.

            SECTION 3.25 TITLE TO AND SUFFICIENCY OF ASSETS.

                         (a) As of the date hereof, the Company Subs own, and as
of the Closing the Company Subs will own, good and marketable title to all of
their assets constituting tangible personal property and rights under Material
Contracts (excluding, for purposes of this sentence, assets held under leases
and assets constituting Intellectual Property), free and clear of any and all
mortgages, liens, encumbrances, charges, claims, restrictions, pledges, security
interests or impositions (collectively, "Liens") other than Permitted Liens,
except as set forth in Section 3.25(a) of the Company Letter. Such tangible
assets and rights under Material Contracts, together with all assets held by the
Company Subs under leases, constitute all tangible personal property and rights
under Material Contracts used in the operation of the business as conducted by
the Company Subs, including the development, manufacture, sale and distribution
of the Company Products. The Company is not a party to any Material Contract and
does not own any tangible personal property, or other asset (other than (i) cash
and cash equivalents held by


                                       31


the Company which will be contributed to the Company Subs prior to the Closing
in accordance with Section 4.1(b)(viii) and (ii) the Secured Recourse Promissory
Note and Pledge Agreements executed by holders of Company Options in connection
with the exercise of such Company Options, for which an amount equal to the
aggregate amounts due under such notes will be contributed to the Company Subs
prior to the Closing or offset in accordance with Section 4.1(b)(viii)).

                         (b) As of the date hereof, the Company and its
Subsidiaries do not own any Real Estate. All Real Estate leases held by the
Company and its Subsidiaries are adequate for the operation of the businesses of
the Company and its Subsidiaries as presently conducted. The leases to all Real
Estate occupied by the Company or its Subsidiaries are listed in Section 3.25(b)
of the Company Letter and are in full force and effect and no event has occurred
which with the passage of time, the giving of notice, or both, would constitute
a material default or event of default by the Company or any Subsidiary or, to
the Knowledge of the Company, any other Person who is a party signatory thereto.
For purposes of this Agreement, "Real Estate" means, with respect to the Company
or any Subsidiary, as applicable, all of the fee, if any, or leasehold ownership
right, title and interest of such Person, in and to all real estate and
improvement owned or leased by any such Person and which is used by any such
Person in connection with the operation of its business.

            SECTION 3.26 BROKERS. Except as disclosed in Section 3.26 of the
Company Letter, no broker, investment banker or other Person is entitled to any
broker's, finder's or other similar fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of the Company. All such fees or commissions are payable by the
Company (out of the proceeds of the Cash Purchase Price), and not by any of the
Company Subs.

            SECTION 3.27 CONTROLS AND PROCEDURES. The officers of the Company
have identified for the Company's auditors any material weaknesses in internal
controls and any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's internal controls.

            SECTION 3.28 CERTAIN BUSINESS PRACTICES. None of the Company, any of
its Subsidiaries, or to the Company's Knowledge, any directors, officers, agents
or employees of the Company or any of its Subsidiaries has (a) used any funds
for unlawful contributions, gifts, entertainment or other unlawful expenses, (b)
made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns or violated
any provision of the Foreign Corrupt Practices Act of 1977, as amended, or (c)
made any payment in the nature of criminal bribery.

                                  ARTICLE IV -
                    COVENANTS RELATING TO CONDUCT OF BUSINESS
                    -----------------------------------------

            SECTION 4.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING THE CLOSING.
Except as expressly permitted by clauses (a)(i) through


                                       32


(xxviii) of this Section 4.1, during the period from the date of this Agreement
through the Closing, the Company and the Company Subs shall carry on their
respective business in the ordinary course of business as currently conducted
and, to the extent consistent therewith, use their respective commercially
reasonable efforts to preserve intact their current businesses organizations,
keep available the services of their respective current officers and employees
and preserve their relationships with customers, suppliers and others having
business dealings with them to the end that the goodwill and ongoing business of
the Company Subs shall be unimpaired at the Closing. Without limiting the
generality of the foregoing, and except as otherwise expressly contemplated by
this Agreement or as set forth in the Company Letter (with specific reference to
the applicable subsection below), prior to the Closing:

                         (a) The Company shall not, and shall cause its
Subsidiaries not to, without the prior written consent of Buyer:

                             (i) (A) declare, set aside or pay any dividends on,
or make any other actual, constructive or deemed distributions in respect of,
any Company Membership Units, or otherwise make any payments to the members of
the Company in their capacity as such, (B) declare, set aside or pay any
dividends on, or make any other actual, constructive or deemed distributions in
respect of, any Shares, or otherwise make any payments to the Company, (C)
split, combine or reclassify any of the Company Membership Units or Shares or
issue or authorize the issuance of any other securities in respect of, in lieu
of or in substitution for Company Membership Units or Shares or (D) purchase,
redeem or otherwise acquire any Company Membership Units or the Shares or any
other securities of the Company or the Company Subs or any rights, warrants or
options to acquire any such units or other securities;

                             (ii) issue, deliver, sell, pledge, dispose of or
otherwise encumber any Company Membership Units or any Shares, any other voting
securities or equity equivalent or any securities convertible into, or any
rights, warrants or options (including options under the Company Option Plans)
to acquire any such Company Membership Units or Shares, voting securities,
equity equivalent or convertible securities, other than the issuance of Company
Membership Units upon the exercise of Company Options outstanding on the date of
this Agreement in accordance with their current terms;

                             (iii) amend the Company Charter (other than as
contemplated by this Agreement) or the articles or bylaws of any Company Sub;

                             (iv) acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial portion of the assets of or
equity in, or by any other manner, any business or any corporation, limited
liability company, partnership, association or other business organization or
division thereof or otherwise acquire or agree to acquire any assets;

                                       33


                             (v) alter through merger, liquidation,
reorganization, restructuring or any other fashion the corporate structure of
the Company or any Company Sub;

                             (vi) sell, lease or otherwise dispose of, or agree
to sell, lease or otherwise dispose of, any of its assets, other than sales of
inventory that are in the ordinary course of business consistent with past
practice;

                             (vii) incur any indebtedness for borrowed money,
guarantee any such indebtedness or make any loans, advances or capital
contributions to, or other investments in, any other Person;

                             (viii) adopt a plan of complete or partial
liquidation, dissolution, merger, consolidation, restructuring, recapitalization
or other reorganization (other than the transactions contemplated by this
Agreement) or otherwise permit its corporate existence, or any of the rights or
franchises or any license, permit or authorization under which the business
operates to be suspended, lapsed or revoked;

                             (ix) enter into or adopt any, or amend any
existing, severance plan, agreement or arrangement or enter into or amend any
Company Plan, employment, or any consulting agreement (other than as set forth
in the Company Letter);

                             (x) except as provided in Section 4.1(x) of the
Company Letter, hire additional employees, consultants or other independent
contractors or increase the compensation payable or to become payable to its
directors, officers or employees (except for increases in the ordinary course of
business consistent with past practice in salaries or wages of employees of the
Company or any of its Subsidiaries who are not officers of the Company or any of
its Subsidiaries) or grant any severance or termination pay to, or enter into
any employment or severance agreement with, any director or officer of the
Company or any of its Subsidiaries, or establish, adopt, enter into, or, except
as may be required to comply with Applicable Law, amend in any material respect
or take action to enhance in any material respect or accelerate any rights or
benefits under, any labor, collective bargaining, bonus, profit sharing, thrift,
compensation, option, restricted unit, pension, retirement, deferred
compensation, employment, termination, severance or other plan, agreement,
trust, fund, policy or arrangement for the benefit of any director, officer or
employee;

                             (xi) knowingly violate or knowingly fail to perform
any obligation or duty imposed upon it or any Subsidiary by any Applicable Law;

                             (xii) make any change to accounting policies or
procedures (other than actions required to be taken by generally accepted
accounting principles);

                             (xiii) prepare or file any Tax Return inconsistent
with its past practice in preparing or filing similar Tax Returns in prior
periods or, on any such Tax Return, take any position, make any election, or
adopt any method that is


                                       34


inconsistent with positions taken, elections made or methods used in preparing
or filing similar Tax Returns in prior periods;

                             (xiv) fail to file in a timely manner any Tax
Returns (except as to filings for which a proper extension has been obtained)
that become due or fail to pay any Taxes that become due;

                             (xv) make or rescind any express or deemed election
relating to Taxes or change any of its methods of reporting income or deductions
for Tax purposes;

                             (xvi) commence any litigation or proceeding with
respect to any material Tax liability or settle or compromise any material Tax
liability or commence any other litigation or proceedings or settle or
compromise any other material claims or litigation;

                             (xvii) except for sales of inventory in the
ordinary course of business and the hiring of employees in the ordinary course
of business as permitted in subsection (ix), enter into, renew, terminate or
amend any Material Contract; or purchase or lease any real property;

                             (xviii) pay, discharge or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than (A) the payment, discharge or satisfaction,
in the ordinary course of business consistent with past practice or in
accordance with their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent financial statements (or the notes thereto) of
the Company included in the Financial Statements or incurred in the ordinary
course of business consistent with past practice or (B) the payment, discharge
or satisfaction of any and all amounts owed to Silicon Valley Bank pursuant to
the Loan and Security Agreement between INC and Silicon Valley Bank dated
January 31, 2003, as amended, in accordance with its terms;

                             (xix) create or form any Subsidiary or make any
other investment in another Person (except for the capital contributions
required by Section 4.1(b)(viii));

                             (xx) [INTENTIONALLY OMITTED];

                             (xxi) modify the standard warranty terms for
products sold by the Company or its Subsidiaries or amend or modify any product
warranties in effect as of the date hereof in any manner that is adverse to the
Company or its Subsidiaries;

                             (xxii) make or authorize any new capital
expenditure or expenditures that individually is in excess of $25,000 or in the
aggregate are in excess of $50,000;


                                       35


                             (xxiii) allow any of the Company's or any
Subsidiaries' Intellectual Property rights to be disclosed, other than under
appropriate non-disclosure agreements, abandoned, or otherwise become
unavailable to the Company or its Subsidiaries on the same terms and conditions
as such rights were available to the Company or its Subsidiaries as of the date
of this Agreement;

                             (xiv) sell or license to any third party any of its
Intellectual Property other than non-exclusive licenses in the ordinary course
of business;

                             (xxv) allow any insurance policy relating to the
Company's or any Subsidiaries' business to be amended or terminated without
replacing such policy without a policy providing at least equal coverage,
insuring comparable risks and issued by an insurance company equivalently rated
to the prior insurance company;

                             (xxvi) enter into or amend any contract, agreement,
commitment or arrangement with any Affiliated Person;

                             (xxvii) pay any legal fees, advisory fees, or other
transaction costs incurred in connection with the transactions contemplated by
this Agreement except out of the Cash Purchase Price; or

                             (xxviii) authorize, recommend, propose or announce
an intention to do any of the foregoing, or enter into any contract, agreement,
commitment or arrangement to do any of the foregoing.

                         (b) The Company shall and shall cause its Subsidiaries
to:

                             (i) maintain their respective assets and properties
(including Intellectual Property) in the ordinary course of business in the
manner historically maintained, reasonable wear and tear, damage by fire and
other casualty excepted;

                             (ii) promptly repair, restore or replace all assets
and properties in the ordinary course of business consistent with past practice;

                             (iii) upon any damage, destruction or loss to any
of its assets or properties, apply any and all insurance proceeds, if any,
received with respect thereto to the prompt repair, replacement and restoration
thereof;

                             (iv) comply with all Applicable Laws;

                             (v) take all actions necessary to be in compliance
with all Material Contracts and to maintain the effectiveness of all Company
Permits;

                             (vi) notify Buyer in writing of the commencement of
any action, suit, claim, investigation or other like proceeding by or against
the Company or any of its Subsidiaries;

                                       36


                             (vii) pay accounts payable and pursue collection of
its accounts receivable in the ordinary course of business, consistent with past
practices; and

                             (viii) contribute to the Company Subs, on or before
the Closing Date (A) all of the cash and cash equivalents held by the Company on
the date hereof, (B) any and all cash amounts received by the Company in
connection with the exercise of Company Options, (C) cash in an amount equal to
any and all amounts payable to the Company under any promissory note or other
evidence of indebtedness held by the Company in connection with the exercise of
Company Options that have not been repaid prior to the Closing, and (D) an
amount equal to the aggregate amount owing from the Company to any Company Sub
in connection with any obligations outstanding between them. To the extent the
Company has not contributed the funds to the Company Subs as set forth in the
preceding clause, Buyer may offset against the Cash Purchase Price,
dollar-for-dollar, accordingly.

            SECTION 4.2  CONDUCT OF THE BUSINESS DURING THE CONTINGENT
CONSIDERATION PERIOD.

                         (a) In General.

                             (i) Uncertainties. The parties understand and
acknowledge that there are uncertainties surrounding the business of the Company
and the Company Products, including, but not limited to: (A) the ability to
satisfactorily complete the design of the Company Products, (B) the clinical
safety of the Company Products, (C) market acceptance of the Company Products,
(D) competitive product offerings that may be introduced by third parties, and
(E) Intellectual Property owned by third parties. As a result of such
uncertainties, the parties agree and acknowledge that Buyer must have
flexibility to react to future developments. Buyer is entitled to exercise its
discretion with respect thereto subject, however, to the following provisions.

                             (ii) No Discontinuance. Prior to the end of FY
2008, Buyer will not withdraw from marketing and sale any Company Product that
is being sold by Buyer unless Buyer determines, in good faith, that a risk to
health, safety or Buyer's reputation exists in connection with the continued
marketing and sale of such Company Product. If Buyer does determine, in good
faith, that such a risk exists with regard to any Company Product, Buyer shall
have no liability to the Company or its members as a result of any impact such
decision, in and of itself, may have on the earning of any Contingent
Consideration.

                             (iii) Employment Decisions. All employment,
personnel and staffing decisions related to the Company Products shall be in the
sole discretion of Buyer. Buyer shall have no liability to the Company or its
members as a result of any impact such decision, in and of itself, may have on
the earning of any Contingent Consideration.

                             (iv) Restructuring and Sale. Buyer may merge all or
any of the Company Subs with or into Buyer or any of its Subsidiaries, including
any


                                       37


merger or other similar reorganization that would result in the termination of
the existence of any Company Sub. Buyer shall be free to sell, assign, transfer
or otherwise dispose of any Company Sub or their respective assets (including a
sale or exclusive license of the Velocimed Intellectual Property related to one
or more of the Company Products) (such sale, a "Permitted Sale"); provided that
a Permitted Sale shall be treated as set forth in Section 4.2(e).

                             (v) Regulatory Approvals. Buyer shall use
commercially reasonable efforts to obtain regulatory approval for the Company
Products in the United States, Japan and the European Union. However, Buyer
shall have the sole right to determine the type and quantity of data and testing
needed in order to assure the safety and efficacy of the Company Products.

                             (vi) Competitive Products. Buyer may acquire,
develop, market, manufacture and sell products that are competitive with the
Company Products and the impact such acquisition development, marketing,
manufacturing or sale, in and of itself, may have on the earning of any
Contingent Consideration shall not be the basis of any claim by the Company or
its members; PROVIDED, HOWEVER, that if Buyer sells any such competitive
product, the revenues from such sales will be included in the calculation of
Revenue if, and only if, such competitive product (A) would, but for the
ownership of the Velocimed Intellectual Property, infringe on the Velocimed
Intellectual Property, or (B) is a Distal Device, in which event, as provided in
Section 4.2(c)(v), 50% of such revenue will be included in such Revenue. Buyer
agrees that, in cases where Buyer sells such a competitive product, Buyer will
not discriminate against the Company Products in delivery priorities nor will
Buyer give its sales force or distributors any comparatively higher commissions
or sales incentives on such competitive products relative to commissions and
incentives on sales of the competitive Company Product.

                         (b) Premere Approval. Buyer shall use commercially
reasonable efforts to obtain the Premere Approval during the Contingent
Consideration Period. Notwithstanding the foregoing or any other provision
herein to the contrary, but subject to Buyer's determinations being subject to a
commercial reasonableness standard, in connection with obtaining the Premere
Approval:

                             (i) Expenditures. Buyer and the Company acknowledge
and agree that Buyer retains the right, in its sole and absolute discretion, to
determine the nature, manner, timing and amount of each and every expenditure
and business decision related to the Premere Approval.

                             (ii) Product Safety. Buyer shall have the sole
right to determine the type and quantity of data and testing needed in order to
assure the safety and efficacy of the related products.

                         (c) Revenue. Buyer shall use commercially reasonable
efforts to develop, distribute, manufacture, market and sell the Company
Products, subject to the provisions set forth in subparagraphs (i)-(v) below.
The parties acknowledge that the nature, timing and extent of such efforts will
vary product by product and that efforts


                                       38


undertaken with one Company Product may not be undertaken with another Company
Product, and agree that such differences shall not be the basis for any claim by
the Company or its members as long as the determinations made by Buyer have a
commercially reasonable basis.

                             (i) Prices. Buyer shall have absolute discretion in
setting the sales prices for any Company Product and the sales price set by
Buyer for any Company Products shall not provide any cause for any claims by the
Company or its members. Buyer shall be permitted to sell the Company Products
either on a stand-alone basis or in Bundled Sales.

                             (ii) Distribution. Except in the case of sales in
Japan (for which no increase shall be made), in calculating Revenue for sales
made to a third party distributor, the amount of the transfer price will be
increased by 10% for any sales in Central or South America, and by 15% for sales
in any other foreign country.

                             (iii) Bundled Sales. In the case of a Bundled Sale,
the gross invoiced price from the sale of the Company Product shall be
determined by first calculating the average selling price for each product
included in the Bundled Sale, in the country of sale, during the one-month
period ending on the day immediately preceding the first day of the accounting
month in which the Bundled Sale occurred. The gross invoiced price from the sale
of the Company Product shall be determined by using the ratio of individual
average selling price to allocate the Bundled Sale's gross invoiced price. For
example, if a Bundled Sale included both the Company Product, whose average
selling price in the country of sale was $1,000, and one Non-Eligible Product
whose average selling price in the country of sale was $2,000, and the Bundled
Sale gross invoiced price was $2,500, then the gross invoiced price from the
sale of the Company Product in connection with the Bundled Sale would be
$833.33. For purposes hereof:

                                   (A) "Bundled Sale" shall mean the sale of
Company Products together with Non-Eligible Products, where the prices of the
separate products are not separately stated.

                                   (B) "Non-Eligible Product" shall mean a
product or service sold by Buyer (or any of its Affiliates) other than a Company
Product.

                             (iv) Buyer Licensing. Revenue from Buyer Licensing
shall be calculated as follows:

                                   (A) If Buyer has licensed Velocimed
Intellectual Property to a third party licensee (a "Licensee") for use in the
field of cardiology or in any other medical field in which Buyer, during the
preceding fiscal year, had $5,000,000 or more of sales revenue, then the Revenue
attributable to such Buyer Licensing for purposes of Section 1.3(b)(xx) shall
equal the aggregate of the sales price of each unit sold by such Licensee less,
(X) transportation, insurance and handling expenses if separately stated on
Licensee's invoice, (Y) any credits or allowances granted with respect to such
product in the ordinary course of business to Licensee's customers,


                                       39


including, without limitation, credits and allowances on account of price
adjustments, returns, discounts, and charge-backs, and (Z) any sales, excise,
value-added, turnover or similar Taxes and any duties and other governmental
charges imposed on the importation, use or sale of a product; PROVIDED, HOWEVER,
that revenue from Bundled Sales or sales made through distributors in foreign
jurisdictions shall be calculated in accordance with the provisions of Section
4.2(c)(iii) hereof. Buyer will require such Licensee to provide Buyer with
sufficient information in order for Buyer to satisfy its information reporting
requirements hereunder.

                                   (B) If Buyer has licensed Velocimed
Intellectual Property to a Licensee for use in any medical field in which Buyer
had less than $5,000,000 of sales revenue during the preceding fiscal year, then
the Revenue attributable to such Buyer Licensing for purposes of Section
1.3(b)(xx) shall equal the royalty or license payment received by Buyer for such
Velocimed Intellectual Property from such Licensee.

                             (v) Distal Device Sales. One-half of revenue
derived by Buyer from the sale of a Distal Device shall be included in Revenue
hereunder, without regard to whether such Distal Device constitutes a competing
product with the Company Products or would, but for the ownership of the
Velocimed Intellectual Property, infringe on the Velocimed Intellectual
Property.

                         (d) Status Reports.

                             (i) Mid-Year Reports. Subject to the
confidentiality provisions set forth in Section 4.2(d)(ii), within 45 days after
the end of the second fiscal quarter of any Fiscal Year, Buyer shall prepare and
provide to the Company a report (the "Mid-Year Report") which shall set forth
(A) Revenue, listed by Company Product or other revenue source, earned during
the first two fiscal quarters of such Fiscal Year, and (B) a report concerning
the status of the Premere Approval which shall include an update on regulatory
and clinical progress.

                             (ii) Confidentiality Agreement. The Company shall
execute and deliver the confidentiality agreement attached hereto as EXHIBIT A
(the "Contingent Consideration Confidentiality Agreement"). The Company will not
provide any information contained in the Mid-Year Report, including information
related to the calculation of the Revenue-Based Contingent Consideration or the
status of the Premere Approval, or any other confidential information related to
the Company Products to any Person, including any director or officer of the
Company or any holder of Company Membership Units, unless such Person also
agrees to execute and deliver to Buyer the Contingent Consideration
Confidentiality Agreement. Notwithstanding anything to the contrary provided
herein, no Person (including any director or officer of the Company or any
holder of Company Membership Units) will be entitled to any such confidential
information if such Person is employed by, a director of, or a consultant to any
company engaged in a business that is competitive with the Company Products. All
directors and officers of the Company and all holders of Company Membership
Units who are either ineligible to obtain information as a result of the
immediately preceding sentence or who


                                       40


have not executed a Contingent Consideration Confidentiality Agreement shall be
entitled only to the information provided in the Revenue Notice and the Premere
Approval Notice.

                             (iii) Meetings. Subject to the provisions of
Section 4.2(d)(ii), if a Mid-Year Report, Premere Approval Notice or Revenue
Notice contains information that is of concern to the Company, the Company shall
have the right, but not the obligation, to have a representative of the Company
meet with a senior business representative of Buyer (the "Buyer Representative")
in order to ask high-level business questions of the Buyer Representative (such
meeting, a "Contingent Consideration Conference"). If the Company shall seek to
convene a Contingent Consideration Conference, the Company shall deliver notice
to Buyer of such request and the parties shall then work in good faith to
arrange for such meeting within 10 days of Buyer's receipt of such notice.

                     (e) Change in Control of Buyer; Permitted Sales.

                             (i) Definitions.

                                   (A) "Premere Trigger" means a Change In
Control in which the Acquiring Person is engaged in the manufacture and sale of
a product that is in direct competition with the Premere Product, including an
atrial septal closure device; or

                                   (B) "Proxis Trigger" means a Change In
Control in which the Acquiring Person is engaged in the manufacture and sale of
any Distal Device or any product that is in direct competition with the Proxis
Product.

                                   (C) A "Change In Control" of Buyer shall mean
the occurrence of any of the following: (X) the consummation in any transaction
or series of related transactions of the sale by Buyer of all or substantially
all of the Buyer's assets to another Person, (Y) the consummation of a
transaction or series of related transactions, including a merger or
consolidation with any other Person other than a transaction which results in
the voting securities of the Buyer outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of a surviving entity or its parent) at least fifty
percent of the total voting securities of Buyer or such surviving entity or its
parent outstanding immediately after such transaction or series of transactions,
or (Z) any Person or group becomes the "beneficial owner" (as defined in Rule
13d-3 of the Securities Exchange Act of 1934), directly or indirectly, of voting
securities of Buyer representing fifty percent or more of the total voting power
represented by Buyer's then outstanding voting securities. The person acquiring
such assets or voting securities shall herein be referred to as the "Acquiring
Person".

                             (ii) Payment on a Premere Trigger or Permitted Sale
of Premere Product.

                                       41


                                   (A) If, prior to December 31, 2008, a Premere
Trigger occurs or Buyer undertakes a Permitted Sale of the Premere Product,
then:

                                       (Y) an amount equal to $100,000,000 less
any Revenue-Based Contingent Consideration payments that have previously been
earned pursuant to Section 1.3(c) shall become earned in lieu of any
Revenue-Based Contingent Consideration payments that would otherwise be earned
pursuant to Section 1.3(c) and 50% of such amount shall be distributed in
accordance with the provisions of Section 1.3(e) following the end of each of
the next two Fiscal Years (unless such Premere Trigger or Permitted Sale occurs
in FY 2008, in which case 100% of such amount shall be distributed following the
end of FY 2008); and

                                       (Z) the Premere Approval shall be deemed
to have been granted during the Target Period in which such Premere Trigger or
Permitted Sale occurs.

                                   (B) If a Premere Trigger or Permitted Sale of
the Premere Product occurs between January 1, 2009 and September 30, 2010, then
the Premere Approval shall be deemed to have been granted during the Target
Period in which such Premere Trigger or Permitted Sale occurs.

                                   (C) In the event Contingent Consideration is
earned pursuant to this Section 4.2(e)(ii), then no further Contingent
Consideration shall ever be earned, and no further amounts shall ever become due
and payable with regard to the Contingent Consideration.

                             (iii) Payment on a Proxis Trigger. If a Proxis
Trigger occurs prior to December 31, 2008, then an amount equal to $100,000,000
less any Revenue-Based Contingent Consideration payments that have previously
been earned pursuant to Section 1.3(c) shall become earned in lieu of any
Revenue-Based Contingent Consideration payments that would otherwise be earned
pursuant to Section 1.3(c) and 50% of such amount shall be distributed in
accordance with the provisions of Section 1.3(e) following the end of each of
the next two Fiscal Years (unless such Proxis Trigger occurs in FY 2008, in
which case 100% of such amount shall be distributed following the end of FY
2008). In the event Contingent Consideration is earned pursuant to this Section
4.2(e)(iii), then no further Revenue-Based Contingent Consideration shall ever
be earned, and no further amounts shall ever become due and payable with regard
to the Revenue-Based Contingent Consideration.

                             (iv) Payment on Permitted Sale of the Proxis or
Venture Product.

                                   (A) If, prior to December 31, 2007 or during
FY 2008 if Buyer made a Revenue-Based Contingent Consideration payment for
either FY 2006 or FY 2007, Buyer undertakes a Permitted Sale of the Proxis
Product or the Venture Product, then an amount equal to $100,000,000 less any
Revenue-Based Contingent Consideration payments that have previously been earned
pursuant to Section 1.3(c) shall


                                       42


become earned in lieu of any Revenue-Based Contingent Consideration payments
that would otherwise be earned pursuant to Section 1.3(c) and 50% of such amount
shall be distributed in accordance with the provisions of Section 1.3(e)
following the end of each of the next two Fiscal Years. In the event Contingent
Consideration is earned pursuant to this Section 4.2(e)(iv), then no further
Revenue-Based Contingent Consideration shall ever be earned, and no further
amounts shall ever become due and payable with regard to the Revenue-Based
Contingent Consideration.

                                   (B) If, during FY 2008, Buyer undertakes a
Permitted Sale of the Proxis Product or the Venture Product and Buyer has not
made a Revenue-Based Contingent Consideration payment for either FY 2006 or FY
2007, then no amounts shall become automatically earned. Instead, Revenue for FY
2008 shall include the sales price of each unit of Proxis Product or Venture
Product (as the case may be) sold by the party acquiring such assets, less, (X)
transportation, insurance and handling expenses if separately stated on the
invoice, (Y) any credits or allowances granted with respect to such product in
the ordinary course of business to customers, including, without limitation,
credits and allowances on account of price adjustments, returns, discounts, and
charge-backs, and (Z) any sales, excise, value-added, turnover or similar Taxes
and any duties and other governmental charges imposed on the importation, use or
sale of a product; PROVIDED, HOWEVER, that revenue from Bundled Sales or sales
made through distributors in foreign jurisdictions shall be calculated in
accordance with the provisions of Section 4.2(c) hereof. Buyer will require the
buyer of such assets to provide Buyer with sufficient information in order for
Buyer to satisfy its information reporting requirements hereunder.

                             (v) Impossibility. Notwithstanding anything to the
contrary herein, if facts and circumstances at the time of a Change In Control
or Permitted Sale exist such that it would be impossible for any further
Revenue-Based Contingent Consideration to become earned, then no Revenue-Based
Contingent Consideration shall become due and payable pursuant to this Section
4.2(e). Similarly and notwithstanding anything to the contrary herein, if facts
and circumstances at the time of a Change In Control or Permitted Sale exist
such that it would be impossible for any Premere Approval-Based Contingent
Consideration to become earned, then no Premere Approval-Based Contingent
Consideration shall become due and payable pursuant to this Section 4.2(e). For
example, and not for purposes of limitation, if clinical trials have shown the
Premere Product to be ineffective and the Premere Approval will therefore not be
forthcoming, then no Contingent Consideration shall ever become due and payable
as a result of the operation of this Section 4.2(e).

                                   ARTICLE V -
                              ADDITIONAL AGREEMENTS
                              ---------------------

            SECTION 5.1  ACCESS TO INFORMATION.

                         (a) The Company shall, and shall cause each of its
Subsidiaries to, afford to the Buyer and its Subsidiaries and each of their
accountants, counsel, financial advisors and other representatives of Buyer
reasonable access, and permit them


                                       43


to make such inspections as they may reasonably require of, during the period
from the date of this Agreement through the Closing, all of their respective
properties, books, contracts, commitments and records (including engineering
records and Tax Returns and the work papers of independent accountants, if
available and subject to the consent of such independent accountants) and,
during such period, the Company shall, and shall cause each of its Subsidiaries
to, (i) promptly make available to Buyer all personnel of the Company and its
Subsidiaries knowledgeable about matters relevant to such inspections as
reasonably requested by Buyer and (ii) provide reasonable access to the
Company's facilities and operations to enable Buyer to conduct a health and
safety review of the business. No investigation pursuant to this Section 5.1
shall affect the rights of any party with respect to the representations and
warranties in Sections 3.9, 3.16, 3.25(a) or the right of setoff set forth in
Section 1.3(e)(vi) of this Agreement. All information obtained by Buyer pursuant
to this Section 5.1 shall be kept confidential in accordance with the
Confidentiality Agreement, dated January 5, 2004 between Buyer and the Company,
as amended as of August 26, 2004, and the Community of Interest Agreement dated
as of December 27, 2004 by and between Buyer, the Company and the Company Subs
(the "Confidentiality Agreement").

                         (b) The Company agrees to provide Buyer and its agents
and representatives with reasonable access to its employees during normal
working hours following the date of this Agreement, and after consultation with
the Company to, among other things, deliver offers of continued employment
contingent upon Closing and to provide information to such employees about
Buyer.

                         (c) On the Closing Date, the Company will deliver or
cause to be delivered to Buyer all original agreements, documents, books and
records and files stored on computer disks or tapes or any other storage medium
in the possession of the Company relating to the business and operations of the
Company and the Company Subs.

                         (d) After the Closing, at the Company's request and at
no cost to the Company, Buyer shall provide the Company with reasonable access
to such pre-Closing books and records of the Company or the Company Subs as are
in Buyer's possession and as the Company may reasonably require in connection
with any Tax Returns, Tax audits, or other bona fide business requirements.

                         (e) After the Closing, at Buyer's request and at no
cost to the Company, the Company shall provide Buyer with reasonable access to
such pre-Closing books and records of the Company or the Company Subs as are in
the Company's possession and as Buyer may reasonably require in connection with
any Tax Returns, Tax audits, or other bona fide business requirements.

            SECTION 5.2 FEES AND EXPENSES. Whether or not the Closing occurs,
the Company and Buyer, respectively, shall each bear their own costs and
expenses incurred in connection with this Agreement in accordance with its terms
and the transactions contemplated hereby, including the fees and disbursements
of counsel, financial advisors and accountants. The Company will pay all of its
expenses in


                                       44


connection with the transactions contemplated hereby from the Cash Purchase
Price and not from any other cash or other assets of the Company or Company
Subs.

            SECTION 5.3 NO SOLICITATION OR NEGOTIATION. Between the date hereof
and the earlier of the termination of this Agreement and the Closing Date, the
Company and the Company Subs will not (nor will the Company or the Company Subs
permit any of their respective officers, directors, employees, agents,
representatives or affiliates to), directly or indirectly, take any of the
following actions with any Person other than Buyer: (i) solicit, initiate,
entertain or encourage any proposals or offers from, or conduct discussions with
or engage in negotiations with any Person relating to any possible acquisition
of the Company or any or all of the Company Subs (whether by way of merger,
purchase of Company Membership Units, purchase of Shares, purchase of assets or
otherwise), any portion of Company Membership Units or any other equity interest
in the Company or any material part of its (tangible or intangible) assets; (ii)
provide information with respect to it to any Person, other than Buyer, relating
to, or otherwise cooperate with, facilitate or encourage any effort or attempt
by any such Person with regard to, any possible acquisition of the Company or
any or all of the Company Subs (whether by way of merger, purchase of Company
Membership Units, purchase of Shares, purchase of assets or otherwise), any
portion of Company Membership Units or any other equity interest in the Company,
purchase of Shares, or any material part of the Company's or any Company Sub's
(tangible or intangible) assets; or (iii) enter into any agreement with any
Person providing for the possible acquisition of the Company or any Company Sub
(whether by way of merger, purchase of Company Membership Units, purchase of
Shares, purchase of assets or otherwise), any portion of Company Membership
Units, purchase of Shares or any other equity interest in the Company or any
Company Sub or any material part of their respective (tangible or intangible)
assets. In the event the Company or any Company Sub receives any communication
from a third party expressing an interest in such a transaction, the Company
will immediately notify Buyer and provide Buyer with a copy of any written
communications and a detailed summary of any oral communications.

            SECTION 5.4  COOPERATION.

                         (a) Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use all reasonable efforts to
take or cause to be taken all actions and to do or cause to be done all things
reasonably necessary, proper or advisable under Applicable Law to consummate and
make effective the transactions contemplated by this Agreement and each of the
other Transaction Documents, including using all reasonable efforts to do the
following: (i) cooperate in the preparation and filing of any filings or
notifications that must be made under the HSR Act or otherwise to any
Governmental Entities; (ii) obtain consents of all third parties and
Governmental Entities necessary, proper, advisable or reasonably requested by
Buyer or the Company, for the consummation of the transactions contemplated by
this Agreement; (iii) contest any legal proceeding relating to the transactions
contemplated by this agreement; and (iv) execute any additional instruments
reasonably necessary to consummate the transactions contemplated hereby. The
Company agrees to use all reasonable efforts to encourage the employees of the
Company Subs to accept any offers of employment extended by Buyer.


                                       45


If at any time after the Closing any further action is necessary to carry out
the purposes of this Agreement, the proper officers and directors of each party
hereto shall take all such necessary action.

                         (b) Buyer and the Company will consult and cooperate
with one another, and consider in good faith the views of one another, in
connection with any analyses, appearances, presentations, letters, white papers,
memoranda, briefs, arguments, opinions or proposals made or submitted by or on
behalf of any party hereto in connection with proceedings under or relating to
any foreign, federal, or state antitrust, competition, or fair trade law. In
this regard but without limitation, each party hereto shall promptly inform the
other of any material communication between such party and the Federal Trade
Commission, the Antitrust Division of the United States Department of Justice,
or any other federal, foreign or state antitrust or competition Governmental
Entity regarding the transactions contemplated herein.

                         (c) Notwithstanding any provision of this Agreement or
otherwise, in connection with the compliance by the parties hereto with any
Applicable Law (including the HSR Act and similar merger notification laws or
regulations of any foreign Governmental Entity) and obtaining the consent or
approval of any Governmental Entity whose consent or approval may be required to
consummate the transactions contemplated by this Agreement, Buyer shall not be
required, or be construed to be required, to proffer to, or agree to: (i) sell
or hold separate, or agree to sell or hold separate, before or after the
Closing, any assets, businesses or any interests in any assets or businesses, of
Buyer, the Company, any Company Sub or any of their respective affiliates (or to
consent to any sale, or agreement to sell, by Buyer, the Company or any Company
Sub of any assets or businesses, or any interests in any assets or businesses),
or any change in or restriction on the operation by Buyer, the Company or any
Company Sub of any assets or businesses, (ii) enter into any agreement or be
bound by any obligation that, in Buyer's good faith judgment, would likely have
an adverse effect on the benefits to Buyer of the transactions contemplated by
this Agreement, or (iii) take any other action that, in Buyer's good faith
judgment, would be adverse to Buyer.

            SECTION 5.5 INTERCOMPANY ACCOUNTS; INDEBTEDNESS. All intercompany
accounts, payables, receivables, and loans between the Company, on the one hand,
and each Company Sub, on the other hand, shall be eliminated, released,
forgiven, paid or satisfied, or assigned, prior to the Closing, as directed by
Buyer.

            SECTION 5.6 INTERCOMPANY ARRANGEMENTS. All intercompany contracts or
arrangements not otherwise described in Section 5.5 that exist between the
Company on the one hand, and the Company Subs on the other hand, shall be
cancelled, assigned, or terminated, immediately prior to the Closing, as
directed by Buyer.

                                       46


            SECTION 5.7 PUBLIC ANNOUNCEMENTS. Buyer and the Company will issue a
press release or make another public statement regarding the execution of this
Agreement in a form that been mutually agreed upon by Buyer and the Company, but
will in any event include any information Buyer deems is required by applicable
law or by obligations pursuant to any listing agreement with or rules of any
national securities exchange. The Company will not issue any other press release
with respect to the transactions contemplated by this Agreement or otherwise
issue any verbal or written public statements with respect to such transactions
without prior consultation with and approval of Buyer, except as may be required
by applicable law or by obligations pursuant to any listing agreement with or
rules of any national securities exchange.

            SECTION 5.8 NOTIFICATION OF CERTAIN MATTERS. Buyer shall use its
best efforts to give prompt notice to the Company, and the Company shall use its
best efforts to give prompt notice to Buyer, of: (i) the occurrence, or
non-occurrence, of any event the occurrence, or non-occurrence, of which it is
aware and which would be reasonably likely to cause (A) any representation or
warranty contained in this Agreement and made by it to be untrue or inaccurate
in any material respect or (B) any covenant, condition or agreement contained in
this Agreement and made by it not to be complied with or satisfied in all
material respects, (ii) any failure of Buyer or the Company, as the case may be,
to comply in a timely manner with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder, or (iii) any change
or event which would be reasonably likely to have a Material Adverse Effect on
Buyer or the Company Subs, as the case may be; provided, however, that the
delivery of any notice pursuant to this Section 5.8 shall not limit or otherwise
affect the remedies available hereunder to the party receiving such notice.

            SECTION 5.9  COMPANY OPTION PLANS.

                         (a) The Company has taken, or shall take, all requisite
action so that, as of the Closing, each option to purchase Company Membership
Units (each, a "Company Option") that is outstanding immediately prior to the
Closing, whether or not then exercisable or vested, by virtue of the Closing and
without further action on the part of the Company, Buyer or the holder of that
Company Option, shall have been irrevocably exercised or forfeited by the holder
of such Company Option. The Company Subs shall pay the employer portion due, and
shall withhold and remit to the proper taxing authorities prior to the Closing
all applicable federal, state and local income, payroll and other taxes required
to be withheld by the Company with respect to the exercise of Company Options.

                         (b) The Company shall take all action necessary in
implementing the provisions of this Section 5.9, including amendment of the
Fourth Amended and Restated Limited Liability Company Agreement of the Company
dated August 31, 2004 or the Company Nonqualified Class C Membership Units
Option Plan (effective May 1, 2001) or the related option agreements, to ensure
that, after giving effect to the foregoing, no Company Option shall be
exercisable for Company Membership Units following the Closing. The Company
shall cancel all outstanding and


                                       47


unexercised Company Options and the Company Nonqualified Class C Membership
Units Option Plan (effective May 1, 2001) at the Closing.

                         (c) The parties acknowledge that the Company Subs shall
report $1.50 per unit as the fair market value of Class C Membership Units for
Company Options exercised prior to the date of this Agreement when computing
compensation income for reporting on IRS Form W-2 or Form 1099 to each holder of
a Company Option. Buyer acknowledges that such valuation determination was made
by the Company's Board of Directors prior to the date of this Agreement.

                         (d) The Company agrees to indemnify and hold harmless
Buyer and each of the Company Subs from any and all federal, state and local
income tax and payroll tax withholding obligations with respect to exercise of
the Company Options and all payments made or deemed made at any time to holders
of Company Options as a result of the exercise of the Company Option.

                         (e) Notwithstanding anything herein to the contrary,
Buyer agrees that, unless otherwise required by the IRS or other governmental
agency, no amendment, modification or adjustment will be made with respect to
the Company Board of Directors' determination of the fair market value of
Company Membership Units with respect to any taxable period or portion thereof
ending on or prior to the Closing Date, as such valuation may have been used by
the Company and its employees, officers and directors for purposes of computing
income, wages or gains (and related compensation expense) from the exercise of
outstanding Company Options by any person holding such options. Buyer agrees
that, unless otherwise required by the IRS or other governmental agency, all
related income tax, payroll, wage and income reporting (including Forms W-2 and
1099, if applicable), will be made on a basis consistent with any such
pre-Closing Date valuation by the Company Board of Directors, irrespective of
whether the applicable Tax Returns with respect thereto are filed by Company, a
Company Sub, Buyer or its affiliates.

                         (f) For any taxable period of the Company Subs
beginning before and ending on or after the Closing Date, Buyer shall timely
prepare and file with the appropriate tax authorities all Tax Returns required
to be filed after the Closing Date. All such Tax Returns shall be prepared on a
basis consistent with past practice unless otherwise required by applicable law.

                         (g) Each of the Company, the Company Subs and Buyer
shall reasonably cooperate, and shall cause their respective affiliates,
officers, employees, agents, auditors and representatives reasonably to
cooperate, in preparing and filing all Tax Returns, including maintaining and
making available to each other all records necessary in connection with Taxes,
and in resolving all Tax claims with respect to all taxable periods.





                                       48


            SECTION 5.10 NON COMPETE AGREEMENT. The Company shall not, directly
or indirectly (including, without limitation, through any existing or future
subsidiary), own, manage, operate, control, enable (whether by license,
sublicense, assignment or otherwise) or otherwise engage or participate in, or
be connected as a shareholder, partner, member, lender, guarantor or advisor of,
or consultant to, any Person that, directly or indirectly, (a) engages in the
research, design, development, testing, distribution, manufacturing or sale of
any product that competes with the Company Products, or (b) engages in the
research, design, development, testing, distribution, manufacturing or sale of
any product that is competitive to products marketed, sold or distributed by
Buyer, a Company Sub, or any of their existing or future direct or indirect
subsidiaries (including partnerships or other entities in which such persons
hold more than 50% of the combined voting power).

            SECTION 5.11 WARRANT AGREEMENT. Prior to the Closing, the Company
shall take all requisite action so that the Amended and Restated Warrant to
Purchase Class D Membership Units of the Company issued on January 24, 2003 (the
"Warrant Agreement") shall have been irrevocably exercised, in full, by Silicon
Valley Bancshares and that the registration right provisions thereof shall have
been terminated.

            SECTION 5.12 MEMBER AGREEMENT. Prior to the Closing, the Company
shall take all requisite action so that, holders of a number of each class of
the Company Membership Units have executed a Member Agreement, in form and
substance reasonably satisfactory to Buyer, sufficient to effect,
contemporaneously with the Closing, (i) the termination of the Fourth Amended
and Restated Holders Agreement, (ii) the termination of the Second Amended and
Restated Registration Rights Agreement, (iii) the amendment of the Fourth
Amended and Restated Limited Liability Company Agreement of the Company as
contemplated herein, (iv) the implementation of provisions of Section 5.9 of
this Agreement regarding the treatment of options to acquire Company Membership
Units, (v) the prohibition of any transfer of the Company Membership Units other
than by operation of law in the case of the death of an individual or the
dissolution of an entity, and (vi) the prohibition of the Company from incurring
any indebtedness or engaging in any business activity other than the
distribution and management of Contingent Consideration or the monitoring and
enforcement of the Company's rights hereunder (such agreement, the "Member
Agreement").

            SECTION 5.13 ASSIGNMENT BY THE COMPANY. Prior to the Closing, the
Company will assign to the Company Subs, in form and substance acceptable to the
Buyer (a) all of any interest the Company has under any Material Contract to
which it is a party, including the Material Contracts referenced in Section 3.25
of the Company Letter and the non-disclosure agreements referenced in the
Agreement dated June 25, 2003 by and among the Company, INC, PFO and DMC
(relating to the enforcement of non-disclosure agreements), and (b) all right,
title and interest in any Intellectual Property held or licensed by the Company.
The Buyer may not require that any terms of such assignments expand or enlarge
the representations and warranties of the Company set forth in this Agreement
with respect to the matter being assigned.

                                       49


            SECTION 5.14 INVOICES RECEIVED BY THE COMPANY AFTER THE CLOSING. The
Company shall deliver to Buyer at the Closing a schedule setting out a good
faith estimate of all invoices (by amount and by vendor) that are anticipated to
be rendered to the Company after the Closing Date for bona fide expenses
incurred on or prior to the Closing Date for the benefit of the business carried
on by the Company Subs, where the relevant product or service has been or will
be delivered or furnished to the Company Subs (excluding in any case legal fees,
advisory fees, or other transaction costs incurred in connection with the
transactions contemplated by this Agreement, "Eligible Invoices") As to Eligible
Invoices that are so scheduled or that the Company otherwise notifies to the
Buyer in writing within 120 days after the Closing Date, the Company shall
present such invoice to Buyer when received and Buyer shall pay such invoice in
accordance with its terms or, if Buyer wishes to dispute such invoice with the
vendor, then the Company shall reasonably cooperate with the Buyer in connection
with such dispute and Buyer shall indemnify and hold harmless the Company and
its members, officers, directors, employees and agents from and against any
claims in respect of such invoice by such vendor, provided, however, that the
foregoing obligation of Buyer shall be subject always to the Company's
representations, warranties and covenants under this Agreement and Buyer's
rights under Article VI and otherwise under this Agreement, such that in the
case of an Eligible Invoice being rendered for which the Company otherwise would
be responsible under the terms of this Agreement, Buyer may decline to pay such
Eligible Invoice or, in its sole discretion, may pay such Eligible Invoice and
recover as otherwise provided herein. Buyer shall not be responsible for any
expenses incurred by the Company that are not Eligible Invoices, or for Eligible
Invoices that are not notified in writing to Buyer within 120 days after the
Closing Date.

                                  ARTICLE VI -
                                 INDEMNIFICATION
                                 ---------------

            SECTION 6.1 GENERAL SURVIVAL. The parties agree that, regardless of
any investigation made by the parties, the representations, warranties,
covenants and agreements of the parties contained in this Agreement shall
survive the Closing for a period beginning on the Closing Date and ending at
5:00 p.m., Minneapolis, Minnesota time, on the same day of the month as the
Closing Date in the month that is 18 months after the Closing Date (the
"Holdback Termination Date"), except that (a) the indemnities, representations,
warranties, covenants and agreements due to breaches of representations and
warranties in Section 3.9 and Section 3.20 shall survive the execution and
delivery of this Agreement until March 31, 2011, and (b) (i) the covenants of
Buyer to pay the Contingent Consideration (subject to Section 1.3(e)(vi)) shall
survive the execution and delivery of this Agreement until the expiration of the
last Target Period and the payment or offset of any Contingent Consideration, if
any is due, as provided in this Agreement, and (ii) the obligation of Buyer to
indemnify Company Indemnitees in Section 6.2(b) hereof (x) insofar as it relates
to Taxes shall survive until March 31, 2011 and (y) insofar as it relates to
Intellectual Property of the Company Subs shall survive (subject to Section
1.3(e)(vi)) until the expiration of the last Target Period and the payment or
offset of any Contingent Consideration, if any is due, as provided in this
Agreement.

                                       50


            SECTION 6.2  INDEMNIFICATION IN GENERAL.

                         (a) Indemnification of Buyer. Subject to Article VI,
from and after the Closing, Buyer, each of the Company Subs, and their
respective affiliates, officers, directors, stockholders, members,
representatives and agents (collectively the "Buyer Indemnitees") shall be
indemnified and held harmless by the Company from and against and in respect of
any and all Losses incurred by, resulting from, arising out of, relating to,
imposed upon or incurred by Buyer, any Company Sub, or any other Buyer
Indemnitee by reason of any of the following:

                             (i) any inaccuracy in or breach of any of the
Company's representations, warranties, covenants or agreements contained in this
Agreement or any of the other Transaction Documents (as hereinafter defined) to
which the Company is a party; and

                             (ii) any misrepresentation contained in any
certificate furnished to Buyer or any other Indemnitee by or on behalf of the
Company pursuant to this Agreement or any other Transaction Document.

                         (b) Indemnification of Seller. Subject to Article VI,
from and after the Closing, the Company and its affiliates, officers, directors,
stockholders, members, representatives and agents (collectively the "Company
Indemnitees") shall be indemnified and held harmless by Buyer from and against
and in respect of any and all Losses incurred by, resulting from, arising out
of, relating to, imposed upon or incurred by any Company Indemnitee by reason of
any third party claim arising from conduct of the business of the Company Subs
prior to the Closing (including the Velocimed Intellectual Property as it exists
as of the date of the Closing) so long as the circumstances relating to such
third party claim would not otherwise constitute a breach of the Company's
representations, warranties, covenants and agreements contained herein.

                         (c) Definitions.

                             (i) The term, "Losses" means (A) any and all
deficiencies, judgments, settlements, demands, claims, suits, actions or causes
of action, assessments, liabilities, losses, damages (whether direct or
indirect), interest, fines and penalties, (B) costs, expenses (including
reasonable legal, accounting and other costs and expenses of professionals)
incurred in connection with investigating, defending, settling or satisfying any
and all demands, claims, actions, causes of action, suits, proceedings,
assessments, judgments or appeals, and in seeking indemnification therefor, and
(C) interest on any of the foregoing from the date incurred until paid at the
prime rate published from time to time by Wells Fargo Bank, N.A.

                             (ii) The term "Transaction Documents" means, this
Agreement, the Confidentiality Agreement, the Contingent Consideration
Confidentiality Agreement, the Member Agreement, and the certificates
contemplated by Article VII.

                                       51


                             (iii) The term "Indemnitee" means either a Buyer
Indemnitee or a Company Indemnitee, as the case may be, and the term
"Indemnitor" means either Buyer or the Company, as appropriate. Any claim for
indemnification under this Article VI shall be referred to as an Indemnification
Claim (an "Indemnification Claim"),

            SECTION 6.3  MANNER OF INDEMNIFICATION.

                         (a) To provide a fund against which a Buyer Indemnitee
may assert an Indemnification Claim, the Holdback Amount shall be withheld by
Buyer in accordance with Section 1.2.

                         (b) If a Buyer Indemnitee is entitled to be indemnified
for Losses, the obligation to pay the amount of indemnification owing hereunder
shall first be satisfied from the Holdback Amount and if the Holdback Amount is
exhausted, by reduction of any accrued and unpaid Contingent Consideration. In
the event an Indemnification Claim by Buyer arises and the amount of Loss in
respect thereof has not yet been determined, a portion of the Holdback Amount
and/or any accrued and unpaid Contingent Consideration sufficient to satisfy the
bona fide estimated maximum Loss shall be retained until the amount of Loss has
been determined, and shall then be applied or distributed as provided for
herein.

                         (c) Each Indemnification Claim shall be made only in
accordance with this Article VI.

            SECTION 6.4  NOTICE OF CLAIMS.

                         (a) Any Indemnitee seeking indemnification hereunder
shall give to Indemnitor a notice (a "Claim Notice") specifying in reasonable
detail the facts giving rise to any Indemnification Claim and shall include in
such Claim Notice (if then known) the amount or the method of computation of the
amount of such Indemnification Claim, and a reference to the provision of this
Agreement or any agreement, certificate or instrument executed pursuant hereto
or in connection herewith upon which such Indemnification Claim is based;
PROVIDED, that a Claim Notice in respect of any action at law or suit in equity
by or against a third Person as to which indemnification will be sought shall be
given promptly after the action or suit is commenced; and PROVIDED FURTHER, that
failure to give such notice shall not relieve the Indemnitor of its obligations
hereunder except to the extent it shall have been prejudiced by such failure.

                         (b) The Indemntior shall have fifteen days after the
giving of any Claim Notice pursuant hereto to provide such Indemnitee with
notice that it disagrees with the amount or method of determination set forth in
the Claim Notice (the "Disagreement Notice"). If a timely Disagreement Notice is
not received or to the extent an item is not objected to in the Disagreement
Notice, the Claim Notice shall be deemed to have been accepted and final and
binding on the parties, absent manifest error. If the Indemnitor delivers a
timely Disagreement Notice, the parties shall resolve such conflict in
accordance with the procedures set forth in Section 6.4(c).

                                       52


                         (c) If Indemntior shall have provided a Disagreement
Notice, the parties will attempt in good faith to agree upon the rights of the
respective parties with respect to each of such claims. If the parties should so
agree, a memorandum setting forth such agreement will be prepared and signed by
Buyer and the Company. If such claim is an Indemnification Claim for Losses
incurred by a Buyer Indemnitee, Buyer will retain or distribute the Holdback
Amount and Contingent Consideration as provided therein. In the event the
parties shall fail to reach an agreement within thirty days after the date on
which an Indemnitor provided a Disagreement Notice, the dispute shall be
submitted to arbitration in accordance with the provisions of Section 9.6.

            SECTION 6.5 THIRD-PARTY CLAIMS. If an Indemnitee becomes aware of a
third-party claim that such Indemnitee believes, in good faith, may result in an
Indemnification Claim, such Indemnitee shall promptly notify the Indemnitor of
such claim, and the Indemnitor shall be entitled to participate in any defense
of such claim; PROVIDED, HOWEVER, that failure to give such notice shall not
relieve the Indemnitor of its obligations hereunder except to the extent it
shall have been prejudiced by such failure. Notwithstanding the immediately
preceding sentence, Buyer shall conduct and control such defense, but shall not
settle any such claim without the consent of the Company, such consent not to be
unreasonably withheld; PROVIDED, HOWEVER, that, if the consent of the Company is
so obtained, the Company shall not have any power or authority to object under
any provision of this Article VI to the amount of any demand by Buyer for
Indemnification with respect to such settlement.

            SECTION 6.6 WAIVER OF DEFENSES. To the maximum extent permitted by
law, the Company and Buyer each waive any claim or defense that the indemnity
provided for herein or any other provision of any Transaction Document is
unenforceable under any provision of Applicable Law.

            SECTION 6.7 TREATMENT OF INDEMNITY PAYMENTS. All indemnity payments
made to Buyer will be, and will be treated as, an adjustment to the Total
Consideration.

            SECTION 6.8  LIMITS ON INDEMNIFICATION.

                         (a) Except in the event of intentional fraud, the
Holdback Amount and, if applicable, the setoff against any accrued and unpaid
Contingent Consideration shall be the sole and exclusive remedy of the Buyer
Indemnitees from and after the Closing for any claims arising under this
Agreement or in connection with the transactions contemplated hereby, including
claims of breach of any representation, warranty or covenant in this Agreement.

                         (b) No party shall be entitled to any recovery under
this Agreement for its own special, incidental or consequential damages. Nothing
in this Section 6.8 shall prevent any Indemnitee from being indemnified for all
components of awards against them in actions by unrelated third parties,
including, without limitation, special, incidental or consequential damage
components.

                                       53


                         (c) No Buyer Indemnitee shall be entitled to
indemnification for any Losses arising under Section 6.2(a) until the aggregate
amount of all Losses under all claims of all Buyer Indemnities under Section
6.2(a) plus any claims for setoff of Losses pursuant to Section 1.3(e)(vi)(B)
exceed $675,000 (the "Deductible"), and, Buyer shall be entitled to retain all
or a portion the Holdback Amount or make an offset under Section 6.2(a) only in
the amount by which such aggregate Losses exceed the Deductible, except that:
all amounts due to Indemnitees related to Losses for Taxes (whether under
Section 3.9 or Section 5.9) or Losses from a breach of the representations and
warranties in Section 3.2 or Section 3.20 shall not be subject to the provisions
of this Section 6.8(c) and shall be paid in full without any regard to the
Deductible. The foregoing shall not limit Buyer's rights under Section
1.3(e)(vi) except as specifically provided in Section 1.3(e)(vi). Further,
except as provided by Section 1.3(e)(vi) and except in the event of intentional
fraud, the total liability of the Company under this Agreement or in connection
with the transactions contemplated hereby shall not exceed the sum of (i) the
Holdback Amount plus (ii) fifty percent of the Contingent Consideration (the
parties' intention being that an offset claim under Section 6.2(a) and an offset
claim arising under 1.3(e)(vi) could result in claims up to 100% of the
Contingent Consideration, but in no event more than the amount set forth in
Section 6.8(a)).

                         (d) Except for the representations and warranties in
Sections 3.9, 3.16 and 3.25(a), no Indemnitee shall be entitled to bring an
Indemnification Claim for the breach of any representation or warranty if the
Buyer had actual knowledge on or prior to the Closing of the facts, events,
circumstances or omissions giving rise to such claim.

                         (e) For purposes of this Agreement, any Loss otherwise
recoverable shall be (i) reduced by the amount of any insurance proceeds
actually recovered by the Indemnitee in connection with such Loss and by the
amount of Tax benefit realized by the Indemnitee arising from the incurrence or
payment of such Loss, and (ii) increased to take account of any increased
insurance premiums arising from the incurrence or payment of such Loss and the
amount of any Tax cost incurred from the receipt of the indemnity payment
hereunder, in the case of (i) and (ii) as reasonably determinable at the time
such Loss is otherwise being determined under this Agreement.

                                  ARTICLE VII -
                       CONDITIONS PRECEDENT TO THE CLOSING
                       -----------------------------------

            SECTION 7.1  CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
CLOSING. The respective obligations of each party to effect the Closing shall be
subject to the fulfillment at or prior to the Closing of each of the following
conditions:

                         (a) HSR Approvals. The waiting period (and any
extension thereof) applicable to the consummation of the transactions
contemplated by this Agreement under the HSR Act shall have expired or been
terminated.

                         (b) No Order. No court or other Governmental Entity
having jurisdiction over the Company or Buyer, or any of their respective
Subsidiaries, shall


                                       54


have enacted, issued, promulgated, enforced or entered any law, rule,
regulation, executive order, decree, injunction or other order (whether
temporary, preliminary or permanent) which is then in effect and has the effect
of, directly or indirectly, restraining, prohibiting or restricting the
transactions contemplated by this Agreement or any of the transactions
contemplated hereby; provided, however, that the provisions of this Section
7.1(c) shall not be available to any party whose failure to fulfill its
obligations pursuant to Section 5.4 shall have been the cause of, or shall have
resulted in, the enforcement or entering into of any such law, rule, regulation,
executive order, decree, injunction or other order.

            SECTION 7.2  CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE
CLOSING. The obligation of the Company to effect the Closing shall be subject to
the fulfillment at or prior to the Closing of each of the following additional
conditions:

                         (a) Performance of Obligations; Representations and
Warranties. (i) Buyer shall have performed in all material respects each of its
agreements and covenants contained in this Agreement required to be performed on
or prior to the Closing, (ii) each of the representations and warranties of
Buyer contained in this Agreement that is qualified by materiality shall have
been true and correct when made, and shall be true and correct at and as of the
Closing as if made on and as of such date (other than representations and
warranties which address matters only as of a certain date other than the date
hereof, which shall be true and correct as of such certain date), and (iii) each
of the representations and warranties that is not so qualified shall have been
true and correct in all material respects when made, and shall be true and
correct in all material respects at and as of the Closing as if made on and as
of such date (other than representations and warranties which address matters
only as of a certain date which shall be true and correct in all material
respects as of such certain date). The Company shall have received certificates
signed on behalf of each of Buyer and Sub by one of its officers to such effect.

                         (b) Opinion of Counsel. The Company shall have received
an opinion of counsel from the General Counsel of Buyer, dated the Closing Date,
in substantially the form attached hereto as EXHIBIT B.

            SECTION 7.3  CONDITIONS TO OBLIGATIONS OF BUYER AND SUB TO EFFECT
THE CLOSING. The obligations of Buyer and Sub to effect the Closing shall be
subject to the fulfillment at or prior to the Closing of each of the following
additional conditions:

                         (a) Performance of Obligations; Representations and
Warranties. (i) The Company shall have performed in all material respects each
of its covenants and agreements contained in this Agreement required to be
performed on or prior to the Closing, (ii) each of the representations and
warranties of the Company contained in this Agreement that is qualified by
materiality shall have been true and correct when made, and shall be true and
correct at and as of the Closing as if made on and as of such date (other than
representations and warranties which address matters only


                                       55


as of a certain date other than the date hereof, which shall be true and correct
as of such certain date), and (iii) each of the representations and warranties
that is not so qualified shall have been true and correct in all material
respects when made, and shall be true and correct in all material respects at
and as of the Closing as if made on and as of such date (other than
representations and warranties which address matters only as of a certain date
which shall be true and correct in all material respects as of such certain
date). Buyer shall have received a certificate signed on behalf of the Company
by its Chief Executive Officer or its Chief Financial Officer to such effect.

                         (b) Opinion of Counsel. Buyer shall have received an
opinion of counsel from Oppenheimer, Wolff & Donnelly LLP counsel to the
Company, dated the Closing Date, in substantially the form attached hereto as
EXHIBIT C.

                         (c) Consents. (i) The Company shall have obtained the
consent or approval of each Person or Governmental Entity (other than approvals
under the HSR Act) whose consent or approval shall be required in connection
with the transactions contemplated hereby under any loan or credit agreement,
note, mortgage, indenture, lease or other agreement or instrument, except as to
which the failure to obtain such consents and approvals would not, individually
or in the aggregate, have a Material Adverse Effect on the Company Subs or Buyer
or upon the consummation of the transactions contemplated in this Agreement.

                             (ii) In obtaining any approval or consent required
to consummate any of the transactions contemplated herein, no Governmental
Entity shall have imposed or shall have sought to impose any condition, penalty
or requirement which, individually or in aggregate would have a Material Adverse
Effect on the Company Subs or Buyer.

                         (d) Material Adverse Change. Since the date of this
Agreement, there shall have been no Material Adverse Change with respect to the
Company Subs. Buyer shall have received a certificate signed on behalf of the
Company by the Chief Executive Officer or the Chief Financial Officer of the
Company to such effect.

                         (e) Company Option Plans. The Company shall have taken
all action required to be taken by it to implement the provisions of Section
5.9.

                         (f) Director and Officer Resignations. All of the
Directors of the Company Subs and any officers thereof designated by Buyer,
shall have tendered their resignations in form and substance satisfactory to
Buyer.

                         (g) Employment and Consulting Agreements. The
Employment Agreement and the Consulting Agreement with Dr. Dennis Wahr shall
remain in full force and effect and shall not have been rescinded by Dr. Wahr.
The Inventions Assignment, Confidentiality and Non-Competition Agreement entered
into by the Company Subs with employees of the Company Subs shall remain
effective, and shall


                                       56


not have been waived, released or modified by the Company or any of the Company
Subs.

                         (h) Member Agreement. The Member Agreement shall have
been executed by members holding 85% of the Company Membership Units, shall be
in form and substance reasonably satisfactory to Buyer, and shall be binding
upon 100% of the Company Membership Units.

                         (i) Silicon Valley Bank Warrant. The Company shall
deliver to Buyer written evidence, in form and substance reasonably satisfactory
to Buyer, of the irrevocable exercise of the Warrant Agreement and the
termination of any other rights associated therewith.

                         (j) Company Assignment. The Company shall have complied
with the provisions in Sections 5.5, 5.6 and 5.13 in form and substance
reasonably satisfactory to Buyer.

                                 ARTICLE VIII -
                        TERMINATION, AMENDMENT AND WAIVER
                        ---------------------------------

            SECTION 8.1  TERMINATION. This Agreement may be terminated at any
time prior to the Closing:

                         (a) by mutual written consent of Buyer and the Company;

                         (b) by either Buyer or the Company if the other party
shall have failed to comply in any material respect with any of its covenants or
agreements contained in this Agreement required to be complied with prior to the
date of such termination, which failure to comply has not been cured within five
business days following receipt by such other party of written notice of such
failure to comply;

                         (c) by Buyer if there has been a breach of a
representation or warranty of the Company that gives rise to a failure of the
fulfillment of a condition of the Buyer's obligations to effect the transactions
contemplated by this Agreement pursuant to Section 7.3(a)(ii) and (iii) or by
Company if there has been a breach of a representation or warranty of the Buyer
that gives rise to a failure of the fulfillment of a condition of the Company's
obligations to effect the transactions contemplated by this Agreement pursuant
to Section 7.2(a)(ii) and (iii), in each case which breach has not been cured
within five business days following receipt by the breaching party of written
notice of the breach; or

                         (d) by either Buyer or the Company if: (i) the Closing
has not occurred on or prior to the close of business on the later of the date
that is 180 days after the date of this Agreement or the date 75 days after the
waiting period applicable to the Closing under the HSR Act has expired or been
terminated; PROVIDED, HOWEVER, that the right to terminate this Agreement
pursuant to this Section 8.1(d)(i) shall not be available to any party whose
failure to fulfill any of its obligations contained in this Agreement has been
the cause of, or resulted in, the failure of the Closing to have occurred on or
prior to


                                       57


the aforesaid date; or (ii) any court or other Governmental Entity having
jurisdiction over a party hereto shall have issued an order, decree or ruling or
taken any other action (which order, decree, ruling or other action the parties
shall have used their reasonable efforts to resist, resolve or lift, as
applicable, subject to the provisions of Section 5.4) permanently enjoining,
restraining or otherwise prohibiting the transactions contemplated by this
Agreement and such order, decree, ruling or other action shall have become final
and nonappealable.

            SECTION 8.2 EFFECT OF TERMINATION. In the event of termination of
this Agreement by either Buyer or the Company, as provided in Section 8.1, this
Agreement shall forthwith become void and there shall be no liability hereunder
on the part of the Company, Buyer or their respective officers or directors
(except for the last sentence of Section 5.1(a) and the entirety of Section 5.2,
which shall survive the termination); PROVIDED, HOWEVER, that nothing contained
in this Section 8.2 shall relieve any party hereto from any liability for any
breach of a representation, warranty, or covenant contained in this Agreement.
Notwithstanding the foregoing, if either party terminates this Agreement prior
to the Closing as a result of any representation or warranty contained in this
Agreement becoming untrue due to circumstances that arise after the date hereof
and prior to the Closing, such party's sole remedy for such breach shall be the
termination of this Agreement in accordance with this Article VIII without any
liability or cost to the terminating party.

            SECTION 8.3 AMENDMENT. This Agreement may not be amended except by
an instrument in writing signed on behalf of each of the parties hereto.

            SECTION 8.4 WAIVER. At any time prior to the Closing, the parties
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein for the benefit of such party which may legally be
waived. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party. No delay on the part of any party hereto in exercising any
right, power or privilege hereunder shall operate as a waiver thereof, nor shall
any waiver on the part of any party hereto of any right, power or privilege
hereunder operate as a waiver of any other right, power or privilege hereunder,
nor shall any single or partial exercise of any right, power or privilege
hereunder preclude any other or further exercise thereof or the exercise of any
other right, power or privilege hereunder. The failure of any party to this
Agreement to assert any of its rights under this Agreement or otherwise shall
not constitute a waiver of those rights.







                                       58


                                  ARTICLE IX -
                               GENERAL PROVISIONS
                               ------------------

            SECTION 9.1 NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given when delivered personally, one
business day after being delivered to an overnight courier or when sent by
facsimile on a business day (and if not sent on a business day, then on the next
succeeding business day) with a confirmatory copy sent by overnight courier to
the parties at the following addresses (or at such other address for a party as
shall be specified by like notice):

            (a)   if to Buyer, to:

                  St. Jude Medical, Inc.
                  One Lilleihei Plaza
                  St. Paul, MN 55117
                  Attn: General Counsel
                  Facsimile (651) 481-7690

                  with a copy to: (which shall not constitute notice)

                  Gibson Dunn & Crutcher LLP
                  1881 Page Mill Road
                  Palo Alto, CA  94304-1125
                  Attn: Joseph Barbeau, Esq.
                  Facsimile: (650) 849-5333

            (b)   if to the Company, to:

                  Velocimed, LLC
                  6550 Wedgwood Road North
                  Suite 150
                  Maple Grove, MN  55311
                  Attn:  Dennis Wahr
                  Facsimile: (763) 488-9780

                  with a copy to (which shall not constitute notice):

                  Oppenheimer, Wolff & Donnelly LLP
                  Plaza VII, Suite 3300
                  45 South Seventh Street
                  Minneapolis, MN  55402
                  Attn: William Kaufman
                  Facsimile: (612) 607-7100

or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above. Any
party hereto may give any notice, request, demand, claim or other communication
hereunder using any


                                       59


other means (including ordinary mail or electronic mail), but no such notice,
request, demand, claim or other communication shall be deemed to have been duly
given unless and until it actually is received by the individual for whom it is
intended.

            SECTION 9.2  INTERPRETATION.

                         (a) When a reference is made in this Agreement to a
Section, such reference shall be to a Section of this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include," "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."

                         (b) "Applicable Laws" or "Applicable Law" means, with
respect to any Person, any domestic or foreign, federal, state or local statute,
law, ordinance, rule, regulation, order, writ, injunction, judgment, decree or
other requirement of any Governmental Entity existing as of the date hereof or
as of the Closing applicable to such Person or any of its properties, assets,
officers, directors, employees, consultants or agents.

                         (c) "Encumbrance" means any charge, claim, limitation,
condition, equitable interest, mortgage, lien, option, pledge, security
interest, easement, encroachment, right of first refusal, adverse claim or
restriction of any kind, including any restriction on transfer or other
assignment, as security or otherwise, of or relating to use, quiet enjoyment,
voting, transfer, receipt of income or exercise of any other attribute of
ownership.

                         (d) "Permitted Lien" means (i) any statutory liens for
Taxes that are not yet due and payable or are being contested in good faith by
appropriate proceedings and are disclosed in Section 3.9 of the Company Letter,
(ii) statutory or common law liens to secure obligations to landlords, lessors,
or renters under leases or rental agreements confined to the premises rented,
(iii) deposits or pledges made in connection with, or to secure payment of,
workers' compensation, unemployment insurance or other social security programs
mandated under Applicable Law, or (iv) statutory or common law liens in favor of
carriers, warehousemen, mechanics and materialmen, to secure claims for labor,
materials or supplies incurred in the ordinary course of business.

                         (e) "Person" means any individual, corporation,
partnership, limited partnership, limited liability company, trust, association
or entity or Governmental Entity or authority.

                         (f) "Subsidiary" means any corporation, partnership,
limited liability company, joint venture or other legal entity of which Buyer or
Company, as the case may be (either alone or through or together with any other
Subsidiary), owns or controls, directly or indirectly, 50% or more of the stock
or other equity interests the holders of which are generally entitled to vote
for the election of the board of directors or


                                       60


other governing body of such corporation, partnership, limited liability
company, joint venture or other legal entity.

            SECTION 9.3 COUNTERPARTS; FACSIMILE SIGNATURES. This Agreement may
be executed in counterparts, all of which shall be considered one and the same
agreement, and shall become effective when one or more counterparts have been
signed by each of the parties and delivered to the other parties. A facsimile
signature of this Agreement or any Transaction Document shall be valid and have
the same force and effect as a manually signed original.

            SECTION 9.4 ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES. This
Agreement and the Confidentiality Agreement constitute the entire agreement and
supersede all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter hereof. The parties stipulate and
agree that no prior drafts, memoranda, notes, or discussions relating to this
Agreement shall be used at any time by either party in any arbitration, trial or
hearing, or be used or discoverable in any discovery process pertaining thereto,
to prove or evidence in any way the intention or understanding of either party
with respect to any provision or part of this Agreement. This Agreement is not
intended to confer upon any Person other than the parties hereto any rights or
remedies hereunder.

            SECTION 9.5 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Minnesota, without regard
to the conflicts of laws provisions thereof that would apply the laws of any
other state.

            SECTION 9.6  DISPUTE RESOLUTION.

                         (a) Any and all disputes, controversies, or claims
arising out of, or relating to this Agreement or any of the Transaction
Documents or the validity, interpretation, breach or termination thereof (a
"Dispute"), shall be resolved in accordance with the procedures set forth in
this Agreement. If a dispute cannot be resolved at the operational level, either
party may submit such Dispute to binding arbitration conducted in Chicago,
Illinois, or such other location upon which the parties may mutually agree in
writing, before a single neutral arbitrator in an arbitration by JAMS under its
Streamlined Arbitration Rules and Procedures (revised version adopted April
2002) ("JAMS Streamlined Rules"), which rules can be viewed at www.jamsadr.com.
The JAMS Streamlined Rules will govern all aspects of the arbitration except as
modified by this Section 9.6.

                         (b) If a party (the "Notifying Party") wishes to submit
a Dispute to JAMS, the Notifying Party shall deliver a written notice (a
"Dispute Notice") together with a copy of this Section 9.6 to the other party
(the "Responding Party") and to JAMS. In the event that either party commences a
dispute by delivering a Dispute Notice, the other party may assert any counter
claims it may have. Following receipt by the Responding Party of the Dispute
Notice, if any, the parties shall promptly meet (but in no event later than ten
business days from the date of receipt by the Responding Party


                                       61


of the Dispute Notice) to agree on the rights of the respective parties with
respect to each of such claims identified by the Dispute Notice. If the parties
should so agree on a resolution of such dispute or disputes, a written
memorandum (the "Memorandum"), setting forth such agreement, shall be prepared
and signed by both parties. If the parties are unable to come to an agreement,
the dispute shall be resolved by the binding arbitration procedures set forth in
this Section 9.6.

                         (c) The sole arbitrator, who shall be selected in
accordance with the JAMS Streamlined Rules, shall be a retired or former judge
of any Federal court appointed under Article III of the United States
Constitution or any trial court of general jurisdiction or higher court in the
State of Minnesota or the State of Illinois. Eligible arbitrator candidates
shall not be limited to those candidates who are listed on the JAMS "List of
Neutrals". The arbitration shall be governed by the United States Arbitration
Act, 9 U.S.C. ss.ss. 1-16. The arbitrator shall apply Minnesota substantive law
to the proceeding.

                         (d) In addition to the exchange of information and
discovery authorized by JAMS Streamlined Rule 13, each party may take up to
three 7-hour long depositions before the Arbitration Hearing.

                         (e) Unless the parties agree otherwise, the Arbitration
Hearing under JAMS Streamlined Rule 17 will commence within 60 days of the date
of the JAMS Commencement Letter described in Streamlined Rule 5, and the
Arbitration Hearing will not last more than four 7-hour days (with the hearing
time equally divided between the parties). The Arbitrator will issue the Award
under Streamlined Rule 19(a) within 7 calendar days of the last day of the
Arbitration Hearing (rather than the 30 calendar days provided for under JAMS
Streamlined Rule 19(a)).

                         (f) The arbitrator shall prepare in writing and provide
to the parties an award including factual findings and the reasons on which the
decision is based. The award and decision of the arbitrator shall be final and
binding and may be submitted to any court having jurisdiction solely for the
purpose of confirmation of the award and entry of judgment. The arbitrator shall
have the right to award or include in his award only compensatory damages (with
interest on unpaid amounts from the date due until paid), and shall not have the
right to award specific performance, injunctive relief or exemplary or punitive
damages. Any controversy concerning whether a Dispute is an arbitrable dispute
shall be determined by the arbitrator. The parties intend that this agreement to
arbitrate be valid, specifically enforceable and irrevocable.

                         (g) The provisions of this Section 9.6 shall survive
the expiration or early termination of this Agreement indefinitely.

            SECTION 9.7 WAIVERS. Each of the parties hereby irrevocably waives
all right to trial by jury in any action, proceeding or counterclaim (whether
based on contract, tort or otherwise) arising out of or relating to this
Agreement or any other Transaction Document or the transactions contemplated
hereby or thereby. Each of the


                                       62


parties hereby further irrevocably waives any right to specific performance,
injunctive relief or exemplary or punitive damages.

            SECTION 9.8 ASSIGNMENT. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors or assigns.

            SECTION 9.9 SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law,
or public policy, all other terms, conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic and
legal substance of the transactions contemplated hereby are not affected in any
manner materially adverse to any party. Upon such determination that any term or
other provision is invalid, illegal or incapable of being enforced, the parties
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in a mutually acceptable
manner in order that the transactions contemplated by this Agreement may be
consummated as originally contemplated to the fullest extent possible.

            SECTION 9.10 DESCRIPTIVE HEADINGS. The descriptive headings herein
are inserted for convenience of reference only and are not intended to be part
of or to affect the meaning or interpretation of this Agreement.

            SECTION 9.11 DEFINED TERMS. Each of the following terms is defined
in the Section identified below:

501(k)'s.........................................................Section 3.8(b)

Acquiring Person.................................................Section 4.2(e)
Affiliated Person...............................................Section 3.23(a)
Agreement..............................................................Preamble
Alternate Payment............................................Section 1.3(c)(ii)
Applicable Law...................................................Section 9.2(b)
Applicable Laws..................................................Section 9.2(b)
Applicable Worker Safety Laws......................................Section 3.13
Auditor..........................................................Section 1.3(e)

Bundled Sale.....................................................Section 4.2(c)
Buyer..................................................................Preamble
Buyer Indemnitees................................................Section 6.2(a)
Buyer Licensing..................................................Section 1.3(b)
Buyer Representative.............................................Section 4.2(d)

Cash Purchase Price..............................................Section 1.1(a)
Change In Control................................................Section 4.2(e)
Claim Notice.....................................................Section 6.4(a)
Closing..........................................................Section 1.5(a)

                                       63


Closing Date.....................................................Section 1.5(a)
Code................................................................Section 3.9
Company................................................................Preamble
Company Balance Sheet............................................Section 3.5(a)
Company Balance Sheet Date.......................................Section 3.5(a)
Company Business Personnel.........................................Section 3.15
Company Charter..................................................Section 3.1(a)
Company Indemnitees..............................................Section 6.2(b)
Company Letter..........................................Preamble to Article III
Company Marks...................................................Section 3.16(c)
Company Membership Units............................................Section 3.3
Company Option...................................................Section 5.9(a)
Company Patents.................................................Section 3.16(b)
Company Permits..................................................Section 3.8(a)
Company Plan....................................................Section 3.12(c)
Company Products.................................................Section 1.3(b)
Company Registered Copyrights...................................Section 3.16(b)
Company Registered IP...........................................Section 3.16(b)
Company Registered Marks........................................Section 3.16(b)
Company Sub............................................................Preamble
Company Subs...........................................................Preamble
Compensation Agreements.........................................Section 3.11(a)
Confidentiality Agreement........................................Section 5.1(a)
Consulting Agreements..................................................Recitals
Contingent Consideration.........................................Section 1.1(b)
Contingent Consideration Conference..............................Section 4.2(d)
Contingent Consideration Confidentiality Agreement...............Section 4.2(d)
Contingent Consideration Distribution Date.......................Section 1.3(b)
Contingent Consideration Notice..................................Section 1.3(b)
Contingent Consideration Period..................................Section 1.3(a)
Copyrights......................................................Section 3.16(a)

Deductible.......................................................Section 6.8(c)
Disagreement Notice..............................................Section 6.4(b)
Dispute..........................................................Section 9.6(a)
Dispute Notice...................................................Section 9.6(b)
Distal Device....................................................Section 1.3(b)
DMC....................................................................Preamble
DMC Shares.......................................................Section 3.2(c)

Eligible Invoices..................................................Section 5.14
Employment Agreements..................................................Recitals
Encumbrance......................................................Section 9.2(c)
Environmental Law...........................................Section 3.20(a)(ii)
Environmental Permit.......................................Section 3.20(a)(iii)
ERISA...........................................................Section 3.12(a)
ERISA Affiliate.................................................Section 3.12(c)

                                       64


FDA..............................................................Section 1.3(b)
Financial Statements.............................................Section 3.5(a)
Fiscal Year......................................................Section 1.3(b)
FY 2006..........................................................Section 1.3(b)
FY 2006 Target...................................................Section 1.3(b)
FY 2007..........................................................Section 1.3(b)
FY 2007 Target...................................................Section 1.3(b)
FY 2008..........................................................Section 1.3(b)
FY 2008 Target...................................................Section 1.3(b)

Governmental Entity.................................................Section 2.3

Hazardous Substances.........................................Section 3.20(a)(i)
Holdback Amount.....................................................Section 1.2
Holdback Termination Date...........................................Section 6.1
HSR Act.............................................................Section 2.3

Inbound License Agreements......................................Section 3.16(f)
INC....................................................................Preamble
INC Shares.......................................................Section 3.2(a)
Indemnification Claim............................................Section 6.2(c)
Indemnitee.......................................................Section 6.2(c)
Indemnitor.......................................................Section 6.2(c)
Insurance Policies.................................................Section 3.22
Intellectual Property...........................................Section 3.16(a)
Intellectual Property Losses.................................Section 1.3(e)(vi)
IRS.................................................................Section 3.9

JAMS Streamlined Rules...........................................Section 9.6(a)

Licensee.........................................................Section 4.2(c)
Liens...........................................................Section 3.25(a)
Losses...........................................................Section 6.2(c)

Marks...........................................................Section 3.16(a)
Material Adverse Change................................Section 3.7. Section 2.3
Material Adverse Effect................................Section 3.7. Section 2.3
Material Contracts..............................................Section 3.11(b)
Member Agreement...................................................Section 5.12
Memorandum.......................................................Section 9.6(b)
Mid-Year Report..................................................Section 4.2(d)

Non-Eligible Product.............................................Section 4.2(c)
Notice of Objection..............................................Section 1.3(e)
Notifying Party..................................................Section 9.6(b)

Open Source License.............................................Section 3.16(i)
Outbound License Agreements.....................................Section 3.16(f)

Patents.........................................................Section 3.16(a)
Permitted Lien...................................................Section 9.2(d)


                                       65


Permitted Sale...................................................Section 4.2(a)
Person...........................................................Section 9.2(e)
PFO....................................................................Preamble
PFO Shares.......................................................Section 3.2(b)
PMA's............................................................Section 1.3(b)
Post Closing Patent..........................................Section 1.3(e)(vi)
Premere Approval.................................................Section 1.3(b)
Premere Approval Notice..........................................Section 1.3(e)
Premere Approval-Based Contingent Consideration..................Section 1.3(d)
Premere First Target Period......................................Section 1.3(b)
Premere Product..................................................Section 1.3(b)
Premere Second Target Period.....................................Section 1.3(b)
Premere Third Target Period......................................Section 1.3(b)
Premere Trigger..................................................Section 4.2(e)
Proxis Product...................................................Section 1.3(b)
Proxis Trigger...................................................Section 4.2(e)

Real Estate.....................................................Section 3.25(b)
Responding Party.................................................Section 9.6(b)
Revenue..........................................................Section 1.3(b)
Revenue Notice...................................................Section 1.3(e)
Revenue-Based Contingent Consideration...........................Section 1.3(c)

Shares.................................................................Preamble
SSA..............................................................Section 3.8(a)
State Takeover Approvals............................................Section 2.3
Subsidiary.......................................................Section 9.2(f)

Target Periods...................................Section 1.3(b). Section 1.3(b)
Tax Return..........................................................Section 3.9
Taxes...............................................................Section 3.9
Total Consideration..............................................Section 1.1(b)
Trade Secrets...................................................Section 3.16(a)
Transaction Documents............................................Section 6.2(c)

Velocimed Intellectual Property..................................Section 1.3(b)
Venture Product..................................................Section 1.3(b)

Warrant Agreement..................................................Section 5.11









                                       66


         IN WITNESS WHEREOF, Buyer, and the Company have caused this Agreement
to be signed by their respective officers thereunto duly authorized all as of
the date first written above.

                                        ST. JUDE MEDICAL, INC.
                                        A MINNESOTA CORPORATION


                                        By:_____________________________
                                           Name:
                                           Title:






                                        VELOCIMED, LLC,
                                        A DELAWARE LIMITED LIABILITY COMPANY


                                        By:_____________________________
                                           Name:
                                           Title:




















                  [SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT]

EX-3.1

                                                                     EXHIBIT 3.1

                            ARTICLES OF INCORPORATION

                                       OF

                             ST. JUDE MEDICAL, INC.


                                   ARTICLE I.

                                      Name
                                      ----

         The name of the corporation shall be St. Jude Medical, Inc.


                                   ARTICLE II.

                                Business Purposes
                                -----------------

         The purposes for which this corporation is organized are as follows:

         a.       General business purposes.

         b.       To do everything necessary, proper, advisable or convenient
                  for the accomplishment of the purposes hereinabove set forth,
                  and to do all other things incidental thereto or connected
                  therewith, which are not forbidden by the laws under which
                  this corporation is organized, by other laws, or by these
                  Articles of Incorporation.

         c.       To carry out the purposes hereinabove set forth in any state,
                  territory, district or possession of the United States, or in
                  any foreign country, to the extent that such purposes are not
                  forbidden by law, to limit in any certificate for application
                  to do business, the purposes or purpose which the corporation
                  proposes to carry on therein to such extent as are not
                  forbidden by law thereof.


                                  ARTICLE III.

                                    Duration
                                    --------

         The duration of the corporation shall be perpetual.




                                       1
                                                              (2005 Restatement)


                                   ARTICLE IV.

                                Registered Office
                                -----------------

         The location and post office address of the registered office of the
corporation in the State of Minnesota is One Lillehei Plaza, St. Paul, Minnesota
55117.

                                   ARTICLE V.

                            Powers of the Corporation
                            -------------------------

         This corporation shall have all the powers granted to private
corporations organized for profit by said Minnesota Business Corporation Act,
and in furtherance and not in limitation of the powers conferred by the laws of
the State of Minnesota upon corporations organized for the foregoing purposes,
the corporation shall have the power:

         a.       To acquire, hold, mortgage, pledge or dispose of the shares,
                  bonds, securities or other evidences of indebtedness of the
                  United States of America, or of any domestic or foreign
                  corporation, and while the holder of such shares to exercise
                  all the privileges of ownership, including the right to vote
                  thereof, to the same extent as a natural person might or could
                  do, by the president of this corporation or by proxy appointed
                  by him, unless some other person, by resolution of the Board
                  of Directors, shall be appointed to vote such shares.

         b.       To purchase or otherwise acquire on such terms and in such
                  manner as the Bylaws of this corporation from time to time
                  provide, and to own all shares of the capital stock of this
                  corporation, and to reissue the same from time to time.

         c.       When and as authorized by the vote of the holders of not less
                  than a majority of the shares entitled to vote, at a
                  shareholders' meeting called for that purpose, or when
                  authorized upon the written consent of the holders of a
                  majority of such shares, to sell, lease, exchange or otherwise
                  dispose of all, or substantially all, of its property and
                  assets, including its goodwill, upon such terms and for such
                  consideration which may be money, shares, bonds or other
                  instruments for the payment of money or other property as the
                  Board of Directors deems expedient or advisable.

         d.       To acquire, hold, lease, encumber, convey or otherwise dispose
                  of, either alone or in conjunction with others, real and
                  personal property within or without the state; and to take
                  real and personal property by will or gift.

         e.       To acquire, hold, take over as a going concern and thereafter
                  to carry on, mortgage, sell or otherwise dispose of, either
                  alone or in conjunction with


                                       2
                                                              (2005 Restatement)


                  others, the rights, property and business of any person,
                  entity, partnership, association or corporation heretofore or
                  hereafter engaged in any business, the purpose of which is
                  similar to the purposes set forth in Article II of these
                  Articles of Incorporation.

         f.       To enter into any lawful arrangement for sharing profits,
                  union of interests, reciprocal association or cooperative
                  association with any corporation, association, partnership,
                  individual or other legal entity, for the carrying on of any
                  business, the purpose of which is similar to the purposes set
                  forth in Article II of these Articles of Incorporation.

                                   ARTICLE VI.

                            Mergers and Consolidation
                            -------------------------

         Any agreement for consolidation or merger with one or more foreign or
domestic corporations may be authorized by vote of the holders of a majority of
the shares entitled to vote.


                                  ARTICLE VII.

                                  Capital Stock
                                  -------------

         The authorized capital stock of this corporation shall be Five Hundred
Million (500,000,000) shares of common stock of the par value of Ten Cents
($.10) per share (the "Common Stock") and Twenty-Five Million (25,000,000)
shares of preferred stock of the par value of One Dollar ($1.00) per share (the
"Preferred Stock").

         SECTION 1.   General.

                  (a) No holder of capital stock in the corporation shall be
         entitled to any cumulative voting rights.

                  (b) No holder of capital stock of the corporation shall have
         any preferential, preemptive or other rights of subscription to any
         shares of any class of capital stock of the corporation allotted or
         sold or to be allotted or sold now or hereafter authorized, or to any
         obligations convertible into the capital stock of the corporation of
         any class, or any right of subscription to any part thereof.

         SECTION 2. Common Stock. Subject to all of the rights of the Preferred
Stock, and except as may be expressly provided with respect to the Preferred
Stock herein, by law or by the Board of Directors pursuant to this Article VII:


                                       3
                                                              (2005 Restatement)


                  (a) The holders of the Common Stock shall be entitled to
         receive when and as declared by the Board of Directors, out of earnings
         or surplus legally available therefore, dividends, payable either in
         cash, in property, or in shares of the capital stock of the
         corporation.

                  (b) The Common Stock may be allotted for such consideration
         and as and when the Board of Directors shall determine, and, under and
         pursuant to the laws of the State of Minnesota, the Board of Directors
         shall have the power to fix or alter, from time to time, in respect to
         shares then unallotted, any or all of the following: the dividend rate,
         the redemption price, the liquidation price, the conversion rights and
         the sinking or purchase fund rights of shares of any class, or of any
         series of any class, or the number of shares constituting any series of
         any class. The Board of Directors shall also have the power to fix the
         terms, provisions and conditions of options to purchase or subscribe
         for shares of any class or classes, including the price and conversion
         basis thereof. The Board of Directors shall also have the power to
         issue shares of stock of the corporation or assets of other business
         enterprises, as it may from time to time deem expedient.

         SECTION 3. Preferred Stock. The Preferred Stock may be issued from time
to time by the Board of Directors as shares of one or more series. Subject to
the provisions hereof and the limitations prescribed by law, the Board of
Directors is expressly authorized by adopting resolutions providing for the
issuance of shares of any particular series and, if and to the extent from time
to time required by law, by filing with the Minnesota Secretary of State a
statement with respect to the adoption of the resolutions pursuant to the
Minnesota Business Corporation Act (or other law hereafter in effect relating to
the same or substantially similar subject matter), to establish the number of
shares to be included in each such series and to fix the designation and
relative powers, preferences and rights and the qualifications and limitations
or restrictions thereof relating to the shares of each such series. The
authority of the Board of Directors with respect to each series shall include,
but not be limited to, determination of the following:

                  (a) the distinctive serial designation of such series and the
         number of shares constituting such series, provided that the aggregate
         number of shares constituting all series of Preferred Stock shall not
         exceed Twenty-five Million (25,000,000);

                  (b) the annual dividend rate on shares of such series, if any,
         whether dividends shall be cumulative and, if so, from which date or
         dates;

                  (c) whether the shares of such series shall be redeemable and,
         if so, the terms and conditions of such redemption, including the date
         or dates upon and after which such shares shall be redeemable, and the
         amount per share payable in case of redemption, which amount may vary
         under different conditions and at different redemption dates;



                                       4
                                                              (2005 Restatement)


                  (d) the obligation, if any, of the corporation to retire
         shares of such series pursuant to a sinking fund;

                  (e) whether shares of such series shall be convertible into,
         or exchangeable for, shares of stock of any other class or classes and,
         if so, the terms and conditions of such conversion or exchange,
         including the price or prices or the rate or rates of conversion or
         exchange and the terms of adjustment, if any;

                  (f) whether the shares of such series shall have voting
         rights, in addition to the voting rights provided by law, and, if so,
         the terms of such voting rights;

                  (g) the rights of the shares of such series in the event of
         voluntary or involuntary liquidation, dissolution or winding up of the
         corporation; and

                  (h) any other relative rights, powers, preferences,
         qualifications, limitations or restrictions thereof relating to such
         series.

         The shares of Preferred Stock of any one series shall be identical with
each other in all respects except as to the dates from and after which dividends
thereon shall cumulate, if cumulative.

                                  ARTICLE VIII.

                                 Stated Capital
                                 --------------

         The minimum amount of stated capital with which the corporation will
begin business is $1,000.00.

                                   ARTICLE IX.

                        Management and Additional Powers
                        --------------------------------

         Section 1. The management and conduct of the business and affairs of
the corporation shall be vested in a Board of Directors which shall consist of
such number of directors, not less than three, the exact number to be fixed from
time to time solely by resolution of the Board of Directors, acting by not less
than a majority of the directors then in office.

         Section 2. The Board of Directors shall be divided into three classes,
with the term of office of one class expiring each year. At the Annual Meeting
of Shareholders in 1986, two directors of the first class shall be elected to
hold office for a term expiring at the 1987 Annual Meeting, two directors of the
second class shall be elected to hold office for a term expiring at the 1988
Annual Meeting, and one director of the third class shall be elected to hold
office for a term expiring at the 1989 Annual Meeting. Commencing


                                       5
                                                              (2005 Restatement)


with the Annual Meeting of Shareholders in 1987, each class of directors whose
term shall then expire shall be elected to hold office for a three-year term. In
the case of any vacancy on the Board of Directors, including a vacancy created
by an increase in the number of directors, the vacancy shall be filled by
election of the Board of Directors with the director so elected to serve for the
remainder of the term of the director being replaced or, in the case of an
additional director, for the remainder of the term of the class to which the
director has been assigned. All directors shall continue in office until the
election and qualification of their respective successors in office. When the
number of directors is changed, any newly created directorships or any decrease
in directorships shall be so assigned among the classes by a majority of the
directors then in office, though less than a quorum, as to make all classes as
nearly equal in number as possible. No decrease in the number of directors shall
have the effect of shortening the term of any incumbent director.

         Section 3. Any director or directors may be removed from office at any
time, but only for cause and only by the affirmative vote of at least 80% of the
votes entitled to be cast by holders of all the outstanding shares of Voting
Stock (as defined in Article XIII hereof), voting together as a single class.

         Section 4. The Board of Directors shall have the authority to accept or
reject subscriptions for capital stock made after incorporation and may grant
options to purchase or subscribe for capital stock. The Board of Directors
shall, from time to time, fix and determine the consideration for which the
corporation shall issue and sell its capital stock, and also the dividends to be
paid by the corporation upon the capital stock. The Board of Directors shall
have authority to fix the terms and conditions of rights to convert any
securities of this corporation into shares and to authorize the issuance of such
conversion rights.

         Section 5. The Board of Directors shall have the authority to issue
bonds, debentures or other securities convertible into capital stock or other
securities of any class, or bearer warrants or other evidences of optional
rights to purchase and/or subscribe to capital stock or other securities of any
class, upon such terms, in such manner, and under such conditions as may be
fixed by resolution of the Board prior to the issue thereof.

         Section 6. The Board of Directors shall have the authority to make and
alter the Bylaws, subject to the power of the shareholders to change or repeal
the Bylaws.

         Section 7. A quorum for any meeting of shareholders to transact
business of this corporation, except as otherwise specifically provided herein
or by law, shall be the presence in person or by proxy of the holders of a
majority of the shares of common stock of the corporation outstanding and of
record on the record date set for such meeting.

         Section 8. Notwithstanding any other provision of these Articles of
Incorporation or of law which might otherwise permit a lesser vote or no vote,
but in addition to any


                                       6
                                                              (2005 Restatement)


affirmative vote of the holders of any particular class of Voting Stock required
by law or these Articles of Incorporation, the affirmative vote of at least 80%
of the votes entitled to be cast by holders of all the outstanding shares of
Voting Stock (as defined in Article XIII hereof), voting together as a single
class, shall be required to alter, amend or repeal this Article IX.

                                   ARTICLE X.

                                    Directors
                                    ---------

         The first Board of Directors shall be comprised of one person whose
name and address are as follows:

                  Manuel A. Villafana
                  2220 Innsbruck Parkway
                  Columbia Heights, Minnesota 55421

                                   ARTICLE XI.

                                  Incorporators
                                  -------------

         The name and address of the incorporator is as follows:

                  Thomas H. Garrett III
                  4200 IDS Center
                  80 South Eighth Street
                  Minneapolis, Minnesota 55402

                                  ARTICLE XII.

                                    Amendment
                                    ---------

         Any provisions contained in these Articles of Incorporation may be
amended solely by the affirmative vote of the holder of a majority of the stock
entitled to vote.







                                       7
                                                              (2005 Restatement)


                                  ARTICLE XIII.

                              Fair Price Provisions
                              ---------------------

         Section 1. In addition to all other requirements imposed by law or
these Articles of Incorporation (including Article VI hereof), and except as
otherwise expressly provided in Section 2 of this Article XIII, a Business
Combination (as hereinafter defined) shall require the affirmative vote of not
less than seventy-five percent (75%) of the votes entitled to be cast by the
holders of all then outstanding shares of Voting Stock (as hereinafter defined),
voting together as a single class. Such affirmative vote shall be required
notwithstanding the fact that no vote may be required, or that a lesser
percentage or separate class vote may be specified, by law or by any other
provision of these Articles of Incorporation or in any agreement with any
national securities exchange or otherwise.

         Section 2. The provisions of Section 1 of this Article XIII shall not
be applicable to any particular Business Combination, and such Business
Combination shall require only such affirmative vote, if any, as is required by
law or by any other provision of these Articles of Incorporation or in any
agreement with any national securities exchange or otherwise, if the conditions
specified in either of the following Paragraphs 1 or 2 are met:

                  1. The Business Combination shall have been approved by a
         majority of the Continuing Directors (as hereinafter defined).

                  2. All of the following conditions shall have been met:

                           a. The aggregate amount of cash and the Fair Market
                  Value (as hereinafter defined) as of the date of the
                  consummation of the Business Combination of consideration
                  other than cash to be received per share by holders of Common
                  Stock in such Business Combination shall be at least equal to
                  the higher amount determined under clauses (i) and (ii) below:

                                    (i) (if applicable) the highest per share
                           price (including any brokerage commissions, transfer
                           taxes and soliciting dealers' fees) paid by or on
                           behalf of the Interested Shareholder (as hereinafter
                           defined) for any share of common stock in connection
                           with the acquisition by the Interested Shareholder of
                           beneficial ownership of shares of common stock (a)
                           within the two-year period immediately prior to the
                           date of the first public announcement of the proposed
                           Business Combination (the "Announcement Date") or (b)
                           in the transaction in which it became an Interested
                           Shareholder, whichever is higher; and

                                    (ii) the Fair Market Value per share of
                           common stock on the Announcement Date or on the date
                           on which the Interested Shareholder became an
                           Interested Shareholder (such latter date


                                       8
                                                              (2005 Restatement)


                           being referred to herein as the "Determination
                           Date"), whichever is higher.

                           b. The aggregate amount of cash and the Fair Market
                  Value as of the date of the consummation of the Business
                  Combination of consideration other than cash to be received
                  per share by holders of shares of any class or series of
                  outstanding capital stock (as hereinafter defined), other than
                  common stock, shall be at least equal to the highest amount
                  determined under clauses (i), (ii) and (iii) below:

                                    (i) (if applicable) the highest per share
                           price (including any brokerage commissions, transfer
                           taxes and soliciting dealers' fees) paid by or on
                           behalf of the Interested Shareholder for any share of
                           such class or series of Capital Stock in connection
                           with the acquisition by the Interested Shareholder of
                           beneficial ownership of shares of such class or
                           series of Capital Stock (a) within the two-year
                           period immediately prior to the Announcement Date or
                           (b) in the transaction in which it became an
                           Interested Shareholder, whichever is higher;

                                    (ii) the Fair Market Value per share of such
                           class or series of Capital Stock on the Announcement
                           Date or on the Determination Date, whichever is
                           higher; and

                                    (iii) (if applicable) the highest
                           preferential amount per share to which the holders of
                           shares of such class or series of Capital Stock would
                           be entitled in the event of any voluntary or
                           involuntary liquidation, dissolution or winding up of
                           the affairs of the corporation, regardless of whether
                           the Business Combination to be consummated
                           constitutes such an event.

                                    The provisions of this Paragraph 2.b shall
                                    be required to be met with respect to every
                                    class or series of outstanding Capital
                                    Stock, whether or not the Interested
                                    Shareholder has previously acquired
                                    beneficial ownership of any shares of a
                                    particular class or series of Capital Stock.

                           c. The consideration to be received by holders of a
                  particular class or series of outstanding Capital Stock shall
                  be in cash or in the same form as previously has been paid by
                  or on behalf of the Interested Shareholder in connection with
                  its direct or indirect acquisition of beneficial ownership of
                  shares of such class or series of Capital Stock. If the
                  consideration so paid for shares of any class or series of
                  Capital Stock varied as to form, the form of consideration for
                  such class or series of Capital


                                       9
                                                              (2005 Restatement)


                  Stock shall be either cash or the form used to acquire
                  beneficial ownership of the largest number of shares of such
                  class or series of Capital Stock previously acquired by the
                  Interested Shareholder. The price determined in accordance
                  with Paragraphs 2.a and 2.b of Section 2 of this Article XIII
                  shall be subject to appropriate adjustment in the event of any
                  stock dividend, stock split, combination of shares or similar
                  event.

                           d. After such Interested Shareholder has become an
                  Interested Shareholder and prior to the consummation of such
                  Business Combination: (i) there shall have been no failure to
                  declare and pay at the regular date therefore any full
                  quarterly dividends (whether or not cumulative) payable in
                  accordance with the terms of any outstanding Capital Stock
                  having a preference over the common stock as to dividends, or
                  upon liquidation, except as approved by a majority of the
                  Continuing Directors; (ii) there shall have been no reduction
                  in the annual rate of dividends paid on the common stock
                  (except as necessary to reflect any stock dividend, stock
                  split, combination of shares or similar event), except as
                  approved by a majority of the Continuing Directors; (iii)
                  there shall have been an increase in the annual rate of
                  dividends paid on the common stock as necessary to reflect any
                  reclassification (including any reverse stock split),
                  recapitalization, reorganization or any similar transaction
                  that has the effect of reducing the number of outstanding
                  shares of common stock, unless the failure to increase such
                  annual rate is approved by a majority of the Continuing
                  Directors; and (iv) except as approved by a majority of the
                  Continuing Directors, such Interested Shareholder shall not
                  have become the beneficial owner of any additional shares of
                  Capital Stock except as part of the transaction that results
                  in such Interested Shareholder becoming an Interested
                  Shareholder and except in the transaction that, after giving
                  effect thereto, would not result in any increase in the
                  Interested Shareholder's percentage beneficial ownership of
                  any class or series of Capital Stock.

                           e. After such Interested Shareholder has become an
                  Interested Shareholder, such Interested Shareholder shall not
                  have received the benefit, directly or indirectly (except
                  proportionately as a shareholder of the corporation), of any
                  loans, advances, guarantees, pledges or other financial
                  assistance or any tax credits or other tax advantages provided
                  by the corporation, whether in anticipation of or in
                  connection with such Business Combination or otherwise.

                           f. A proxy or information statement describing the
                  proposed Business Combination and complying with the
                  requirements of the Securities Exchange Act of 1934 (the
                  "Act") and the rules and regulations thereunder (or any
                  subsequent provisions replacing such Act, rules or
                  regulations) shall be mailed to all shareholders of the
                  corporation at least 30 days prior to the consummation of such
                  Business Combination (whether of not such proxy or information
                  statement is required to be mailed pursuant to the Act or
                  subsequent provisions). The proxy or


                                       10
                                                              (2005 Restatement)


                  information statement shall contain on the first page thereof,
                  in a prominent place, any statement as to the advisability (or
                  inadvisability) of the Business Combination that a majority of
                  the Continuing Directors may choose to make and, if deemed
                  advisable by a majority of the Continuing Directors as to the
                  fairness (or lack of fairness) of the terms of the Business
                  Combination from a financial point of view to the holders of
                  the outstanding shares of Capital Stock other than the
                  Interested Shareholder and its Affiliates (as hereinafter
                  defined) or Associates (as hereinafter defined).

                           g. Such Interested Shareholder shall not have made or
                  caused to be made any major change in the corporation's
                  business or equity capital structure without the approval of a
                  majority of the Continuing Directors.

         Section 3.  For the purpose of this Article XIII:

                  1.       The term "Business Combination" shall mean:

                           a. any merger, consolidation or statutory exchange of
                  shares of the corporation or any Subsidiary (as hereinafter
                  defined) with (i) any Interested Shareholder or (ii) any other
                  corporation (whether or not itself an Interested Shareholder)
                  which is or after such merger, consolidation or statutory
                  share exchange would be an Affiliate or Associate of an
                  Interested Shareholder; provided, however, that the foregoing
                  shall not include the merger of a wholly owned Subsidiary of
                  the corporation into the corporation or the merger of two or
                  more wholly owned Subsidiaries of the corporation; or

                           b. any sale, lease, exchange, mortgage, pledge,
                  transfer or other disposition (in one transaction or a series
                  of transactions) to or with an Interested Shareholder or any
                  Affiliate or Associate of any Interested Shareholder of any
                  assets of the corporation or any Subsidiary equal to or
                  greater than ten percent (10%) of the book value of the
                  consolidated assets of the corporation; or

                           c. any sale, lease, exchange, mortgage, pledge,
                  transfer or other disposition (in one transaction or a series
                  of transactions) to or with the corporation or any Subsidiary
                  of any assets of any Interested Shareholder or any Affiliate
                  or Associate of any Interested Shareholder equal to or greater
                  than ten percent (10%) of the book value of the consolidated
                  assets of the corporation; or

                           d. the issuance or transfer by the corporation or any
                  Subsidiary (in one transaction or a series of transactions) to
                  any Interested Shareholder or any Affiliate or Associate of
                  any Interested Shareholder of


                                       11
                                                              (2005 Restatement)


                  any securities of the corporation (except pursuant to stock
                  dividends, stock splits, or similar transactions which would
                  not have the effect, directly or indirectly, of increasing the
                  proportionate share of any class or series of Capital Stock,
                  or any securities convertible into Capital Stock or into
                  equity securities of any Subsidiary, that is beneficially
                  owned by any Interested Shareholder, directly or indirectly,
                  of increasing the proportionate share of any class or series
                  of Capital Stock, or any securities convertible into Capital
                  Stock or into equity securities of any Subsidiary, that is
                  beneficially owned by any Interested Shareholder or any
                  Affiliate or Associate of any Interested Shareholder) or of
                  any securities of a Subsidiary (except pursuant to a pro rata
                  distribution to all holders of common stock of the
                  corporation); or

                           e. the adoption of any plan or proposal for the
                  liquidation or dissolution of the corporation proposed by or
                  on behalf of an Interested Shareholder or any Affiliate or
                  Associate of any Interested Shareholder; or

                           f. any transaction (whether or not with or otherwise
                  involving and Interested Shareholder) that has the effect,
                  directly or indirectly, of increasing the proportionate share
                  of any class or series of Capital Stock, or any securities
                  convertible into Capital Stock or into equity securities of
                  any Subsidiary, that is beneficially owned by any Interested
                  Shareholder or any Affiliate or Associate of any Interested
                  Shareholder, including, without limitation, any
                  reclassification of securities (including any reverse stock
                  split), or recapitalization of the corporation, or any merger,
                  consolidation or statutory exchange of shares of the
                  corporation with any of its Subsidiaries; or

                           g. any agreement, contract or other agreement or
                  understanding providing for any one or more of the actions
                  specified in the foregoing clauses (a) to (f).

                  2. The term "Capital Stock" shall mean all capital stock of
         the corporation authorized to be issued from time to time under Article
         VII of these Articles of Incorporation. The term "Voting Stock" shall
         mean all Capital Stock of the corporation entitled to vote generally in
         the election of directors of the corporation.

                  3. The term "person" shall mean any individual, firm,
         corporation or other entity and shall include any group comprised of
         any person and any other person or persons with whom such person or any
         Affiliate or Associate of such person has any agreement, arrangement or
         understanding, directly or indirectly, for the purpose of acquiring,
         holding, voting, or disposing of Capital Stock.

                                       12
                                                              (2005 Restatement)


                  4. The term "Interested Shareholder" shall mean any person
         (other than the corporation or any Subsidiary and other than any
         profit-sharing, employee stock ownership or other employee benefit plan
         of the corporation or any Subsidiary or any trustee of or fiduciary
         with respect to any such plan when acting in such capacity) who (a) is
         the beneficial owner of Voting Stock representing ten percent (10%) or
         more of the votes entitled to be cast by the holders of all then
         outstanding shares of Voting Stock; or (b) is an Affiliate or Associate
         of the corporation and at any time within the two-year period
         immediately prior to the date in question was the beneficial owner of
         Voting Stock representing ten percent (10%) or more of the votes
         entitled to be cast by the holders of all then outstanding shares of
         Voting Stock; or (c) is an assignee of or has otherwise succeeded to
         any shares of Voting Stock which were at any time within the two-year
         period immediately prior to the date in question beneficially owned by
         an Interested Shareholder, if such assignment or succession shall have
         occurred in the course of a transaction or series of transactions not
         involving a public offering within the meaning of the Securities Act of
         1933.

                  5. A person shall be a "beneficial owner" of any Capital Stock
         (a) which such person or any of its Affiliates or Associates
         beneficially owns, directly or indirectly; (b) which such person or any
         of its Affiliates or Associates has, directly or indirectly, (i) the
         right to acquire (whether such right is exercisable immediately or
         subject only to the passage of time), pursuant to any agreement,
         arrangement or understanding or upon the exercise of conversion rights,
         exchange rights, warrants or options, or otherwise, or (ii) the right
         to vote pursuant to any agreement, arrangement or understanding, or
         (iii) the right to dispose or direct the disposition of, pursuant to
         any agreement, arrangement or understanding; or (c) which are
         beneficially owned, directly or indirectly, by any other person with
         which such person or any of its Affiliates or Associates has any
         agreement, arrangement or understanding for the purpose of acquiring,
         holding, voting or disposing of any shares of Capital Stock. For the
         purposes of determining whether a person is an Interested Shareholder
         pursuant to Paragraph 4 of this Section 3, the number of shares of
         Capital Stock deemed to be outstanding shall include shares deemed
         beneficially owned by such person through application of this Paragraph
         5, but shall not include any other shares of Capital Stock that may be
         issuable pursuant to any agreement, arrangement or understanding, or
         upon exercise of conversion rights, exchange rights, warrants or
         options, or otherwise.

                  6. The term "Affiliate," used to indicate a relationship with
         a specified person, shall mean a person that directly, or indirectly
         through one or more intermediaries, controls, or is controlled by, or
         is under common control with, such specified person. The term
         "Associate," used to indicate a relationship with a specified person,
         shall mean (a) any person (other than the corporation or a Subsidiary)
         of which such specified person is an officer or partner or is, directly
         or indirectly, the beneficial owner of ten percent (10%) or more of any
         class of equity securities, (b) any trust or other estate in which such
         specified person has a


                                       13


         substantial beneficial interest or as to which such specified person
         serves as a trustee or in a similar fiduciary capacity, (c) any
         relative or spouse of such specified person or any relative of such
         spouse, who has the same home as such specified person or who is a
         director or officer of the corporation or any Subsidiary, and (d) any
         person who is a director or officer of such specified person or any of
         its parents or subsidiaries (other than the corporation or a
         Subsidiary).

                  7. The term "Subsidiary" shall mean any corporation of which a
         majority of any class of equity security is beneficially owned,
         directly or indirectly, by the corporation; provided, however, that for
         the purposes of Paragraph 4 of this Section 3, the term "Subsidiary"
         shall mean only a corporation of which a majority of each class of
         equity security is beneficially owned, directly or indirectly, by the
         corporation.

                  8. The term "Continuing Director" shall mean any member of the
         Board of Directors of the corporation, while such person is a member of
         the Board of Directors, who was a member of the Board of Directors
         prior to the time that the Interested Shareholder involved in the
         Business Combination in question became an Interested Shareholder, and
         any member of the Board of Directors, while such person is a member of
         the Board of Directors, whose election, or nomination for election by
         the corporation's shareholders, was approved by a vote of a majority of
         the Continuing Directors; provided, however, that in no event shall an
         Interested Shareholder involved in the Business Combination in question
         or any Affiliate, Associate or representative of such Interested
         Shareholder, be deemed to be a Continuing Director.

                  9. The term "Fair Market Value" shall mean (a) in the case of
         cash, the amount of such cash; (b) in the case of stock, on the
         principal United States securities exchange registered under the Act on
         which such stock is listed, or, if such stock is not listed on any such
         exchange, the highest closing sale or closing bid quotation (whichever
         is applicable) with respect to a share of such stock during the 30-day
         period immediately preceding the date in question of a share of such
         stock on the National Association of Securities Dealers, Inc. Automated
         Quotations System or any similar system then in use, or if no such
         quotations are available, the fair market value on the date in question
         of a share of such stock as determined by a majority of the Continuing
         Directors in good faith; and (c) in the case of property other than
         cash or stock, the fair market value of such property on the date in
         question as determined in good faith by a majority of the Continuing
         Directors.

                  10. In the event of any Business Combination in which the
         corporation survives, the phrase "consideration other than cash to be
         received" as used in Paragraphs 2.a and 2.b of Section 2 of this
         Article XIII shall include the shares of common stock and/or the shares
         of any other class or series of Capital Stock retained by the holders
         of such shares.


                                       14
                                                              (2005 Restatement)


         Section 4. The Continuing Directors by majority vote shall have the
power to determine for the purposes of this Article XIII, on the basis of
information known to them after reasonable inquiry, (a) whether a person is an
Interested Shareholder, (b) the number of shares of Capital Stock (including
Voting Stock) or other securities beneficially owned by any person, (c) whether
a person is an Affiliate or Associate of another, (d) whether the assets that
are the subject of any Business Combination equal or exceed ten percent (10%) of
the book value of the consolidated assets of the corporation, (e) whether a
proposed plan of dissolution or liquidation is proposed by or on behalf of an
Interested Shareholder or any Affiliate or Associate of any Interested
Shareholder, (f) whether any transaction has the effect, directly or indirectly,
of increasing the proportionate share of any class or series of Capital Stock,
or any securities convertible into Capital Stock or into equity securities of
any Subsidiary, that is beneficially owned by an Interested Shareholder or any
Affiliate or Associate of an Interested Shareholder, (g) whether any Business
Combination satisfies the conditions set forth in Paragraph 2 of Section 2 of
this Article XIII, and (h) such other matters with respect to which a
determination is required under this Article XIII. Any such determination made
in good faith shall be binding and conclusive on all parties.

         Section 5. Nothing contained in this Article XIII shall be construed to
relieve any Interested Shareholder from any fiduciary obligation imposed by law.

         Section 6. The fact that any Business Combination complies with the
provisions of Section 2 of this Article XIII shall not be construed to impose
any fiduciary duty, obligation or responsibility on the Board of Directors, or
any member thereof, or the Continuing Directors, or any of them, to approve such
Business Combination or recommend its adoption or approval to the shareholders
of the corporation, nor shall such compliance limit, prohibit or otherwise
restrict in any manner the Board of Directors, or any member thereof, or the
Continuing Directors, or any of them, with respect to evaluations of or actions
and responses taken with respect to such Business Combination. The Board of
Directors of the corporation, when evaluating any actions or transactions
described in Section 2 of this Article XIII, shall, in connection with the
exercise of its judgment in determining what is in the best interests of the
corporation and its shareholders, give due consideration to all relevant factors
including without limitation the social and economic effects on the employees,
customers, suppliers and other constituents of the corporation and its
subsidiaries and on the communities in which the corporation and its
subsidiaries operate or are located.

         Section 7. Notwithstanding any other provisions of these Articles of
Incorporation (and notwithstanding the fact that a lesser percentage or separate
class vote may be specified by law or these Articles of Incorporation), the
affirmative vote of the holders of not less than 80% of the votes entitled to be
cast by the holders of all then outstanding shares of Voting Stock, voting
together as a single class, shall be required to amend or repeal, or adopt any
provisions inconsistent with this Article XIII.


                                       15
                                                              (2005 Restatement)


                                  ARTICLE XIV.

                               Director Liability
                               ------------------

         No director of this Corporation shall be personally liable to the
Corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its shareholders; (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law; (iii) under Sections 302A.559 or 80A.23 of the Minnesota
Statutes; (iv) for any transaction from which the director derived any improper
personal benefit; or (v) for any act or omission occurring prior to the date
when this provision becomes effective.

         The provisions of this Article shall not be deemed to limit or preclude
indemnification of a director by the Corporation for any liability of a director
which has not been eliminated by the provisions of this Article.

         If the Minnesota Statutes hereafter are amended to authorize the
further elimination or limitation of the liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the amended Minnesota Statutes.

































                                       16
                                                              (2005 Restatement)

EX-10.14

                                                                   EXHIBIT 10.14



                             ST. JUDE MEDICAL, INC.
                        NON-QUALIFIED STOCK OPTION AWARD
                                (2002 STOCK PLAN)

[NAME AND ADDRESS OF OPTIONEE]

[SOCIAL SECURITY NUMBER OF OPTIONEE]



         THIS CERTIFIES that St. Jude Medical, Inc. (the "Company") has granted
you an option (the "Option") to purchase shares (the "Option Shares") of common
stock, par value $.10 per share, of the Company (the "Common Stock") pursuant to
the St. Jude Medical, Inc. 2002 Stock Plan, as amended (the "Plan"), as follows:

         Grant Type:       Non-Qualified Stock Option

         Grant Date:

         Exercise Price Per Share:

         Total Number of Option Shares:

         Expiration Date:

         The Option is granted under and governed by the following terms and
conditions and the terms and conditions contained in the Plan. A copy of the
Plan is available upon request. Any capitalized terms not defined in this Award
will have the meaning set forth in the Plan.

                                              ST. JUDE MEDICAL, INC.


                                              By: ______________________________
                                              Name:
                                              Title:




TERMS AND CONDITIONS OF NON-QUALIFIED STOCK OPTION AWARD


         1.    Vesting and Term of Option.

         (a)   The Option will become exercisable as to 25% of the Option Shares
on each anniversary of the Grant Date (stated on the first page of this Award),
commencing with the first anniversary of the Grant Date, unless the Option
terminates or the vesting accelerates as provided in this Award. Once the Option
has become exercisable for all or a portion of the Option Shares, it will remain
exercisable for all or such portion of the Option Shares, as the case may be,
until the Option expires or is terminated as provided in this Award. The Option
will expire on the Expiration Date (stated on the first page of this Award),
unless it is terminated prior to that time in accordance with the terms and
conditions of this Award.

         (b)   Notwithstanding the vesting provision contained in Section 1(a)
above, but subject to the other terms and conditions set forth herein, from and
after a Change of Control (as hereinafter defined) the Option will become
immediately exercisable in full. As used herein, "Change of Control" shall mean
any of the following events:

               (i)    the acquisition by any person, entity or "group," within
         the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
         Act of 1934, as amended (the "Exchange Act"), other than the Company or
         any of its Subsidiaries, or any employee benefit plan of the Company
         and/or one or more of its Subsidiaries, of beneficial ownership (within
         the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or
         more of either the then outstanding shares of Common Stock or the
         combined voting power of the Company's then outstanding voting
         securities in a transaction or series of transactions not approved in
         advance by a vote of at least three-quarters of the Continuing
         Directors (as hereinafter defined); or

               (ii)   individuals who, as of the Grant Date, constitute the
         Board of Directors of the Company (generally the "Directors" and as of
         the Grant Date the "Continuing Directors") cease for any reason to
         constitute at least a majority thereof, provided that any person
         becoming a Director subsequent to the Grant Date whose nomination for
         election was approved in advance by a vote of at least three-quarters
         of the Continuing Directors (other than a nomination of an individual
         whose initial assumption of office is in connection with an actual or
         threatened solicitation with respect to the election or removal of the
         Directors of the Company, as such terms are used in Rule 14a-11 of
         Regulation 14A under the Exchange Act) shall be deemed to be a
         Continuing Director; or

               (iii)  the approval by the shareholders of the Company of a
         reorganization, merger, consolidation, liquidation or dissolution of
         the Company or of the sale (in one transaction or a series of related
         transactions) of all or substantially all of the assets of the Company
         other than a reorganization, merger, consolidation, liquidation,
         dissolution or sale approved in advance by a vote of at least
         three-quarters of the Continuing Directors; or

                                       2



               (iv)   the first purchase under any tender offer or exchange
         offer (other than an offer by the Company or any of its Subsidiaries)
         pursuant to which shares of Common Stock are purchased; or

               (v)    at least a majority of the Continuing Directors determines
         in their sole discretion that there has been a change in control of the
         Company.

         3.    Effect of Termination of Employment.

         (a)   If your employment is terminated by reason of your death, the
Option may be exercised at any time within 12 months after the date of your
death, to the extent that the Option was exercisable by you on the date of
death, by your personal representatives or administrators or by any person or
persons to whom the Option has been transferred by will or the applicable laws
of descent and distribution, subject to the condition that the Option will not
be exercisable after the Expiration Date of the Option.

         (b)   If your employment is terminated by reason of Disability, you may
exercise the Option at any time within 12 months after such termination of
employment, to the extent that the Option was exercisable by you on the date of
such termination, subject to the condition that the Option will not be
exercisable after the Expiration Date of the Option.

         (c)   If your employment is terminated by reason of Retirement, you may
exercise the Option at any time within 36 months after such termination of
employment, to the extent that the Option was exercisable by you on the date of
such termination, subject to the condition that the Option will not be
exercisable after the Expiration Date of the Option.

         (d)   If your employment is terminated for Cause, the Option will
terminate immediately upon termination of employment and will not be exercisable
thereafter.

         (e)   If your employment terminates for any reason other than your
death, Disability, Retirement or for Cause, you may exercise the Option at any
time within 90 days after the date of such termination of employment, to the
extent that the Option was exercisable by you on the date of such termination,
subject to the condition that the Option will not be exercisable after the
Expiration Date of the Option. However, if upon termination of your employment
you become a consultant to the Company pursuant to a written consulting
agreement, then you may continue to exercise the Option at any time until 90
days after the date of termination of such consulting agreement to the extent
the Option was exercisable by you on the date of your termination of employment
and subject to the condition that the Option may not be exercised after the
termination of the Option.

         4.   Method of Exercising Option.

         (a)  Subject to the terms and conditions of this Award, the Option may
be exercised by written notice to the Company, to the attention of the Stock
Option Administrator at Corporate Headquarters. Such notice must state the
election to exercise the Option, the number of Option Shares as to which the
Option is being exercised and the manner of payment, and must be signed by the
person or persons so exercising the Option. The notice must be accompanied by
payment in full of the Exercise Price (stated on the first page of this Award)
for all Option Shares

                                       3




designated in the notice.  To the extent that the Option is exercised by a
person or persons other than you, the notice of exercise also must be
accompanied by appropriate proof of the right of such person or persons to
exercise the Option.

         (b)   Payment of the Exercise Price must be made to the Company through
one or a combination of the following methods:

               (i)    delivery of a check payable to the Company or cash, in
         United States currency;

               (ii)   delivery of shares of Common Stock acquired by you (or
         the other person(s) exercising the Option) more than six months prior
         to the date of exercise having a Fair Market Value on the date of
         exercise equal to the Exercise Price. You (or such other person(s))
         must duly endorse all certificates delivered to the Company in blank
         and must represent and warrant in writing that you are the owner of the
         shares so delivered, free and clear of all liens, encumbrances,
         security interests and restrictions; or

               (iii)  delivery of a combination of cash or a check and Common
         Stock acquired by you (or the other person(s) exercising the Option)
         more than six months prior to the date of exercise having an aggregate
         Fair Market Value on the date of exercise equal to the Exercise Price.

         5.    Income Tax Withholding.

         In order to provide the Company with the opportunity to claim the
benefit of any income tax deduction that may be available to it upon the
exercise of the Option, and in order to comply with all applicable federal or
state income tax laws or regulations, the Company may take such action as it
deems appropriate to ensure that all applicable minimum federal or state income,
withholding, social, payroll or other taxes, which are your sole and absolute
responsibility, are withheld or collected from you or the other person(s)
exercising the Option. You or such other person(s) exercising the Option may, at
your election (the "Tax Election"), satisfy the applicable minimum tax
withholding obligations by (a) electing to have the Company withhold a portion
of the Option Shares otherwise to be delivered upon exercise of the Option
having a Fair Market Value equal to the amount of such taxes or (b) delivering
to the Company shares of Common Stock having a Fair Market Value equal to the
amount of such taxes. The Tax Election must be made on or before the date that
the amount of tax to be withheld is determined.

         6.    Restriction on Transfer or Sale of Option Shares.

         (a)   Each time that all or a portion of the Option is exercised in
accordance with the terms and conditions of this Award, 50% of the Option Shares
(after deducting any Option Shares used or sold by you to pay the exercise price
or to satisfy the applicable minimum tax withholding obligations in connection
with such exercise, and rounded down to the nearest whole share) received by you
from such exercise shall be held by you for one year from the date of such
exercise, provided, however, the Committee, in its sole discretion, may waive
such restriction on transfer or sale on all or a portion of such Option Shares
prior to the expiration of such one-year period. Nothing in this Section 6(a)
shall prevent you from accepting a payment of cash or other property or
securities in consideration for the Option or the Option Shares in connection
with a Change of Control, provided that the restriction on transfer or sale set
forth in this Section 6(a) shall continue to apply to any securities received by
you in consideration for the Option or the Option Shares in

                                       4




connection with any such Change of Control to the same extent as if those
securities had been received upon the exercise of the Option, unless your
employment is terminated and the restriction ceases to apply as provided in
Section 6(b).

         (b)   Notwithstanding Section 6(a), if your employment is terminated
pursuant to Section 3(a), (b) or (c) above, the restriction on transfer or sale
pursuant to Section 6(a) will automatically cease and, so long as all federal
and state securities laws are adhered to, any Option Shares which you (or in the
case of your death, your personal representatives or administrators or any
person or persons to whom the Option or the Option Shares have been transferred
by will or the applicable laws of descent and distribution) receive or have
received pursuant to the exercise of the Option may be immediately transferred
or sold.

         7.    Adjustments.

         If the Committee determines that any merger, reorganization,
consolidation, recapitalization, stock dividend, stock split, reverse stock
split, other change in corporate structure affecting the Common Stock, spin-off,
split-up or other distribution of assets to shareholders, or other similar
corporate transaction or event affects the shares of Common Stock such that an
adjustment is determined by the Committee to be appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended to be
made available under this Award, then an appropriate adjustment automatically
will be made in the number and kind of Option Shares with a corresponding
adjustment in the Exercise Price; provided that the number of Option Shares
always will be a whole number.

         8.    Securities Matters.

         No Option Shares will be issued hereunder prior to such time as counsel
to the Company has determined that the issuance of the Option Shares will not
violate any federal or state securities or other laws, rules or regulations. The
Company will not be required to deliver any Option Shares until the requirements
of any federal or state securities or other laws, rules or regulations
(including the rules of any securities exchange) as may be determined by the
Company to be applicable are satisfied.

         9.    General Provisions.

         (a)   Interpretations. This Award is subject in all respects to the
terms of the Plan. In the event that any provision of this Award is inconsistent
with the terms of the Plan, the terms of the Plan will govern. Any question of
administration or interpretation arising under this Award will be determined by
the Committee, and such determination will be final, conclusive and binding upon
all parties in interest.

         (b)   No Rights as a Shareholder. Neither you nor your legal
representatives will have any of the rights and privileges of a shareholder of
the Company with respect to the Option Shares unless and until certificates for
such Option Shares have been issued upon exercise of the Option.

                                       5




         (c)   No Right to Employment. Nothing in this Agreement or the Plan
will be construed as giving you the right to be retained as an employee of the
Company. In addition, the Company may at any time dismiss you from employment,
free from any liability or any claim under this Award.

         (d)   Option Not Transferable. The Option may not be transferred,
pledged, alienated, attached or otherwise encumbered, and any purported
transfer, pledge, alienation, attachment or encumbrance of the Option will be
void and unenforceable against the Company, except that the Option may be
transferred (i) by will or by the laws of descent and distribution or (ii) by
gift, without consideration, under a written instrument that is approved in
advance by the Committee, to a member of your family, as defined in Section 267
of the Internal Revenue Code of 1986, as amended, or to a trust or similar
entity whose sole beneficiaries are you and/or members of your family (such
family member or other entity, a "Permitted Transferee"), provided that such
transfer and the exercise of the Option by such Permitted Transferee do not
violate any federal or state securities laws. During your lifetime the Option
will be exercisable only by you or such Permitted Transferee.

         (e)   Reservation of Shares. The Company will at all times during the
term of the Option reserve and keep available such number of shares of Common
Stock as will be sufficient to satisfy the requirements of this Award.

         (f)   Headings. Headings are given to the sections and subsections of
this Award solely as a convenience to facilitate reference. Such headings will
not be deemed in any way material or relevant to the construction or
interpretation of this Award or any provision hereof.

         (g)   Governing Law. The internal law, and not the law of conflicts, of
the State of Minnesota will govern all questions concerning the validity,
construction and effect of this Award.

                                       6

EX-13

MANAGEMENT'S DISCUSSION AND ANALYSIS OF                               EXHIBIT 13
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


OVERVIEW

Our business is focused on the development, manufacturing and distribution of
cardiovascular medical devices for the global cardiac rhythm management (CRM),
cardiac surgery (CS) and cardiology and vascular access (C/VA) therapy areas.
Our principal products in each of these therapy areas are as follows:

CRM
    o    bradycardia pacemaker systems (pacemakers),
    o    tachycardia implantable cardioverter defibrillator systems (ICDs), and
    o    electrophysiology (EP) catheters

CS
    o    mechanical and tissue heart valves,
    o    valve repair products, and
    o    epicardial ablation systems

C/VA
    o    vascular closure devices,
    o    angiography catheters,
    o    guidewires, and
    o    hemostasis introducers

Our products are sold in more than 130 countries around the world. Our largest
geographic markets are the United States, Europe and Japan.

We compete on the basis of providing reliable products with advanced features.
Our industry has undergone significant consolidation in the last decade and is
very competitive. Our strategy requires significant investments in research and
development in order to introduce new products, particularly in the cardiac
rhythm management and the cardiology and vascular access therapy areas. We have
also sought to improve our operating margins through a variety of techniques,
including maintaining our average selling prices while improving the efficiency
of our manufacturing operations. Our products are generally not affected by
economic cycles. However, we expect cost containment pressure on healthcare
systems to continue to place downward pressure on prices for our products. The
industry in which we operate is characterized by frequent patent and product
liability litigation, which are issues that we must manage.

The Company participates in several different markets, each of which has its own
expected rate of growth. Management is particularly focused in the implantable
cardioverter defibrillator (ICD) market, which includes congestive heart failure
devices. The Centers for Medicare and Medicaid Services (CMS) recently expanded
the indications for these devices that would be reimbursed by Medicare and
Medicaid. As a result of this decision and clinical data from various studies of
these devices, management estimates this market is to grow at a compounded rate
of 20% per year for the next 3 years. Management's goal is to participate in the
growth of the market and to increase the Company's market share of the ICD
market which we currently estimate to be approximately 14%.


                                       1



Effective January 1, 2005, the Company formed an Atrial Fibrallation (AF)
Division and a Cardiology Division to focus efforts on these two areas. As a
result, the Daig Division will no longer function as a business unit. Management
believes that AF is a prevalent, debilitating disease state that is not
effectively treated at this time. Device technologies are emerging that may
provide therapeutic improvements compared to current treatments. In addition,
the electrophysiologist, the medical specialist who treats AF with devices, is
also the primary customer of ICD products. Management believes that providing
advanced AF products to electrophysiologists will generate goodwill that may
lead to increased ICD sales. Finally, the creation of a separate Cardiology
Division will facilitate management focus on not just the Angio-Seal product
line, but on other products in the cardiology market as well.



RESULTS OF OPERATIONS

FINANCIAL SUMMARY
Net sales in 2004 increased approximately 19% over 2003 driven primarily by
growth in our ICD and vascular closure devices, incremental revenue as a result
of our acquisition of Getz Bros. Co., Ltd. in Japan (Getz Japan) in April 2003,
and the positive impact of foreign currency translation as the U.S. dollar
weakened against most currencies during 2004 as compared with 2003. Our ICD net
sales grew approximately 41% to $583.7 million during 2004. Our vascular closure
net sales increased approximately 32% to $287.9 million in 2004, strengthening
our leadership position in the vascular closure market.

During 2004, we completed our acquisitions of Epicor Medical, Inc. (Epicor) and
Irvine Biomedical, Inc. (IBI). The addition of these operations further
strengthened our portfolio of products used to treat heart rhythm disorders.
During 2003, we completed our acquisition of Getz Japan and Getz's related
distribution operations in Australia. The addition of these operations further
strengthened our presence in Japan and Australia.

Our results for 2004 include pre-tax $35.4 million special charges relating to
the discontinuance of our Symmetry(TM) Bypass Aortic Connector Product line and
Symmetry(TM) Bypass Aortic Connector litigation. Additionally, the Company
recorded $9.1 million of purchased in-process research and development and a
pre-tax $5.5 million charge resulting from the settlement of certain patent
infringement litigation. The Company also recorded the reversal of $14.0 million
of previously recorded income tax expense due to the conclusion of certain tax
audits.


                                       2


Net earnings and diluted net earnings per share for 2004 increased approximately
22% and 21%, respectively, over 2003 due primarily to incremental profits
resulting from higher sales.

We ended the year with $688.0 million of cash and cash equivalents and $234.9
million of long-term debt. We have strong short-term credit ratings, with an A2
rating from Standard & Poor's and a P2 rating from Moody's. Our cash flows from
operations remained strong during 2004, helping to further strengthen our
balance sheet and fund the acquisitions of Epicor and IBI. We expect to use our
future cash flows to fund internal development opportunities, reduce our debt
and fund acquisitions, including the acquisition of Endocardial Solutions, Inc.
(ESI) and Velocimed LLC (Velocimed) and our minority investment in ProRhythm,
Inc. (ProRhythm) in January 2005. See ACQUISITIONS & MINORITY INVESTMENTS for a
discussion of ESI, Velocimed and ProRhythm.

We utilize a 52/53-week fiscal year ending on the Saturday nearest December 31,
but for simplicity of presentation, describe all periods as if the year end is
December 31. Fiscal 2004 and 2002 each consisted of 52 weeks. Fiscal year 2003
consisted of 53 weeks, adding three additional selling days as compared with
2002 and 2004. The additional selling days occurred between the Christmas and
New Year's Day holidays, which typically are lower volume selling days due to
the elective nature of the procedures that use our devices. These additional
selling days did not have a material impact on our net sales or results of
operations for 2003.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Preparation of our consolidated financial statements in accordance with
accounting principles generally accepted in the United States requires us to
adopt various accounting policies and to make estimates and assumptions that
affect the reported amounts in the financial statements and accompanying notes.
Our significant accounting policies are disclosed in Note 1 to the consolidated
financial statements.

On an ongoing basis, we evaluate our estimates and assumptions, including those
related to accounts receivable allowance for doubtful accounts; estimated useful
lives of diagnostic equipment; valuation of in-process research and development;
goodwill and other intangible assets; income taxes; Silzone(R) special charge
accruals; and legal reserves. We base our estimates on historical experience and
various other assumptions that are believed to be reasonable under the
circumstances, and the results form the basis for making judgments about the
reported values of assets, liabilities, revenues and expenses. Actual results
may differ from these estimates.

We believe that the following represent our most critical accounting estimates:

ACCOUNTS RECEIVABLE ALLOWANCE FOR DOUBTFUL ACCOUNTS: We grant credit to
customers in the normal course of business, and generally do not require
collateral or any other security to support our accounts receivable. We maintain
an allowance for doubtful accounts for potential credit losses, which primarily
consists of reserves for specific customer balances that we believe may not be
collectible. We determine the adequacy of this allowance by regularly reviewing
the accounts receivable agings, customer financial conditions and credit
histories, and current economic conditions. In some developed markets and in
many emerging markets, payments of certain accounts receivable balances are made
by the individual countries' healthcare systems for which payment is dependent,
to some extent, upon the political and economic environment within those
countries. Although we consider our allowance for doubtful accounts to be
adequate, if the financial condition of our customers or the individual
countries' healthcare systems were to deteriorate and impair their ability to
make payments to us, additional allowances may be required in future periods.
The allowance for doubtful accounts was $31.3 million at December 31, 2004 and
$31.9 million at December 31, 2003.


                                       3


ESTIMATED USEFUL LIVES OF DIAGNOTIC EQUIPMENT: Diagnostic equipment is recorded
at cost and is depreciated using the straight-line method over its estimated
useful life of five to eight years. Diagnostic equipment primarily consists of
programmers that are used by physicians and healthcare professionals to program
and analyze data from pacemaker and ICD devices. The estimated useful life of
this equipment is determined based on our estimates of its usage by the
physicians and healthcare professionals, factoring in new technology platforms
and rollouts. To the extent that we experience changes in the usage of this
equipment or there are introductions of new technologies to the market, the
estimated useful lives of this equipment may change in a future period.
Diagnostic equipment had a net carrying value of $85.8 million and $68.7 million
at December 31, 2004 and 2003, respectively. If we had used an estimated useful
life on diagnostic equipment that was one year less than our current estimate,
our 2004 depreciation expense would have been approximately $3.0 million higher.

VALUATION OF PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT (IPR&D), GOODWILL AND
OTHER INTANGIBLE ASSETS: When we acquire another company, the purchase price is
allocated, as applicable, between IPR&D, other identifiable intangible assets,
tangible assets, and goodwill. IPR&D is defined as the value assigned to those
projects for which the related products have not received regulatory approval
and have no alternative future use. Determining the portion of the purchase
price allocated to IPR&D and other intangible assets requires us to make
significant estimates. The amount of the purchase price allocated to IPR&D and
other intangible assets is determined by estimating the future cash flows of
each project or technology and discounting the net cash flows back to their
present values. The discount rate used is determined at the time of acquisition,
in accordance with accepted valuation methods, and includes consideration of the
assessed risk of the project not being developed to commercial feasibility.

Goodwill represents the excess of the aggregate purchase price over the fair
value of net assets, including IPR&D, of the acquired businesses. Goodwill is
tested for impairment annually for each reportable segment or more frequently if
changes in circumstance or the occurrence of events suggest impairment exists.
The test for impairment requires us to make several estimates about fair value,
most of which are based on projected future cash flows. Our estimates associated
with the goodwill impairment tests are considered critical due to the amount of
goodwill recorded on our consolidated balance sheets and the judgment required
in determining fair value amounts, including projected future cash flows.
Goodwill was $593.8 and $407.0 million as of December 31, 2004 and 2003,
respectively.

Other intangible assets consist primarily of customer lists and relationships,
purchased technology, patents, and are amortized using the straight-line method
over their estimated useful lives, ranging from 3 to 20 years. Other intangible
assets also consist of trademarks which are indefinite lived intangibles and are
not amortized. We review these intangible assets for impairment as changes in
circumstance or the occurrence of events suggest the remaining value may not be
recoverable. Other intangible assets, net of accumulated amortization, were
$207.1 and $154.4 million as of December 31, 2004 and 2003, respectively.

INCOME TAXES: As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each of the
jurisdictions in which we operate. This process involves estimating the actual
current tax expense as well as assessing temporary differences in the treatment
of items for tax and accounting purposes. These timing differences result in
deferred tax assets and liabilities, which are included in our consolidated
balance sheet. We must then assess the likelihood that our deferred tax assets
will be recovered from future taxable income, and to the extent that we believe
that recovery is not likely, a valuation allowance must be established. At
December 31,


                                       4



2004, we had approximately $132.0 million of gross deferred tax assets,
including net operating loss and tax credit carryforwards that will expire from
2005 to 2024 if not utilized. We believe that our deferred tax assets, including
the net operating loss and tax credit carryforwards, will be fully realized
based upon our estimates of future taxable income. As such, we have not recorded
any valuation allowance for our deferred tax assets. If our estimates of future
taxable income are not met, a valuation allowance for some of these deferred tax
assets would be required.

We have not recorded U.S. deferred income taxes on certain of our non-U.S.
subsidiaries' undistributed earnings, because such amounts are intended to be
reinvested outside the United States indefinitely. However, should we change our
business and tax strategies in the future and decide to repatriate a portion of
these earnings to one of our U.S. subsidiaries, including cash maintained by
these non-U.S. subsidiaries (see FINANCIAL CONDITION - LIQUIDITY AND CAPITAL
RESOURCES), additional U.S. tax liabilities would be incurred.

We operate within multiple taxing jurisdictions and are subject to audits in
these jurisdictions. These audits can involve complex issues, including
challenges regarding the timing and amount of deductions and the allocation of
income among various tax jurisdictions. Our U.S. federal tax filings prior to
2001 have been examined by the Internal Revenue Service (IRS), and we have
settled all differences arising out of those examinations. The IRS is currently
in the process of examining our U.S. federal tax returns for the calendar years
2001, 2002 and 2003.

We record our income tax provisions based on our knowledge of all relevant facts
and circumstances, including the existing tax laws, our experience with previous
settlement agreements, the status of current IRS examinations and our
understanding of how the tax authorities view certain relevant industry and
commercial matters. Although we have recorded all probable income tax accruals
in accordance with Statement of Financial Accounting Standards (SFAS) No. 5,
"ACCOUNTING FOR CONTINGENCIES" and SFAS No. 109, "ACCOUNTING FOR INCOME TAXES,"
our accruals represent accounting estimates that are subject to the inherent
uncertainties associated with the tax audit process, and therefore include
certain contingencies. We believe that any potential tax assessments from the
various tax authorities that are not covered by our income tax provision will
not have a material adverse impact on our consolidated financial position or
liquidity. However, they may be material to our consolidated results of
operations of a future period.

SILZONE(R) SPECIAL CHARGE ACCRUALS: In January 2000, we initiated a worldwide
voluntary recall of all field inventory of heart valve replacement and repair
products incorporating Silzone(R) coating on the sewing cuff fabric. We
concluded that we would no longer utilize Silzone(R) coating and recorded a
special charge totaling $26.1 million during the first quarter of 2000 to cover
various asset write-downs and anticipated costs associated with these matters.
In the second quarter of 2002, we increased our Silzone(R) reserves by $11
million to cover additional anticipated costs. See further discussion of
Silzone(R) litigation in Note 5 of the Consolidated Financial Statements. We
have recorded an accrual for probable legal and other costs that we will incur
to defend the various cases involving Silzone(R) devices, and we have recorded a
receivable from our product liability insurance carriers for amounts expected to
be recovered. We have not accrued for any amounts associated with probable legal
settlements or judgments because we cannot reasonably estimate such amounts.
However, we believe that no significant claims will ultimately be allowed to
proceed as class actions in the United States, and, therefore, that all
settlements and judgments will be covered under our remaining product liability
insurance coverage (approximately $151 million at February 25, 2005), subject to
the insurance companies' performance under the policies. As such, we believe
that any costs (the material components of which are settlements, judgments and
legal fees) not covered by our product liability


                                       5



insurance policies or existing reserves will not have a material adverse effect
on our statement of financial position or liquidity, however, such costs may be
material to our consolidated results of operations of a future period.

Our remaining product liability insurance for Silzone(R) claims consists of a
number of layers, each of which is covered by one or more insurance companies.
Our present layer of insurance, which is a $30 million layer of which
approximately $11 million has been reimbursed as of February 25, 2005, is
covered by Lumberman's Mutual Casualty Insurance, a unit of the Kemper Insurance
Companies (collectively referred to as Kemper). Kemper's credit rating by A.M.
Best has been downgraded to a "D" (poor). Kemper is currently in "run off,"
which means that it is not issuing new policies and is, therefore, not
generating any new revenue that could be used to cover claims made under
previously-issued policies. In the event Kemper is unable to pay part or all of
the claims directed to it, we believe the other insurance carriers in our
program will take the position that we will be directly liable for any claims
and costs that Kemper is unable to pay, and that insurance carriers at policy
layers following Kemper's layer will not provide coverage for Kemper's layer.
Kemper also provides part of the coverage for Silzone(R) claims in our final
layer of insurance ($20 million of the final $50 million layer).

It is possible that Silzone(R) costs and expenses will reach the limit of one or
both of the Kemper layers of insurance coverage, and it is possible that Kemper
will be unable to meet its obligations to us. If this were to happen, we could
incur a loss of up to approximately $39 million as of February 25, 2005. We have
not accrued for any such losses as potential losses are possible, but not
estimable, at this time.

LEGAL RESERVES: We operate in an industry that is susceptible to significant
product liability and intellectual property claims. We record a liability in our
consolidated financial statements for costs related to claims, including future
legal costs, settlements and judgments where we have assessed that a loss is
probable and an amount can be reasonably estimated. Product liability claims may
be brought by individuals seeking relief for themselves or, increasingly, by
groups seeking to represent a class. In addition, claims may be asserted against
us in the future relative to events that are not known to us at the present
time. Our product liability insurance coverage during most of 2004 was $425
million, with a $75 million deductible per claim. In light of our significant
self-insured retention, our product liability insurance coverage is designed to
help protect against a catastrophic claim. We record a liability in our
consolidated financial statements for costs related to claims, including future
legal costs, settlements and judgments where we have assessed that a loss is
probable and an amount can be reasonably estimated.

Additionally, a substantial amount of intellectual property litigation occurs in
our industry. In November 1996, one of our competitors, Guidant Corporation
(Guidant), initiated a lawsuit against us alleging that we did not have a
license to certain patents which they controlled and as such, we were infringing
on those patents. A jury found against us in July 2001; however, the judge
overseeing the trial issued post-trial rulings in February 2002 which
essentially set aside the jury's $140 million damage assessment. Guidant
appealed certain aspects of the judge's ruling, and the Appellate Court ruled
that the matter should return to the district court for further proceedings. We
are requesting that the U.S. Supreme Court review the matter. It is not expected
that the U.S. Supreme Court would rule on this request until sometime during the
second quarter of 2005. We will continue to vigorously defend against the claims
that Guidant has asserted in this lawsuit.

In February 2004, Guidant initiated two lawsuits against us alleging that a
number of our CRT products infringe on two of their patents. We have not
submitted a substantive response to Guidant's February


                                       6



2004 claims at this time. To date, we have not recorded any liability for any
legal settlements or judgments related to these litigation matters since
potential losses arising from any legal settlements or judgments are possible,
but not estimable at this time. The range of such a loss could be material to
our consolidated financial position, liquidity and results of operations.

ACQUISITIONS & MINORITY INVESTMENT
Acquisitions and minority investments can have an impact on the comparison of
our operating results and financial condition from year to year.

On February 15, 2005, we announced that we signed a definitive agreement to
acquire the business of Velocimed, for $82.5 million less approximately $8.5
million of cash expected to be on hand at Velocimed at closing plus additional
contingent payments tied to revenues in excess of minimum future targets, and a
milestone payment upon U.S. Food and Drug Administration (FDA) approval of the
Premere(TM) patent foramen ovale closure system. Velocimed is a privately held
company which develops and manufactures specialty interventional cardiology
devices. The first additional contingent payment contemplated under the
agreement would be paid in March 2007. The results of operations of the
Velocimed business acquisition are expected to be included in our consolidated
results of operations beginning in the second quarter of 2005.

On January 13, 2005, we completed our acquisition of ESI for $280.5 million,
which includes closing costs less $8.2 million of cash acquired. ESI had been
publicly traded on the NASDAQ market under the ticker symbol ECSI. ESI develops,
manufactures, and markets the EnSite(R) System used for the navigation and
localization of diagnostic and therapeutic catheters used by physician
specialists to diagnose and treat cardiac rhythm disorders. We expect to record
a purchased in-process R&D charge of approximately $12 million associated with
the completion of this transaction during the first quarter of 2005. The results
of operations of ESI will be included in the Company's consolidated results of
operations beginning in the first quarter of 2005.

On October 7, 2004, we completed our acquisition of the remaining capital stock
of IBI, a privately held company which develops and sells EP catheter products
used by physician specialists to diagnose and treat cardiac rhythm disorders. In
April 2003, we acquired a minority investment of 14% in IBI through the
Company's acquisition of Getz Japan. We paid approximately $50.6 million to
acquire the remaining 86% of IBI capital stock that we did not already own. This
amount was net of cash acquired from IBI as well as consideration from the
exercise of IBI stock options. The original investment of $4.5 million was
accounted for under the cost method until the date the remaining shares were
purchased. We recorded a purchased in-process R&D charge of $9.1 million in the
fourth quarter of 2004 associated with the completion of this transaction.

On June 8, 2004, we completed our acquisition of the remaining capital stock of
Epicor, a company focused on developing products which use high intensity
focused ultrasound (HIFU) to ablate cardiac tissue. In May 2003, we made an
initial $15.0 million minority investment in Epicor and acquired an option to
purchase the remaining ownership of Epicor prior to June 30, 2004 for $185.0
million. Pursuant to the option, we paid $185.0 million in cash to acquire the
remaining outstanding capital stock of Epicor on June 8, 2004. The original
investment was accounted for under the cost method until the date the remaining
shares were purchased. Net consideration paid for the total acquisition was
$198.0 million, which includes closing costs less $2.4 million of cash acquired.

On April 1, 2003, we completed the acquisition of Getz Japan, a distributor of
medical technology products in Japan and our largest volume distributor in
Japan. We paid 26.9 billion Japanese Yen in


                                       7



cash to acquire 100% of the outstanding common stock of Getz Japan. Net
consideration paid was $219.2 million, which includes closing costs less $12.0
million of cash acquired. We also acquired the net assets of Getz Bros. & Co.
(Aust.) Pty. Limited and Medtel Pty. Limited (collectively referred to as Getz
Australia) related to the distribution of our products in Australia for $6.2
million in cash, including closing costs. Prior to the acquisition of Getz Japan
and Getz Australia (collectively referred to as Getz), we recognized revenue
from the sale of our products to Getz as our distributor. Subsequent to the
acquisition date, we recognized additional revenue from Getz related to the sale
of non-St. Jude Medical manufactured products sold by Getz and the incremental
revenue on the sale of St. Jude Medical manufactured products.

The results of operations of the acquisitions noted above have been included in
our consolidated results of operations since the acquisition date.

MINORITY INVESTMENT: On January 12, 2005, we made an initial equity investment
of $12.5 million pursuant to the Preferred Stock Purchase and Acquisition Option
Agreement (the Purchase and Option Agreement) and an Agreement and Plan of
Merger (the Merger Agreement) entered into with ProRhythm. The initial
investment equated to a 9% ownership interest and is accounted for under the
cost method. ProRhythm is developing a HIFU catheter-based ablation system for
the treatment of atrial fibrillation. Under the terms of the Purchase and Option
Agreement, we have the option to make, or ProRhythm can require us to make, an
additional $12.5 million equity investment through January 31, 2006, upon
completion of specific clinical and regulatory milestones.

The Purchase and Option Agreement also provides that we have the exclusive
right, but not the obligation, through the later of 3 months after the date
ProRhythm delivers certain clinical trial data or March 31, 2007, to acquire
ProRhythm for $125 million in cash consideration payable to the ProRhythm
stockholders (other than us) pursuant to the terms and conditions set forth in
the Merger Agreement, with additional cash consideration payable to the
ProRhythm stockholders (other than us) after the consummation of the
acquisition, if ProRhythm achieves certain performance-related milestones.

SEGMENT REVIEW
We have two reportable segments, the Cardiac Rhythm Management/Cardiac Surgery
(CRM/CS) segment and the Daig segment, which focus on the development and
manufacture of our products. The primary products produced by each segment are:
CRM/CS - pacemaker and ICD systems, mechanical and tissue heart valves and other
cardiac surgery products; Daig - electrophysiology catheters, vascular closure
devices and other cardiology and vascular access products.

Our reportable segments include end customer revenues from the sale of products
they each develop and manufacture. The costs included in each of the reportable
segments' operating results include the direct costs of the products sold to end
customers and operating expenses managed by each of the segments. Certain costs
of goods sold and operating expenses managed by our selling and corporate
functions are not included in segment operating profit. Because of this, segment
operating profit is not representative of the operating profit of our products
in these segments.


                                       8



The following table presents certain financial information about our reportable
segments (in thousands):



                                         CRM/CS         DAIG          OTHER         TOTAL
- --------------------------------------------------------------------------------------------
                                                                     
FISCAL YEAR ENDED DECEMBER 31, 2004
  Net sales                           $ 1,729,862   $   470,720   $    93,591    $ 2,294,173
  Operating profit (a)                  1,015,621       254,270      (733,933)       535,958
  Total assets (b)(c)                     877,448       156,972     2,196,327      3,230,747
- --------------------------------------------------------------------------------------------

FISCAL YEAR ENDED DECEMBER 31, 2003
  Net sales                           $ 1,499,425   $   366,433   $    66,656    $ 1,932,514
  Operating profit (a)                    873,904       202,007      (619,966)       455,945
  Total assets (b)(c)                     639,724       147,270     1,766,488      2,553,482
- --------------------------------------------------------------------------------------------

FISCAL YEAR ENDED DECEMBER 31, 2002
  Net sales                           $ 1,305,750   $   284,179   $        --    $ 1,589,929
  Operating profit (a)                    713,341       149,592      (492,978)       369,955
  Total assets (b)(c)                     723,414       134,610     1,093,355      1,951,379
============================================================================================


     (a)  Other operating profit includes certain costs of goods sold and
          operating expense managed by our selling and corporate functions. In
          fiscal year 2004, we recorded $40.9 million of special charges that
          are included in the Other operating profit. Additionally, we recorded
          $9.1 million of purchased in-process research and development in
          conjunction with the IBI acquisition that is included in the Daig
          operating profit.
     (b)  Other total assets include the assets managed by our selling and
          corporate functions, including end customer receivables, inventory,
          corporate cash and equivalents and deferred income taxes.
     (c)  We do not compile expenditures for long-lived assets by segment and,
          therefore, we have not included this information as it is
          impracticable to do so.

The following discussion of the changes in our net sales is provided by class of
similar products, which is the primary focus of our sales activities. This
analysis sufficiently describes the changes in our sales results for our two
reportable segments.
















                                       9



NET SALES
Net sales by geographic markets were as follows (in thousands):

                        2004              2003             2002
- -------------------------------------------------------------------
United States        $1,264,756        $1,129,055        $1,042,766
International
  Europe                577,058           465,369           347,936
  Japan                 267,723           207,431            95,813
  Other                 184,636           130,659           103,414
- -------------------------------------------------------------------
                      1,029,417           803,459           547,163
- -------------------------------------------------------------------
                     $2,294,173        $1,932,514        $1,589,929
===================================================================

Foreign currency translation relating to our international operations can have a
significant impact on our operating results from year to year. Foreign currency
translation had a net favorable impact on 2004 net sales as compared with 2003
of approximately $73 million, due primarily to the strengthening of the Euro and
the Japanese Yen against the U.S. dollar. Foreign currency translation had a
favorable impact on 2003 net sales as compared with 2002 of approximately $71
million due primarily to the strengthening of the Euro against the U.S. dollar.
These amounts are not indicative of the net earnings impact of foreign currency
translation for 2004, 2003 and 2002 due to partially offsetting unfavorable
foreign currency translation impacts on cost of sales and operating expenses.

Net sales by class of similar products were as follows (in thousands):



                                                       2004          2003        2002
- ----------------------------------------------------------------------------------------
                                                                     
CARDIAC RHYTHM MANAGEMENT
    Pacemaker systems                               $  890,076   $  826,121   $  751,575
    ICD systems                                        583,694      414,255      303,218
    Electrophysiology catheters                        156,840      124,836       92,696
- ----------------------------------------------------------------------------------------
                                                     1,630,610    1,365,212    1,147,489
CARDIAC SURGERY
    Heart valves                                       253,236      250,840      232,986
    Other cardiac surgery products                      21,743       20,093       17,971
- ----------------------------------------------------------------------------------------
                                                       274,979      270,933      250,957
CARDIOLOGY AND VASCULAR ACCESS
    Vascular closure devices                           287,930      218,215      156,474
    Other cardiology and vascular access products      100,654       78,154       35,009
- ----------------------------------------------------------------------------------------
                                                       388,584      296,369      191,483

- ----------------------------------------------------------------------------------------
                                                    $2,294,173   $1,932,514   $1,589,929
========================================================================================


2004 NET SALES COMPARED TO 2003: Overall, net sales increased 19% in 2004 versus
2003. 2004 net sales were favorably impacted by growth in unit volume of
approximately 17% and incremental revenue of $42.3 million resulting from the
Getz acquisitions. The additional revenue from Getz was generated from the sale
of non-St. Jude Medical manufactured products sold by Getz and the incremental
revenue on the sale of St. Jude Medical manufactured products. Prior to April 1,
2003, we recognized revenue from the sale of our products to Getz as our
distributor. Foreign currency translation had a favorable impact on net sales in
2004 as compared with 2003 of approximately $73.0


                                       10



million due primarily to the strengthening of the Euro and the Yen against the
U.S. dollar. Overall, average selling price declines negatively impacted net
sales in 2004 by approximately 5% compared with 2003, due to a larger portion of
our sales mix coming from lower-priced markets outside of the United States.

Cardiac rhythm management net sales increased 19% in 2004 over 2003. 2004 CRM
net sales were favorably impacted by growth in unit volume driven by sales of
traditional pacemaker and ICD products and the introduction of products into the
cardiac resynchronization therapy (CRT) segments of the U.S. pacemaker and ICD
market. Additionally during 2004, CRM net sales increased due to incremental
revenue of approximately $19.8 million related to the Getz acquisitions. Foreign
currency translation also had a favorable impact on CRM net sales in 2004 as
compared with 2003 of approximately $49.3 million. The increases in CRM net
sales were partially offset by a 5% decline in average selling price, which is
primarily due to a larger portion of our sales mix coming from lower-priced
markets outside of the United States. Net sales of pacemaker systems increased
8% during 2004 due to a 10% increase in pacemaker unit sales, approximately
$30.9 million of favorable impact from foreign currency translation and $12.5
million of favorable impact from the Getz acquisitions. These increases for the
year were offset in part by a 7% decline in average selling price resulting from
a larger portion of our sales mix coming from lower-priced markets outside of
the United States and lower average selling prices in the United States. Net
sales of ICD systems increased 41% in 2004, due to a 39% increase in ICD unit
sales offset in part by a 1% decline in average selling prices primarily due to
a larger portion of our sales mix coming from lower-priced markets outside of
the United States. Net sales of ICD systems in 2004 also included favorable
impact from foreign currency translation of approximately $13.0 million.
Electrophysiology catheter net sales increased 26% in 2004 due to a 15% increase
in unit sales and approximately $5.4 million of favorable impact from foreign
currency translation. Electrophysiology catheter net sales in 2004 also
benefited from $7.3 million of favorable impact from the Getz acquisitions.

Cardiac surgery net sales increased 2% in 2004 over 2003. The increase in 2004
CS net sales was due to $11.9 million of favorable impact from foreign currency
translation and $9.6 million of favorable impact from the Getz acquisitions.
These increases were offset by a global average selling price decline of
approximately 6% and a low single-digit decrease in unit volume. Heart valve net
sales increased 1% in the year 2004, due primarily to an increase in unit volume
of approximately 1% and approximately $10.8 million of favorable impact from
foreign currency translation and $4.6 million of favorable impact from the Getz
acquisitions. These increases were offset by a 6% decline in global average
selling price primarily due to a larger portion of our sales mix coming from
lower-priced markets outside of the United States. Net sales of other cardiac
surgery products increased 8% during 2004 primarily due to $1.1 million of
favorable impact from foreign currency translation and $5.0 million of favorable
impact from the Getz acquisitions. These increases for other cardiac surgery
products were offset by an 18% decrease in unit sales and a 4% decrease in
average selling price.

Cardiology and vascular access net sales increased 31% during 2004 compared to
2003. 2004 C/VA net sales were favorably impacted by growth in unit volume of
approximately 26%, $11.8 million of favorable impact from foreign currency
translation and incremental revenue of $12.9 million resulting from the Getz
acquisitions. These increases were offset by a 3% decrease in average selling
price, in part due to a larger portion of our C/VA sales mix coming from
lower-priced markets outside of the United States. Net sales of vascular closure
devices increased 32% during 2004 due to a 31% increase in Angio-Seal(TM) unit
sales and approximately $7.8 million of favorable impact from foreign currency
translation. These increases were partially offset by a low single-digit
percentage decline in global average selling prices due to a larger portion of
our sales mix coming from lower-priced markets


                                       11



outside of the United States. Net sales of other cardiology and vascular access
products increased 29% in 2004 due to a 12% increase in unit sales, $4.0 million
of favorable impact from foreign currency translation and $12.9 million of sales
of non-St. Jude Medical manufactured products distributed by Getz Japan. These
increases were offset by a low single-digit decline in average selling prices.

2003 NET SALES COMPARED TO 2002: Cardiac rhythm management net sales increased
19% in 2003 versus 2002. Net sales of pacemaker systems increased 10% in 2003
due to an increase in pacemaker unit sales of approximately 5% from 2002,
approximately $33 million of favorable impact from foreign currency translation
and $29 million of favorable impact from the Getz acquisitions. Pacemaker net
sales in 2003 benefited from the worldwide launches of our Identity(R) ADx,
Integrity(R) ADx and Verity(TM) ADx pacemaker product families. These increases
were offset in part by average selling price declines of approximately 3%. Net
sales of ICD systems increased 37% in 2003 due to growth in ICD unit sales of
approximately 39%, offset in part by average selling price declines of
approximately 6%. ICD net sales in 2003 benefited from the worldwide launch in
mid-2003 of our Epic(TM)+ DR ICD containing AF Suppression(TM) technology. Net
sales of ICD systems in 2003 also included approximately $12 million of
favorable impact from foreign currency translation. Electrophysiology catheter
net sales increased 35% in 2003 due primarily to a 9% increase in unit sales,
$18 million of favorable impact from the Getz acquisitions and approximately $4
million of favorable impact from foreign currency translation.

Cardiac surgery net sales increased 8% in 2003 versus 2002. Heart valve net
sales increased 8% in 2003 due primarily to approximately $12 million of
favorable impact from foreign currency translation and $10 million of favorable
impact from the Getz acquisitions. These increases were partially offset by a
global average selling price decline of approximately 4% due to a larger portion
of our sales mix coming from lower-priced international markets. Net sales of
other cardiac surgery products increased 12% in 2003, due primarily to $13
million of favorable impact from the Getz acquisitions, offset in part by a 60%
decrease in aortic connector unit sales.

Cardiology and vascular access net sales increased 55% during 2003 versus 2002.
Net sales of vascular closure devices increased 40% in 2003 due to an increase
of 37% in Angio-Seal(TM) unit sales and approximately $8 million of favorable
impact from foreign currency translation. These increases were partially offset
by a global average selling price decline of approximately 3% due to a larger
portion of our sales mix coming from lower-priced international markets. Net
sales in 2003 benefited from the global launch of our fifth-generation
Angio-Seal(TM) vascular closure product, the STS Plus, in the third quarter. Net
sales of other cardiology and vascular access products increased 123% in 2003
due primarily to $36 million of sales of non-St. Jude Medical manufactured
products distributed in Japan by Getz, a 19% increase in unit sales and
approximately $2 million of favorable impact from foreign currency translation.

GROSS PROFIT
Gross profits were as follows (in thousands):

                                  2004            2003            2002
- ------------------------------------------------------------------------
Gross profit              $  1,615,123    $  1,329,423    $  1,083,983
Percentage of net sales           70.4%           68.8%           68.2%
- ------------------------------------------------------------------------

Gross profit for 2004 totaled $1,615.1 million, or 70.4% of net sales, as
compared with $1,329.4 million, or 68.8% of net sales, for 2003. The increase in
our gross profit percentage during 2004 is primarily related to lower CRM cost
of sales in Japan of approximately 0.7 percentage points now that


                                       12



we have sold through the CRM inventory on hand at the time of the Getz
acquisition, reduced material costs and increased labor efficiencies due to
continued improvements in our CRM manufacturing processes, and increased sales
of higher margin ICD systems related primarily to the launch of CRT products in
the United States. These increases are partially offset by $12.1 million of
inventory write-downs and equipment write-offs in 2004 related to the
discontinuance of our Symmetry Bypass System Aortic Connector product line (see
further details under SPECIAL CHARGES). In 2005, we anticipate that our gross
profit percentage will increase to a range of 72.0% to 73.0% due to the
increased sales of higher margin ICD systems and continual efficiency
improvements in our manufacturing process.

Gross profit for 2003 totaled $1,329.4 million, or 68.8% of net sales, as
compared with $1,084.0 million, or 68.2% of net sales, 2002. The increases in
our gross profit percentage during 2003 is primarily a result of reduced
material costs and increased labor efficiencies due to continued improvements in
our CRM manufacturing processes, and to lower overhead costs per unit as a
result of higher CRM production volumes. In addition, our ongoing cost
management efforts helped to improve our gross profit percentage. These
increases were offset by higher CRM cost of sales in Japan as a result of the
Getz acquisition of approximately $30.9 million or 1.6 percentage points.

On April 1, 2003, we valued the Getz Japan-owned inventory of pacemaker systems
and heart valves at fair value in accordance with acquisition accounting rules.
This fair value was established as the price at which we had sold the inventory
to Getz. As these inventory items were sold subsequent to April 1, 2003, our
gross profit percentage was reduced since the gross profit recognized by Getz
Japan was less than our historical gross profit related to the sale of these
items to Getz Japan as our distributor.

OPERATING EXPENSES
Certain operating expenses were as follows (in thousands):

                                            2004          2003          2002
- ------------------------------------------------------------------------------
Selling, general and administrative   $  759,320    $  632,395    $  513,691
Percentage of net sales                     33.1%         32.7%         32.3%

Research and development              $  281,935    $  241,083    $  200,337
Percentage of net sales                     12.3%         12.5%         12.6%
- ------------------------------------------------------------------------------

SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE: SG&A expense for 2004
totaled $759.3 million, or 33.1% of net sales, as compared with $632.4 million,
or 32.7% of net sales, for 2003. This increase in SG&A as a percentage of net
sales is primarily due to the full-year impact of the addition of the Getz
direct sales organization beginning April 1, 2003, which included approximately
400 sales, sales support and marketing personnel. In addition, we incurred
increased selling and marketing expenses in 2004 in conjunction with our entry
into the CRT segments of the U.S. pacemaker and ICD markets in 2004 primarily
related to headcount additions to support the increased sales activity. These
headcount increases in our worldwide selling organizations were offset, in part,
by the effects of spreading certain relatively fixed elements of our selling and
administrative costs over a revenue base that grew 19% in 2004. We anticipate
that SG&A expense as a percentage of net sales will range from 33% to 34% in
2005.

SG&A expense for 2003 totaled $632.4 million, or 32.7% of net sales, as compared
with $513.7 million, or 32.3% of net sales, for 2002. SG&A expense as a
percentage of net sales increased 0.4 percentage points in 2003 when compared to
2002. This increase is due primarily to the addition of the Getz direct sales
organization beginning April 1, 2003, which included approximately 400 sales,
sales


                                       13



support and marketing personnel. In addition, we incurred increased selling and
marketing expenses in 2003 in anticipation of our entry into the CRT segments of
the U.S. pacemaker and ICD markets in 2004. These headcount increases in our
worldwide selling organizations were offset, in part, by the effects of
spreading certain relatively fixed elements of our selling and administrative
costs over a revenue base that grew 22% in 2003.

RESEARCH AND DEVELOPMENT (R&D) EXPENSE: R&D expenses in 2004 totaled $281.9
million, or 12.3% of net sales, compared with $241.1 million, or 12.5% of net
sales, for 2003. R&D expense increased in 2004, 2003 and 2002 due primarily to
our increased spending on the development of new products and related clinical
trials, including our CRT devices and other products to treat emerging
indications including atrial fibrillation. We anticipate that R&D expense as a
percentage of net sales will range from 12% to 13% in 2005.

PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES

IRVINE BIOMEDICAL INC.: In October 2004, we acquired the remaining capital stock
of IBI (see further discussion in Note 2 of the consolidated financial
statements). At the date of acquisition, $9.1 million of the purchase price was
expensed as purchased in-process research and development related to therapeutic
catheters that had not yet reached technological feasibility and had no future
alternative use. These devices are part of an ablation system in which the
catheters are connected to a generator which delivers radiofrequency or
ultrasound energy through the catheter to create lesions through ablation of
cardiac tissue. The acquisition of IBI is expected to further enhance our
portfolio of products used to treat heart rhythm disorders. In 2004, we incurred
$0.3 million in research and development costs related to these products and we
expect to incur $3.4 million in future periods to bring these products to
commercialization in various markets. These costs are being funded by internally
generated cash flows.

SPECIAL CHARGES

2004 SPECIAL CHARGES

EDWARDS LIFESCIENCES CORPORATION: In December 2004, we settled a patent
infringement lawsuit with Edwards LifeSciences Corporation and recorded a
pre-tax charge of $5.5 million.

SYMMETRY BYPASS SYSTEM AORTIC CONNECTOR PRODUCT LINE DISCONTINUANCE: On
September 23, 2004, management committed the Company to a plan to discontinue
developing, manufacturing, marketing and selling its Symmetry Bypass System
Aortic Connector (Symmetry(TM) device). The decision to discontinue developing,
manufacturing, marketing and selling the Symmetry(TM) device was primarily based
on losses incurred related to the product over the previous three years and the
prospect of ongoing operating losses, resulting from a decrease in the number of
coronary artery bypass graft surgery cases and an apparent slow down in the
adoption of off-pump procedures for which the Symmetry(TM) device was developed.

In conjunction with the plan, we recorded a pre-tax charge in the third quarter
of 2004 of $14.4 million. The charge was comprised of $4.4 million of inventory
write-offs, $4.1 million of fixed asset write-offs, $3.6 million of sales
returns, $1.3 million of contract termination and other costs, primarily related
to a leased facility, and $1.0 million in workforce reduction costs. These
activities have been completed and all payments required in connection with the
charge are expected to be made by June 30, 2005. The portion of the charge that
is expected to result in future cash expenditures is estimated to be $2.9
million. In addition, we expect to incur additional future expense for related
matters totaling


                                       14



approximately $6.5 million in periods prior to 2007. A summary of the activity
related to the remaining accruals for customer returns, contract termination,
and workforce reduction costs during the year ended December 31, 2004 is as
follows (in thousands):



                                            CUSTOMER                CONTRACT                 WORKFORCE
                                         RETURNS AND         TERMINATION AND             REDUCTION AND
                                       RELATED COSTS           RELATED COSTS             RELATED COSTS                 TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
                                                                                                         
Accrual for Product Discontinuance           $ 3,600                 $ 1,308                   $ 1,002               $ 5,910
Cash payments or credits issued               (1,356)                 (1,140)                     (428)               (2,924)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004                 $ 2,244                 $   168                   $   574               $ 2,986
- -----------------------------------------------------------------------------------------------------------------------------


SYMMETRY BYPASS SYSTEM AORTIC CONNECTOR LITIGATION: There are sixteen legal
cases in the United States pending as of February 25, 2005, alleging that our
Symmetry(TM) device caused bodily injury or might cause bodily injury. Four of
these matters seek class action status (one of these has already been dismissed,
but is now on appeal, another is presently stayed). There are also a number of
persons who have made a claim against us involving the Symmetry(TM) device
without filing a lawsuit. During the third quarter of 2004, the number of cases
increased, and the number of persons asserting claims outside of litigation
increased as well. With this background, we determined that it was probable that
a liability for future legal fees to defend the cases had been incurred and the
amount of such fees was reasonably estimable. As a result, we recorded a pre-tax
charge in the third quarter of 2004 of $21.0 million to reflect this liability.
No lawsuits involving the product were initiated against us during the fourth
quarter of 2004, and the number of claims asserted outside of the litigation has
been minimal since the third quarter of 2004.

SILZONE(R) SPECIAL CHARGES

On January 21, 2000, we initiated a worldwide voluntary recall of all field
inventories of heart valve replacement and repair products incorporating
Silzone(R) coating on the sewing cuff fabric. We concluded that we would no
longer utilize Silzone(R) coating. As a result of the voluntary recall and
product discontinuance, we recorded a special charge totaling $26.1 million
during the first quarter of 2000. The $26.1 million special charge consisted of
asset write-downs ($9.5 million), legal and patient follow-up costs ($14.4
million) and customer returns and related costs ($2.2 million).

In the second quarter of 2002, we determined that the Silzone(R) reserves should
be increased by $11.0 million as a result of difficulties in obtaining certain
reimbursements from our insurance carriers under our product liability insurance
policies ($4.6 million), an increase in our estimate of the costs associated
with future patient follow-up as a result of extending the time period in which
we planned to perform patient follow-up activities ($5.8 million) and an
increase in other related costs ($0.6 million).

Our product liability insurance coverage for Silzone(R) claims consists of a
number of policies with different carriers. During 2002, we observed a trend
where various insurance companies were not reimbursing us or outside legal
counsel for a variety of costs incurred, which we believed should be paid under
the product liability insurance policies. These insurance companies were either
refusing to pay the claims or had delayed providing an explanation for
non-payment for an extended period of time. Although we believe we have legal
recourse from these insurance carriers for the costs they are refusing to pay,
the additional costs we would need to incur to resolve these disputes may exceed
the amount we would recover. As a result of these developments, we increased the
Silzone(R) reserves by $4.6 million in the second quarter of 2002, which
represents the existing disputed costs already incurred


                                       15



at that time plus the anticipated future costs where we expect similar
resistance from the insurance companies on reimbursement.

During the fourth quarter of 2003, the Company reclassified $15.7 million of
receivables from the Company's insurance carriers recorded in the Silzone(R)
special charge accrual to other current assets. This amount related to probable
future legal costs associated with the Silzone(R) litigation.

A summary of the legal and monitoring costs and customer returns and related
costs activity is as follows (in thousands):



                                             LEGAL AND               CUSTOMER
                                            MONITORING            RETURNS AND
                                                 COSTS          RELATED COSTS             TOTAL
- ------------------------------------------------------------------------------------------------
                                                                              
Initial expense and accrual in 2000           $ 14,397                $ 2,239          $ 16,636
Cash payments                                   (5,955)                (2,239)           (8,194)
- ------------------------------------------------------------------------------------------------
Balance at December 31, 2000                     8,442                     --             8,442

Cash payments                                   (3,042)                    --            (3,042)
- ------------------------------------------------------------------------------------------------
Balance at December 31, 2001                     5,400                     --             5,400

Additional expense                              10,433                    567            11,000
Cash payments                                   (2,442)                   (59)           (2,501)
- ------------------------------------------------------------------------------------------------
Balance at December 31, 2002                    13,391                    508            13,899

Cash payments                                   (1,206)                   (22)           (1,228)
Reclassification of legal accruals              15,721                     --            15,721
- ------------------------------------------------------------------------------------------------
Balance at December 31, 2003                    27,906                    486            28,392

Cash payments                                   (1,471)                  (305)           (1,776)
- ------------------------------------------------------------------------------------------------
Balance at December 31, 2004                  $ 26,435                $   181          $ 26,616
- ------------------------------------------------------------------------------------------------


In addition to the amounts available under the above Silzone(R) reserves, we
have approximately $151 million remaining in product liability insurance
currently available for the Silzone(R)-related matters. See discussion of one of
our product liability insurance carriers, Kemper, under CRITICAL ACCOUNTING
POLICIES AND ESTIMATES - SILZONE(R) SPECIAL CHARGE ACCRUALS.

OTHER INCOME (EXPENSE)

Other income (expense) consisted of the following (in thousands):

                                    2004              2003              2002
- -----------------------------------------------------------------------------
Equity method losses            $ (2,091)         $ (3,530)          $    --
Interest income                   10,093             7,031             5,481
Interest expense                  (4,810)           (3,746)           (1,754)
Other                             (1,958)             (593)             (324)
- -----------------------------------------------------------------------------
Other income (expense)          $  1,234          $   (838)          $ 3,403
- -----------------------------------------------------------------------------

The increase in other income (expense) during 2004 as compared with 2003 was due
primarily to higher levels of interest income as a result of higher average
invested cash balances and a decrease in


                                       16



equity method losses related to Epicor as it was acquired during 2004. These
increases were offset in part by interest expense as a result of higher levels
of borrowings and increased interest rates and the recording of equity method
losses related to the IBI investment.

The decrease in other income (expense) during 2003 as compared with 2002 was due
primarily to higher levels of interest expense as a result of borrowings for our
Getz Japan acquisition in 2003 and our August 2003 share repurchase and the
recording of equity method losses related to the Epicor investment, offset in
part by higher levels of interest income as a result of higher average invested
cash balances.

INCOME TAXES
Our effective income tax rates were 23.7% in 2004 and 26.0% in 2003 and 2002.
During 2004, we recorded a $9.1 million purchased in-process research and
development charge that was not deductible for income tax purposes. In addition
in 2004, we recorded a reversal of approximately $14.0 million previously
recorded tax expense due to the finalization of certain tax examinations. We
anticipate our effective tax rate will increase to a range of 27.0% to 27.5% in
2005.

NET EARNINGS
Net earnings were $409.9 million in 2004, a 22% increase over 2003, and diluted
earnings per share were $1.10 in 2004, a 21% increase over 2003. Net earnings
were $336.8 million in 2003, a 23% increase over 2002, and diluted net earnings
per share were $0.91 in 2003, a 22% increase over 2002. Our 2004 net earnings
included $20.5 million of special charges and purchased in-process research and
development charges, or $0.06 per diluted share.

STOCK SPLITS
On October 11, 2004 and May 16, 2002, our Board of Directors declared
two-for-one stock splits effected in the form of 100% stock dividends to
shareholders of record on November 1, 2004 and June 10, 2002, respectively. Net
earnings per share, shares outstanding and weighted average shares outstanding
have been restated to reflect these stock splits.

GOVERNMENT REGULATION, COMPETITION AND OTHER CONSIDERATIONS
We expect that market demand, government regulation and reimbursement policies,
and societal pressures will continue to change the worldwide healthcare industry
resulting in further business consolidations and alliances. We participate with
industry groups to promote the use of advanced medical device technology in a
cost-conscious environment.

The global medical technology industry is highly competitive and is
characterized by rapid product development and technological change. Our
products must continually improve technologically and provide improved clinical
outcomes due to the competitive nature of the industry. In addition, competitors
have historically employed litigation to gain a competitive advantage.

The pacemaker and ICD markets are highly competitive. There are currently three
principal suppliers to these markets, including St. Jude Medical, and our two
principal competitors each have substantially more assets and sales than us.
Rapid technological change in these markets is expected to continue, requiring
us to invest heavily in R&D and to effectively market our products. Two trends
began to emerge in these markets during 2002. The first involved a shift of some
traditional pacemaker patients to ICD devices in the United States, and the
second involved the increasing use of resynchronization devices in both the U.S.
ICD and pacemaker markets. Our competitors in CRM have had approved
resynchronization devices in the U.S. markets during this period. We obtained
U.S. regulatory approval


                                       17



to market our resynchronization devices in the second quarter of 2004. A large
portion of our sales growth in CRM products in the near term is dependent on
market acceptance of our resynchronization devices.

The cardiac surgery markets, which include mechanical heart valves, tissue heart
valves and valve repair products, are also highly competitive. Since 1999,
cardiac surgery therapies have shifted to tissue valves and repair products from
mechanical heart valves, resulting in an overall market share loss for us.
Competition is anticipated to continue to place pressure on pricing and terms,
including a trend toward vendor-owned (consignment) inventory at the hospitals.
Also, healthcare reform is expected to result in further hospital consolidations
over time with related pressure on pricing and terms.

The cardiology and vascular access therapy area is also growing and has numerous
competitors. Over 70% of our sales in this area are comprised of vascular
closure devices. The market for vascular closure devices is highly competitive,
and there are several companies, in addition to St. Jude Medical, that
manufacture and market these products worldwide. Additionally, we anticipate
other large companies will enter this market in the coming years, which will
likely increase competition.

We operate in an industry that is susceptible to significant product liability
claims. These claims may be brought by individuals seeking relief for themselves
or, increasingly, by groups seeking to represent a class. In addition, product
liability claims may be asserted against us in the future relative to events
that are not known to us at the present time. Our product liability insurance
coverage for the period April 1, 2004 through April 1, 2005 is $425 million,
with a $75 million deductible per occurrence. In light of our significant
self-insured retention, our product liability insurance coverage is designed to
help protect against a catastrophic claim.

     Group purchasing organizations, independent delivery networks and large
single accounts, such as the Veterans Administration in the United States,
continue to consolidate purchasing decisions for some of our hospital customers.
We have contracts in place with many of these organizations. In some
circumstances, our inability to obtain a contract with such an organization
could adversely affect our efforts to sell our products to that organization's
hospitals.

MARKET RISK
We are exposed to foreign currency exchange rate fluctuations due to
transactions denominated primarily in Euros, Japanese Yen, Canadian Dollars,
Brazilian Reals, British Pounds, and Swedish Kronor. Although we elected not to
enter into any hedging contracts during 2004, 2003 or 2002, historically we
have, from time to time, hedged a portion of our foreign currency exchange rate
risk through the use of forward exchange or option contracts. The gains or
losses on these contracts are intended to offset changes in the fair value of
the anticipated foreign currency transactions. We do not enter into contracts
for trading or speculative purposes. We continue to evaluate our foreign
currency exchange rate risk and the different mechanisms for use in managing
such risk. We had no forward exchange or option contracts outstanding at
December 31, 2004 or 2003. A hypothetical 10% change in the value of the U.S.
dollar in relation to our most significant foreign currency exposures would have
had an impact of approximately $92.0 million on our 2004 net sales. This amount
is not indicative of the hypothetical net earnings impact due to partially
offsetting impacts on cost of sales and operating expenses.

With our acquisition of Getz Japan during 2003, we significantly increased our
exposure to foreign currency exchange rate fluctuations due to transactions
denominated in Japanese Yen. We elected to naturally hedge a portion of our
Yen-denominated net asset exposure by issuing 1.02% Yen-


                                       18



denominated 7-year notes, the proceeds of which were used to repay the
short-term bank debt that we used to fund a portion of the Getz Japan purchase
price. Excess cash flows from our Getz Japan operations will be used to fund
principal and interest payments on the Yen-denominated borrowings. We have not
entered into any Yen-denominated hedging contracts to mitigate any remaining
foreign currency exchange rate risk. We are also exposed to fair value risk on
our 1.02% Yen-denominated fixed-rate notes. A hypothetical 10% change in
interest rates would have an impact of approximately $1.1 million on the fair
value of these notes, which is not material to our financial position or
consolidated results of operations.

In the United States, we issue short-term, unsecured commercial paper that bears
interest at varying market rates. We also have two committed credit facilities
that have variable interest rates tied to the London InterBank Offered Rate
(LIBOR). Our variable interest rate borrowings had a notional value of $33.9
million at December 31, 2004. A hypothetical 10% change in interest rates
assuming the current level of borrowings would have had an impact of
approximately $0.1 million on our 2004 interest expense, which is not material
to our consolidated results of operations.

We are also exposed to equity market risk on our marketable equity security
investments. We hold certain marketable equity securities of emerging technology
companies. Our investments in these companies had a fair value of $34.4 million
and $23.7 million at December 31, 2004 and 2003, which are subject to the
underlying price risk of the public equity markets.

NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 123(R), SHARE-BASED PAYMENT, which is a revision of FASB Statement
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Statement 123(R) supersedes
APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and amends FASB
Statement No. 95, STATEMENT OF CASH FLOWS. Generally, the approach in Statement
123(R) is similar to the approach described in Statement 123. However, Statement
123(R) REQUIRES all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative.

Statement 123(R) must be adopted no later than July 1, 2005. We expect to adopt
Statement 123(R) on July 1, 2005. Statement 123(R) permits public companies to
adopt its requirements using one of two methods. We plan to adopt Statement
123(R) using the modified-prospective method. The "modified prospective" method
is a method in which compensation cost is recognized beginning with the
effective date (a) based on the requirements of Statement 123(R) for all
share-based payments granted after the effective date and (b) based on the
requirements of Statement 123 for all awards granted to employees prior to the
effective date of Statement 123(R) that remain unvested on the effective date.

As permitted by Statement 123, we currently account for share-based payments to
employees using Opinion 25's intrinsic value method and, as such, generally
recognize no compensation cost for employee stock options.
 Accordingly, the adoption of Statement 123(R)'s fair value method will have a
significant impact on our consolidated results of operations, although it will
have no impact on our overall financial position. The impact of adopting
Statement 123(R) on future period earnings cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future.
However, had we adopted Statement 123(R) in prior periods, the impact of that
standard would have approximated the impact of Statement 123 as described in the
disclosure of pro forma net income and earnings per share.


                                       19


In December 2004, the FASB issued two FASB staff positions (FSP): FSP FAS
109-1, "APPLICATION OF FASB STATEMENT NO. 109, ACCOUNTING FOR INCOME TAXES, FOR
THE TAX DEDUCTION PROVIDED TO U.S.-BASED MANUFACTURERS BY THE AMERICAN JOBS
CREATION ACT OF 2004"; and FSP FAS 109-2,"ACCOUNTING AND DISCLOSURE GUIDANCE FOR
THE FOREIGN EARNINGS REPATRIATION PROVISION WITHIN THE AMERICAN JOBS CREATION
ACT OF 2004." FSP FAS 109-1 clarifies that the tax deduction for domestic
manufacturers under the American Jobs Creation Act of 2004 (the Act) should be
accounted for as a special deduction in accordance with SFAS No. 109,
"ACCOUNTING FOR INCOME TAXES." FAS 109-2 provides enterprises more time (beyond
the financial-reporting period during which the Act took effect) to evaluate the
Act's impact on the enterprise's plan for reinvestment or repatriation of
certain foreign earnings for purposes of applying SFAS No. 109. Based on these
requirements, we have approximately $500 million of cash held outside the United
States, which could be eligible for the special deduction in 2005 under the Act.
Due to the complexity of the repatriation provision, the Company is still
evaluating the effects of the Act on our plan for repatriation of foreign
earnings and the related impact to our tax provision. It is anticipated that
this evaluation will be completed by the end of 2005. The range of possible
amounts that we are currently considering for repatriation is between zero and
$500 million. The related potential range of income tax is between zero and
$26.0 million.

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and cash flows remained strong during 2004. Cash provided by
operating activities was $604.3 million for 2004, up $130.0 million from 2003
due primarily to increased earnings and an increase in the tax benefit realized
from the exercise of employee stock options. Offsetting these improvements was
an increase in our accounts receivable and inventory levels. Accounts receivable
increased in 2004 as the result of higher sales volumes, timing of sales and a
higher portion of sales mix coming from international customers who
traditionally have longer payment cycles. Our day sales outstanding increased to
94 days at December 31, 2004 from 88 days at December 31, 2003. Our increase in
inventory was primarily the result of maintaining higher finished goods
inventory levels to support our higher sales volumes. Our inventory, expressed
as the number of days of cost of sales on hand, declined from 188 days at the
end of 2003 to 176 days at the end of 2004. Our cash flow generated from
operations in 2004 was used to further strengthen our balance sheet and fund the
acquisitions of Epicor and IBI. Cash provided by operating activities was $474.3
million for 2003, up $57.1 million from 2002 due primarily to increased earnings
and an increase in the tax benefit realized from the exercise of employee stock
options. Offsetting these improvements was an increase in our finished goods
inventory levels as a result of fourth quarter 2003 new product launches. We
expect to use our future cash flows to fund internal development opportunities,
reduce our debt and fund acquisitions, including the acquisition of ESI and
Velocimed and our minority investment in ProRhythm, Inc. in January 2005.

At December 31, 2004, a substantial portion of our cash and cash equivalents
were held by our non-U.S. subsidiaries. These funds are only available for use
by our U.S. operations if they are repatriated into the United States. On
October 22, 2004, the American Jobs Creation Act of 2004 (the Act) was signed
into law by the President of the United States. The Act allows U.S. corporations
a one-time deduction of 85% of certain "cash dividends" received from controlled
foreign corporations. The deduction is available to corporations during the tax
year that includes October 22, 2004 or in the immediately subsequent tax year.
According to the Act, the amount of eligible dividends is limited to $500
million or the amount described as permanently reinvested earnings outside the
United States in the most recent audited financial statements filed with the SEC
on or before June 30, 2003. Based on


                                       20



these requirements, the Company has approximately $500 million of cash held
outside the United States, which could be eligible for the special deduction in
2005. Due to the complexity of the repatriation provision, we are evaluating the
effects of the Act on our plan for repatriation of foreign earnings and the
related impact to our tax provision. It is anticipated that this evaluation will
be completed by the end of 2005.

COMMITMENTS AND CONTINGENCIES
On January 12, 2005, we made an initial equity investment of $12.5 million
pursuant to the Purchase and Option Agreement and the Merger Agreement, entered
into with ProRhythm. Under the terms of the Purchase and Option Agreement, we
have the option to make, or ProRhythm can require, us to make an additional
$12.5 million equity investment through January 31, 2006 upon completion of
specific clinical and regulatory milestones.

The ProRhythm Purchase and Option Agreement also provides us with the exclusive
right, but not the obligation, through the later of 3 months after the date
ProRhythm delivers certain clinical trial data or March 31, 2007, to acquire
ProRhythm for $125 million in cash consideration payable to the ProRhythm
stockholders (other than the Company) pursuant to the terms and conditions set
forth in the merger agreement, with additional cash consideration payable to the
ProRhythm stockholders (other than the Company) after the consummation of the
acquisition, if ProRhythm achieves certain performance-related milestones.

Under the terms of the IBI purchase agreement, we are obligated to pay
contingent consideration of up to $13.0 million to the non-St. Jude Medical
shareholders if IBI receives approval by certain specified dates in 2005 and
2006 from the FDA of certain EP catheter ablation systems currently in
development.

We also have contingent commitments to acquire various businesses involved in
the distribution of our products that could total approximately $54 million in
aggregate during 2004 to 2010, provided that certain contingencies are
satisfied. The purchase prices of the individual businesses range from
approximately $0.4 million to $5.8 million.

SHARE REPURCHASES
On July 22, 2003, the Board of Directors authorized a share repurchase program
of up to $500 million of our outstanding common stock and the establishment of a
$500 million credit facility. On August 7, 2003, we repurchased approximately
18.5 million shares, or about five percent of our outstanding common stock, for
$500 million under a privately-negotiated transaction with an investment bank.
The investment bank borrowed the 18.5 million shares to complete the transaction
and purchased replacement shares in the open market over a three month period
which ended November 7, 2003. We entered into a related accelerated stock
buyback contract with the same investment bank which, in return for a separate
payment to the investment bank, included a price-protection feature. The
price-protection feature provided that if the investment bank's per share
purchase price of the replacement shares was lower than the initial share
purchase price for the 18.5 million shares ($27.03), then the investment bank
would, at our election, make a payment or deliver additional shares to us in the
amount of the difference between the initial share purchase price and their
replacement price, subject to a maximum amount. In addition, the
price-protection feature provided that if the investment bank's replacement
price was greater than the initial share purchase price, we would not be
required to make any further payments. On November 7, 2003, the investment bank
completed its purchase of replacement shares. The market price of our shares
during this replacement period exceeded the initial purchase price, resulting in
no additional exchange of consideration.


                                       21



On October 11, 2004, the Board of Directors authorized a share repurchase
program of up to $300 million of our outstanding common stock. The share
repurchases can be made through transactions in the open market and/or privately
negotiated transactions, including the use of options, futures, swaps and
accelerated share repurchase contracts. This authorization expires on December
31, 2006. We did not repurchase any of our common stock during 2004.

DEBT AND CREDIT FACILITIES
On April 1, 2003, we borrowed 24.6 billion Japanese Yen, or approximately $208
million, under a short-term, unsecured bank credit agreement to partially
finance the Getz Japan acquisition. Borrowings under this agreement bore
interest at an average rate of 0.58% per annum and were repaid in May 2003.

In May 2003, we issued 7-year, 1.02% unsecured notes totaling 20.9 billion Yen
or $200.9 million at December 31, 2004. Interest payments are required on a
semi-annual basis and the entire principal balance is due in May 2010. We also
obtained a short-term, unsecured bank credit agreement that provided for
borrowings of up to 3.8 billion Yen and was due in May 2004. Borrowings under
the short-term, bank credit agreement bore interest at the floating Yen London
InterBank Offered Rate (LIBOR) plus 0.50% per annum. The balance outstanding at
December 31, 2003 was $12.1 million. We repaid the remaining borrowings under
the short-term, unsecured bank credit agreement in April 2004.

In July 2003, we obtained a $400 million short-term revolving credit facility.
Borrowings under this facility bore interest at an average rate of 1.73% per
annum and were repaid in September 2003.

In September 2003, we obtained a $350 million unsecured revolving credit
agreement with a consortium of lenders that expires in September 2008. This
credit facility bears interest at the United States Dollar LIBOR plus 0.60% per
annum, subject to adjustment in the event of a change in the Company's debt
ratings. The credit agreement creates a $350 million unsecured revolving credit
facility that we can draw upon for general corporate purposes or use to support
our commercial paper program. There were no outstanding borrowings under this
credit facility at December 31, 2004 and 2003.

During September 2003, we began issuing short-term, unsecured commercial paper
with maturities up to 270 days. These commercial paper borrowings bear interest
at varying market rates. The balance of commercial paper borrowings outstanding
at December 31, 2004 and 2003 was $33.9 million and $157.4 million,
respectively. The weighted average effective interest rate at December 31, 2004
and 2003 was 2.3% and 1.2%, respectively, and the weighted average original
maturity of commercial paper outstanding was 12 and 67 days, respectively.

In May 2004, we obtained a 1.0 billion Yen credit facility that expires in June
2005. Borrowings under the credit facility bear interest at the floating Tokyo
InterBank Offered Rate (TIBOR) plus 0.50% per annum. There were no outstanding
borrowings under this credit facility at December 31, 2004.

In September 2004, we entered into a $400 million unsecured revolving credit
agreement with a consortium of lenders that expires in September 2009. The
credit agreement creates a $400 million unsecured revolving credit facility that
we can draw upon for general corporate purposes or use to support our commercial
paper program. This credit agreement replaced a $150 million credit agreement
which expired in September 2004. Borrowings under the credit agreement bear
interest at United States Dollar LIBOR plus 0.39%, or in the event over half of
the facility is drawn on, LIBOR


                                       22



plus 0.515%, in each case subject to adjustment in the event of a change in the
our credit ratings. There were no outstanding borrowings under this credit
facility at December 31, 2004.

We classify all of our commercial paper borrowings as long-term on the balance
sheet as we have the ability to repay any short-term maturity with available
cash from our existing long-term, committed credit facilities. We continually
review our cash flow projections and may from time to time repay a portion of
the borrowings.

Our 7-year, 1.02% notes, short-term bank credit agreement and revolving credit
facilities contain various operating and financial covenants. Specifically, we
must have a ratio of total debt to total capitalization not exceeding 55%, have
a leverage ratio (defined as the ratio of total debt to EBITDA (net earnings
before interest, income taxes, depreciation and amortization) and the ratio of
total debt to EBIT (net earnings before interest and income taxes)) not
exceeding 3.0 to 1.0, and an interest coverage ratio (defined as the ratio of
EBITDA to interest expense and the ratio of EBIT to interest expense) not less
than 3.0 to 1.0 and 3.5 to 1.0 for our 1.02% notes and revolving credit
facilities, respectively. We also have limitations on additional liens or
indebtedness and limitations on certain acquisitions, investments and
dispositions of assets. However, these agreements do not include provisions for
the termination of the agreements or acceleration of repayment due to changes in
our credit ratings. We were in compliance with all of our debt covenants at
December 31, 2004.

We believe that our existing cash balances, available borrowings under our
committed credit facilities of up to $750 million and future cash generated from
operations will be sufficient to meet our working capital and capital investment
needs over the next twelve months and in the foreseeable future thereafter.
Should suitable investment opportunities arise, we believe that our earnings,
cash flows and balance sheet position will permit us to obtain additional debt
financing or equity capital, if necessary.

OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet financing arrangements other than operating leases
for various facilities and equipment as noted below in the table of contractual
obligations and other commitments.













                                       23



CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
Presented below is a summary of our contractual obligations and other
commitments as of December 31, 2004 (in thousands):



                                                                        PAYMENTS DUE BY PERIOD
                                           --------------------------------------------------------------------------
                                                               Less than           1-3            4-5        After 5
                                                    Total         1 Year         Years          Years          Years
- ---------------------------------------------------------------------------------------------------------------------
                                                                                              
Long-term debt (1)                                234,865             --            76         33,900        200,889
Operating leases (2)                               71,909         16,006        21,599         16,579         17,725
Purchase commitments (2)(3)                       190,320        183,080         7,152             88             --
Contingent acquisitions (2)(4)                    372,173        345,639        21,714          2,120          2,700
- ---------------------------------------------------------------------------------------------------------------------
     Total                                       $869,267       $544,725      $ 50,541       $ 52,687       $221,314
- ---------------------------------------------------------------------------------------------------------------------


(1)   LONG-TERM DEBT INCLUDES $200.9 MILLION OF LONG-TERM NOTES DUE IN MAY 2010
      AND $33.9 MILLION OF COMMERCIAL PAPER BORROWINGS THAT ARE BACKED BY OUR
      COMMITTED CREDIT FACILITIES THAT EXPIRE IN SEPTEMBER 2008 AND 2009. WE MAY
      REPAY THE COMMERICAL PAPER BORROWINGS PRIOR TO THE EXPIRATION OF OUR
      LONG-TERM COMMITTED CREDIT FACILITY.

(2)   IN ACCORDANCE WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
      STATES, THESE OBLIGATIONS ARE NOT RECORDED IN THE CONSOLIDATED BALANCE
      SHEET.

(3)   THESE AMOUNTS INCLUDE COMMITMENTS FOR INVENTORY PURCHASES AND CAPITAL
      EXPENDITURES THAT DO NOT EXCEED OUR PROJECTED REQUIREMENTS OVER THE
      RELATED TERMS AND ARE IN THE NORMAL

(4)  THESE AMOUNTS INCLUDE A $25 MILLION COMMITMENT TO MAKE A PREFERRED STOCK
     INVESTMENT IN PRORHYTHM, INC IN 2005, A $280.5 MILLION COMMITMENT TO
     COMPLETE THE ACQUISITION OF ESI IN 2005, AND CONTINGENT PURCHASE
     CONSIDERATION CONSUMMATED UNDER THE IBI ACQUISITION OF $13.0 MILLION AS
     WELL AS CONTINGENT COMMITMENTS TO ACQUIRE VARIOUS BUSINESS INVOLVED IN THE
     DISTRIBUTION OF OUR PRODUCTS. WHILE IT IS NOT CERTAIN IF AND/OR WHEN THESE
     PAYMENTS WILL BE MADE, WE HAVE INCLUDED THE PAYMENTS IN THE TABLE BASED ON
     OUR ESTIMATE OF THE EARLIEST DATE WHEN THE MILESTONE OR CONTINGENCIES MAY
     BE MET.

DIVIDENDS
We did not declare or pay any cash dividends during 2004, 2003 or 2002. We
currently intend to utilize our earnings for operating and investment purposes.

CAUTIONARY STATEMENTS
In this discussion and in other written or oral statements made from time to
time, we have included and may include statements that may constitute
"forward-looking statements" within the meaning of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements are not historical facts but instead represent our belief regarding
future events, many of which, by their nature, are inherently uncertain and
beyond our control. These statements relate to our future plans and objectives,
among other things. By identifying these statements for you in this manner, we
are alerting you to the possibility that actual results may differ, possibly
materially, from the results indicated by these forward-looking statements. We
undertake no obligation to update any forward-looking statements.

Various factors contained in the previous discussion and those described below
may affect our operations and results. We believe the most significant factors
that could affect our future operations and results are set forth in the list
below. Since it is not possible to foresee all such factors, you should not
consider these factors to be a complete list of all risks or uncertainties.


                                       24


1.   Legislative or administrative reforms to the U.S. Medicare or Medicaid
     systems or similar reforms of international reimbursement systems in a
     manner that significantly reduces reimbursement for procedures using
     our medical devices or denies coverage for such procedures. Adverse
     decisions relating to our products by administrators of such systems in
     coverage or reimbursement issues.
2.   Acquisition of key patents by others that have the effect of excluding
     us from market segments or require us to pay royalties.
3.   Economic factors, including inflation, changes in interest rates and
     changes in foreign currency exchange rates.
4.   Product introductions by competitors which have advanced technology,
     better features or lower pricing.
5.   Price increases by suppliers of key components, some of which are
     sole-sourced.
6.   A reduction in the number of procedures using our devices caused by cost-
     containment pressures or preferences for alternate therapies.
7.   Safety, performance or efficacy concerns about our marketed products,
     many of which are expected to be implanted for many years, leading to
     recalls and/or advisories with the attendant expenses and declining
     sales.
8.   Changes in laws, regulations or administrative practices affecting
     government regulation of our products, such as FDA laws and
     regulations, that increase pre-approval testing requirements for
     products or impose additional burdens on the manufacture and sale of
     medical devices.
9.   Regulatory actions arising from the concern over Bovine Spongiform
     Encephalopathy (BSE), sometimes referred to as "mad cow disease", that
     have the effect of limiting the Company's ability to market products
     using collagen, such as Angio-SealTM, or that impose added costs on the
     procurement of collagen.
10.  Difficulties obtaining, or the inability to obtain, appropriate levels
     of product liability insurance.
11.  The ability of our Silzone(R) product liability insurers, especially
     Kemper, to meet their obligations to us.
12.  A serious earthquake affecting our facilities in Sunnyvale or Sylmar,
     California, or a hurricane affecting our operations in Puerto Rico.
13.  Healthcare industry consolidation leading to demands for price
     concessions or the exclusion of some suppliers from significant market
     segments.
14.  Adverse developments in litigation including product liability
     litigation, patent litigation or other intellectual property
     litigation.











                                       25



REPORT OF MANAGEMENT

MANAGEMENT'S REPORT ON THE FINANCIAL STATMENTS

We are responsible for the preparation, integrity and objectivity of the
accompanying financial statements. The financial statements were prepared in
accordance with accounting principles generally accepted in the United States
and include amounts which reflect management's best estimates based on its
informed judgment and consideration given to materiality. We are also
responsible for the accuracy of the related data in the annual report and its
consistency with the financial statements.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

We have established disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated subsidiaries, is
made known to the officers who certify the Company's financial reports and to
other members of senior management and the Board of Directors.

Based on their evaluation as of December 31, 2004, the Chief Executive Officer
(CEO) and the Chief Financial Officer (CFO) of the Company have concluded that
the Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure
that the information required to be disclosed by the Company in the reports that
it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f). Under the supervision and with the participation of the Company's
management, including the CEO and the CFO, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on our evaluation
under the framework in Internal Control - Integrated Framework, the CEO and CFO
concluded that our internal control over financial reporting was effective as of
December 31, 2004. Our management's assessment of the effectiveness of our
internal control over financial reporting as of December 31, 2004 has been
audited by Ernst & Young LLP, an independent registered public accounting firm,
as stated in their report which is included herein.

AUDIT COMMITTEE OVERSIGHT

The adequacy of our internal accounting controls, the accounting principles
employed in our financial reporting and the scope of independent and internal
audits are reviewed by the Audit Committee of the Board of Directors, consisting
solely of outside directors. The independent auditors meet with, and have
confidential access to, the Audit Committee to discuss the results of their
audit work.




/s/ DANIEL J. STARKS
- -----------------------------------------------------
Daniel J. Starks
Chairman, President and Chief Executive Officer




/s/ JOHN C. HEINMILLER
- -----------------------------------------------------
John C. Heinmiller
Executive Vice President and Chief Financial Officer


                                       26



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


BOARD OF DIRECTORS AND SHAREHOLDERS OF ST. JUDE MEDICAL, INC.


We have audited management's assessment, included in the section of the
accompanying Report of Management entitled Management's Report on Internal
Control Over Financial Reporting, that St. Jude Medical, Inc. and subsidiaries
maintained effective internal control over financial reporting as of December
31, 2004, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). St. Jude Medical, Inc.'s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the company's internal control
over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, management's assessment that St. Jude Medical, Inc. maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, St. Jude Medical, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004,
based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets St.
Jude Medical, Inc. and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated results of their operations and their cash flows for each
of the three fiscal years in the period ended December 31, 2004 and our report
dated February 16, 2005 expressed an unqualified opinion thereon.


/s/ ERNST & YOUNG LLP

Minneapolis, Minnesota
February 16, 2005


                                       27



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
St. Jude Medical, Inc.

We have audited the accompanying consolidated balance sheets of St. Jude
Medical, Inc. and subsidiaries as of December 31, 2004 and 2003 and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the three fiscal years in the period ended December 31, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of St. Jude Medical,
Inc. and subsidiaries at December 31, 2004 and 2003 and the consolidated results
of their operations and their cash flows for each of the three fiscal years in
the period ended December 31, 2004 in conformity with U.S. generally accepted
accounting principles.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of St. Jude
Medical, Inc.'s internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 16, 2005 expressed an unqualified opinion
thereon..


/s/ ERNST & YOUNG LLP

Minneapolis, Minnesota
February 16, 2005


                                       28



CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)



FISCAL YEAR ENDED DECEMBER 31,                                              2004                    2003                  2002
- -------------------------------------------------------------------------------------------------------------------------------
                                                                                                          
Net sales                                                            $ 2,294,173             $ 1,932,514           $ 1,589,929
Cost of sales:
   Cost of sales before special charges                                  666,977                 603,091               505,946
   Special charges                                                        12,073                      --                    --
- -------------------------------------------------------------------------------------------------------------------------------
Total cost of sales                                                      679,050                 603,091               505,946
- -------------------------------------------------------------------------------------------------------------------------------
   Gross profit                                                        1,615,123               1,329,423             1,083,983

Selling, general and administrative expense                              759,320                 632,395               513,691
Research and development expense                                         281,935                 241,083               200,337
Purchased in-process research and development charges                      9,100                      --                    --
Special charges                                                           28,810                      --                    --
- -------------------------------------------------------------------------------------------------------------------------------
    Operating profit                                                     535,958                 455,945               369,955

Other income (expense)                                                     1,234                    (838)                3,403
- -------------------------------------------------------------------------------------------------------------------------------
    Earnings before income taxes                                         537,192                 455,107               373,358

Income tax expense                                                       127,258                 118,328                97,073
- -------------------------------------------------------------------------------------------------------------------------------
Net earnings                                                         $   409,934             $   336,779           $   276,285
===============================================================================================================================

===============================================================================================================================
NET EARNINGS PER SHARE:
      Basic                                                          $      1.16             $      0.95           $      0.78
      Diluted                                                        $      1.10             $      0.91           $      0.75
WEIGHTED AVERAGE SHARES OUTSTANDING:
      Basic                                                              353,454                 353,913               353,140
      Diluted                                                            370,992                 370,753               366,004
===============================================================================================================================



SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.




                                       29



CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)



DECEMBER 31,                                                                            2004               2003
- ----------------------------------------------------------------------------------------------------------------
                                                                                              
ASSETS
CURRENT ASSETS
Cash and cash equivalents                                                        $   688,040        $   461,253
Accounts receivable, less allowances for doubtful accounts                           630,983            501,759
Inventories                                                                          330,873            311,761
Deferred income taxes                                                                 92,757            112,376
Other                                                                                120,564            105,188
- ----------------------------------------------------------------------------------------------------------------
    Total current assets                                                           1,863,217          1,492,337

PROPERTY, PLANT AND EQUIPMENT
Land, buildings and improvements                                                     155,975            145,405
Machinery and equipment                                                              473,486            431,839
Diagnostic equipment                                                                 182,748            173,851
- ----------------------------------------------------------------------------------------------------------------
Property, plant and equipment at cost                                                812,209            751,095
Less accumulated depreciation                                                       (485,228)          (449,442)
- ----------------------------------------------------------------------------------------------------------------
    Net property, plant and equipment                                                326,981            301,653

OTHER ASSETS
Goodwill                                                                             593,799            407,013
Other intangible assets, net                                                         207,096            154,404
Other                                                                                239,654            198,075
- ----------------------------------------------------------------------------------------------------------------
    Total other assets                                                             1,040,549            759,492
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                                     $ 3,230,747        $ 2,553,482
================================================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt                                                                  $        --        $    12,115
Accounts payable                                                                     135,499            128,206
Income taxes payable                                                                 101,257             72,376
Accrued expenses
    Employee compensation and related benefits                                       235,752            190,152
    Other                                                                            132,885            107,466
- ----------------------------------------------------------------------------------------------------------------
    Total current liabilities                                                        605,393            510,315

LONG-TERM DEBT                                                                       234,865            351,813

DEFERRED INCOME TAXES                                                                 56,561             89,719

COMMITMENTS AND CONTINGENCIES                                                             --                 --

SHAREHOLDERS' EQUITY
Preferred stock                                                                           --                 --
Common stock (358,760,693 and 346,028,334 shares issued and
    outstanding at December 31, 2004 and 2003, respectively)                          35,876             34,602
Additional paid-in capital                                                           277,147             18,326
Retained earnings                                                                  1,951,821          1,541,887
Accumulated other comprehensive income (loss):
    Cumulative translation adjustment                                                 53,851             (4,246)
    Unrealized gain on available-for-sale securities                                  15,233             11,066
- ----------------------------------------------------------------------------------------------------------------
    Total shareholders' equity                                                     2,333,928          1,601,635
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                       $ 3,230,747        $ 2,553,482
================================================================================================================



SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.





                                       30


CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)



                                                 COMMON STOCK                                      ACCUMULATED
                                          -----------------------   ADDITIONAL                           OTHER             TOTAL
                                            NUMBER OF                  PAID-IN        RETAINED   COMPREHENSIVE     SHAREHOLDERS'
                                               SHARES      AMOUNT      CAPITAL        EARNINGS    INCOME (LOSS)           EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------
                                                                                                   
BALANCE AT JANUARY 1, 2002                348,837,424    $ 34,884    $ 108,563     $ 1,134,909       $ (94,611)      $ 1,183,745
Comprehensive income:
  Net earnings                                                                         276,285                           276,285
  Other comprehensive income:
    Unrealized loss on investments,
      net of taxes of $(3,021)                                                                          (4,930)           (4,930)
    Foreign currency translation
      adjustment, net of taxes of $4,291                                                                30,393            30,393
                                                                                                                     ------------
    Other comprehensive income                                                                                            25,463
                                                                                                                     ------------
Comprehensive income                                                                                                     301,748
                                                                                                                     ============
Common stock issued under stock
  plans and other, net                      7,218,834         722       65,283                                            66,005
Tax benefit from stock plans                                            25,229                                            25,229
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002              356,056,258      35,606      199,075       1,411,194         (69,148)        1,576,727
Comprehensive income:
  Net earnings                                                                         336,779                           336,779
  Other comprehensive income:
    Unrealized gain on investments,
      net of taxes of $4,183                                                                             6,826             6,826
    Foreign currency translation
      adjustment, net of taxes of $16,71                                                                69,142            69,142
                                                                                                                     ------------
    Other comprehensive income                                                                                            75,968
                                                                                                                     ------------
Comprehensive income                                                                                                     412,747
                                                                                                                     ============
Common stock issued under stock
  plans and other, net                      8,469,166         846       88,856                                            89,702
Tax benefit from stock plans                                            42,484                                            42,484
Common stock repurchased,
  including related costs                 (18,497,090)     (1,850)    (312,089)       (206,086)                         (520,025)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003              346,028,334      34,602       18,326       1,541,887           6,820         1,601,635
Comprehensive income:
  Net earnings                                                                         409,934                           409,934
  Other comprehensive income:
    Unrealized gain on investments,
      net of taxes of $3,034                                                                             4,167             4,167
    Foreign currency translation
      adjustment, net of taxes of $8,270                                                                58,097            58,097
                                                                                                                     ------------
    Other comprehensive income                                                                                            62,264
                                                                                                                     ------------
Comprehensive income                                                                                                     472,198
                                                                                                                     ============
Common stock issued under stock
  plans and other, net                     12,732,359       1,274      144,869                                           146,143
Tax benefit from stock plans                                           113,952                                           113,952
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2004              358,760,693    $ 35,876    $ 277,147     $ 1,951,821       $  69,084       $ 2,333,928
=================================================================================================================================


SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.





                                       31



CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)



FISCAL YEAR ENDED DECEMBER 31                                                       2004             2003             2002
- ---------------------------------------------------------------------------------------------------------------------------
                                                                                                        
OPERATING ACTIVITIES
Net earnings                                                                 $   409,934       $  336,779        $ 276,285
Adjustments to reconcile net earnings to net cash from operating
  activities:
      Depreciation                                                                68,294           64,695           67,224
      Amortization                                                                17,461           11,988            7,696
      Equity losses in Epicor Medical, Inc., net of income taxes                     962            2,612               --
      Equity losses in Irvine Biomedical, Inc., net of income taxes                  780               --               --
      Purchased in-process research and development charges                        9,100               --               --
      Special charges                                                             40,883               --               --
      Deferred income taxes                                                       (9,340)          33,146           37,695
      Changes in operating assets and liabilities, net of business
        acquisitions:
         Accounts receivable                                                    (102,405)         (31,315)         (39,146)
         Inventories                                                             (14,209)         (17,388)          15,784
         Other current assets                                                        164          (40,273)          (8,719)
         Accounts payable and accrued expenses                                    25,793           52,714           48,376
         Income taxes payable                                                    156,865           61,327           12,005
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                        604,282          474,285          417,200

INVESTING ACTIVITIES
Purchases of property, plant and equipment                                       (89,468)         (49,565)         (62,176)
Proceeds from sale or maturity of marketable securities                               --               --            7,000
Business acquisition payments, net of cash acquired                             (249,941)        (230,839)         (29,500)
Minority investment in Epicor Medical, Inc.                                           --          (15,505)              --
Other                                                                            (68,399)         (50,691)         (31,088)
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES                                           (407,808)        (346,600)        (115,764)

FINANCING ACTIVITIES
Proceeds from exercise of stock options and stock issued                         146,143           89,702           66,005
Common stock repurchased, including related costs                                     --         (520,025)              --
Net (payments) / borrowings under short-term debt facilities                     (11,964)           9,454               --
Issuance of long-term notes                                                           --          173,350               --
Borrowings under debt facilities                                               2,285,775        1,111,450          352,000
Payments under debt facilities                                                (2,409,200)        (954,050)        (475,128)
===========================================================================================================================
NET CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES                             10,754          (90,119)         (57,123)

Effect of currency exchange rate changes on cash and cash equivalents             19,559           21,827            9,212
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND EQUIVALENTS                                             226,787           59,393          253,525
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                   461,253          401,860          148,335
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                     $   688,040       $  461,253        $ 401,860
===========================================================================================================================

SUPPLEMENTAL CASH FLOW INFORMATION
===========================================================================================================================
Cash paid during the year for:
   Interest                                                                  $     5,158       $    3,557        $   1,473
   Income taxes                                                                   24,564           57,217           51,243
===========================================================================================================================



SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.





                                       32



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

COMPANY OVERVIEW: St. Jude Medical, Inc. (St. Jude Medical or the Company)
develops, manufactures and distributes cardiovascular medical devices for the
global cardiac rhythm management (CRM), cardiac surgery (CS) and cardiology and
vascular access (C/VA) therapy areas. The Company's principal products in each
of these therapy areas are as follows:

CRM
    o    bradycardia pacemaker systems (pacemakers),
    o    tachycardia implantable cardioverter defibrillator systems (ICDs), and
    o    electrophysiology (EP) catheters

CS
    o    mechanical and tissue heart valves,
    o    valve repair products, and
    o    epicardial ablation systems

C/VA
    o    vascular closure devices,
    o    angiography catheters,
    o    guidewires, and
    o    hemostasis introducers

The Company markets and sells its products primarily through a direct sales
force. The principal geographic markets for the Company's products are the
United States, Europe and Japan.

PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. Significant
intercompany transactions and balances have been eliminated in consolidation.
Certain reclassifications of previously reported amounts have been made to
conform to the current year presentation. As a result of the acquisition of the
remaining capital stock of Epicor Medical, Inc. (Epicor) in June 2004, the
Company, in accordance with step-acquisition accounting treatment, retroactively
adjusted the historical financial statements to reflect the portion of Epicor's
operating losses attributable to the Company's ownership from the date of its
original investment until the final purchase and the Company's portion of
in-process research and development that would have been recognized as of the
date of the original investment. These amounts totaled $2.6 million, net of tax,
for the year ended December 31, 2003, and were recognized in the income
statement on the line item captioned other income (expense).

FISCAL YEAR: The Company utilizes a 52/53-week fiscal year ending on the
Saturday nearest December 31. For simplicity of presentation, the Company
describes all periods as if the year end is December 31. Fiscal years 2004 and
2002 consisted of 52 weeks and fiscal year 2003 consisted of 53 weeks.

USE OF ESTIMATES: Preparation of the Company's consolidated financial statements
in conformity with accounting principles generally accepted in the United States
requires management to make estimates


                                       33



and assumptions that affect the reported amounts in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.

CASH EQUIVALENTS: The Company considers highly liquid investments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are stated at cost, which approximates market. The Company's cash
equivalents include bank certificates of deposit, money market funds and
instruments, commercial paper investments and repurchase agreements
collateralized by U.S. government agency securities. The Company performs
periodic evaluations of the relative credit standing of the financial
institutions and issuers of its cash equivalents and limits the amount of credit
exposure with any one issuer.

MARKETABLE SECURITIES: Marketable securities consist of publicly-traded equity
securities. Marketable securities are classified as available-for-sale, recorded
at fair market value based upon quoted market prices and are classified with
other current assets on the balance sheet. The following table summarizes the
Company's available-for-sale marketable securities as of December 31 (in
thousands):

                                                      2004            2003
- ---------------------------------------------------------------------------
Adjusted cost                                     $  9,408        $  5,826
Gross unrealized gains                              25,048          18,461
Gross unrealized losses                                 --            (613)
- ---------------------------------------------------------------------------
Fair value                                        $ 34,456        $ 23,674
===========================================================================

Unrealized gains and losses, net of related incomes taxes, are recorded in
accumulated other comprehensive income (loss) in shareholders' equity. Realized
gains and losses from the sale of marketable securities are recorded in other
income (expense) and are computed using the specific identification method.

The Company's policy for assessing recoverability of its available-for-sale
securities is to record a charge against net earnings when the Company
determines that a decline in the fair value of a security drops below the cost
basis and judges that decline to be other-than-temporary. During 2004 and 2003,
the Company recorded writedowns of $1.3 and $1.0 million, respectively, on one
of its equity securities, which is included in other income (expense). Other
comprehensive income reclassification adjustments for realized losses on the
write-down of marketable securities, net of income taxes, were $0.9 million and
$0.6 million in 2004 and 2003.

ACCOUNTS RECEIVABLE: The Company grants credit to customers in the normal course
of business, but generally does not require collateral or any other security to
support its receivables. The Company maintains an allowance for doubtful
accounts for potential credit losses. The allowance for doubtful accounts was
$31.3 million at December 31, 2004 and $31.9 million at December 31, 2003.

INVENTORIES: Inventories are stated at the lower of cost or market with cost
determined using the first-in, first-out method.


                                       34



Inventories consist of the following at December 31 (in thousands):

                                      2004                   2003
- ------------------------------------------------------------------
Finished goods                   $ 237,574              $ 209,236
Work in process                     33,984                 32,547
Raw materials                       59,315                 69,978
- ------------------------------------------------------------------
                                 $ 330,873              $ 311,761
==================================================================

PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are recorded at
cost and are depreciated using the straight-line method over their estimated
useful lives, ranging from 15 to 39 years for buildings and improvements, three
to seven years for machinery and equipment and five to eight years for
diagnostic equipment. Diagnostic equipment primarily consists of programmers
that are used by physicians and healthcare professionals to program and analyze
data from pacemaker and ICD devices. The estimated useful lives of this
equipment are based on management's estimates of its usage by the physicians and
healthcare professionals, factoring in new technology platforms and rollouts by
the Company. To the extent that the Company experiences changes in the usage of
this equipment or introductions of new technologies to the market, the estimated
useful lives of this equipment may change in a future period. Diagnostic
equipment had a net carrying value of $85.8 million and $68.7 million at
December 31, 2004 and 2003. Accelerated depreciation methods are used for income
tax purposes.

GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill represents the excess of cost
over the fair value of identifiable net assets of businesses acquired. Other
intangible assets consist of customer lists and relationships, purchased
technology and patents, distribution agreements and licenses and are amortized
on a straight-line basis using lives ranging from 10 to 20 years. Other
intangible assets also consist of trademarks which are an indefinite lived
intangible asset.

Statement of Financial Accounting Standards (SFAS) No. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS" (Statement 142), requires that goodwill for each reporting
unit be reviewed for impairment at least annually. The Company has three
reporting units at December 31, 2004, consisting of its three operating segments
(see Note 11). The Company tests goodwill for impairment using the two-step
process prescribed in Statement 142. In the first step, the Company compares the
fair value of each reporting unit, as computed primarily by present value cash
flow calculations, to its book carrying value, including goodwill. If the fair
value exceeds the carrying value, no further work is required and no impairment
loss is recognized. If the carrying value exceeds the fair value, the goodwill
of the reporting unit is potentially impaired and the Company would then
complete step 2 in order to measure the impairment loss. In step 2, the Company
would calculate the implied fair value of goodwill by deducting the fair value
of all tangible and intangible net assets (including unrecognized intangible
assets) of the reporting unit from the fair value of the reporting unit (as
determined in step 1). If the implied fair value of goodwill is less than the
carrying value of goodwill, the Company would recognize an impairment loss equal
to the difference.

Management also reviews other intangible assets for impairment at least annually
to determine if any adverse conditions exist that would indicate impairment. If
the carrying value of other intangible assets exceeds the undiscounted cash
flows, the carrying value is written down to fair value in the period
identified. Indefinite-lived intangible assets are reviewed at least annually
for impairment by calculating the fair value of the assets and comparing with
their carrying value. In assessing fair


                                       35



value, management generally utilizes present value cash flow calculations using
an appropriate risk-adjusted discount rate.

During the fourth quarters of 2004 and 2003, management completed its annual
goodwill and other intangible asset impairment reviews with no impairments to
the carrying values identified.

TECHNOLOGY LICENSE AGREEMENT: The Company has a technology license agreement
that provides access to a significant number of patents covering a broad range
of technology used in the Company's pacemaker and ICD systems. The agreement
provided for payments through September 2004, at which time the Company was
granted a fully paid-up license to the underlying patents which expire at
various dates through the year 2014. The costs deferred under this license are
recorded on the balance sheet in other long-term assets and are being recognized
as an expense over the term of the underlying patents' lives.

PRODUCT WARRANTIES: The Company offers a warranty on various products, the most
significant of which relate to pacemaker and ICD systems. The Company estimates
the costs that may be incurred under its warranties and records a liability in
the amount of such costs at the time the product is sold. Factors that affect
the Company's warranty liability include the number of units sold, historical
and anticipated rates of warranty claims and cost per claim. The Company
periodically assesses the adequacy of its recorded warranty liabilities and
adjusts the amounts as necessary. Changes in the Company's product warranty
liability during 2004 and 2003 were as follows (in thousands):

                                                      2004            2003
- ---------------------------------------------------------------------------
Balance at beginning of year                      $ 15,221        $ 14,755
Warranty expense recognized                            567           3,035
Warranty credits issued                             (2,553)         (2,569)
- ---------------------------------------------------------------------------
Balance at end of year                            $ 13,235        $ 15,221
===========================================================================

REVENUE RECOGNITION: The Company sells its products to hospitals primarily
through a direct sales force. In certain international markets, the Company
sells its products through independent distributors. The Company recognizes
revenue when persuasive evidence of a sales arrangement exists, delivery of
goods occurs through the transfer of title and risks and rewards of ownership,
the selling price is fixed or determinable and collectibility is reasonably
assured. A portion of the Company's inventory is consigned at hospitals; revenue
is recognized at the time the Company is notified that the consigned inventory
has been used by the customer. For products that are not consigned, revenue
recognition occurs upon shipment to the hospital or, in the case of
distributors, when title transfers under the contract. The Company records
estimated sales returns, discounts and rebates as a reduction of net sales in
the same period revenue is recognized.

RESEARCH AND DEVELOPMENT: Research and development costs are charged to expense
as incurred.

PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT (IPR&D): When the Company acquires
another entity, the purchase price is allocated, as applicable, between IPR&D,
other intangible assets, net tangible assets and goodwill. The Company's policy
defines IPR&D as the value assigned to those projects for which the related
products have not received regulatory approval and have no alternative future
use. Determining the portion of the purchase price allocated to IPR&D requires
the Company to make significant estimates. The amount of the purchase price
allocated to IPR&D is determined by estimating the future cash flows of each
project or technology and discounting the net cash flows back to their present
values. The discount rate used is determined at the time of acquisition, in
accordance


                                       36



with accepted valuation methods, and includes consideration of the assessed risk
of the project not being developed to commercial feasible stage.

LITIGATION: The Company accrues a liability for costs related to claims,
including future legal costs, settlements and judgments where it has assessed
that a loss is probable and an amount can be reasonably ESTIMATED.

STOCK-BASED COMPENSATION: The Company accounts for its stock-based employee
compensation plans (see Note 6) under the recognition and measurement principles
of APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO Employees," and related
Interpretations. The Company has not adopted fair value accounting for its
stock-based compensation arrangements with employees at December 31, 2004. The
following table illustrates the effect on net earnings and net earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," to its stock-based employee
compensation (in thousands, except per share amounts):



                                                                   2004              2003             2002
- -----------------------------------------------------------------------------------------------------------
                                                                                        
Net earnings, as reported                                     $ 409,934         $ 336,779        $ 276,285

Less:  Total stock-based employee compensation
  expense determined under fair value based method
  for all awards, net of related tax effects                    (50,888)          (38,030)         (33,194)
- -----------------------------------------------------------------------------------------------------------

Pro forma net earnings                                        $ 359,046         $ 298,749        $ 243,091
===========================================================================================================

===========================================================================================================
Net earnings per share:
  Basic-as reported                                              $ 1.16            $ 0.95           $ 0.78
  Basic-pro forma                                                  1.02              0.84             0.69

  Diluted-as reported                                            $ 1.10            $ 0.91           $ 0.75
  Diluted-pro forma                                                0.98              0.81             0.66
===========================================================================================================


The weighted-average fair value of options granted and the assumptions used in
the Black-Scholes option-pricing model are as follows:

                                              2004          2003         2002
- ------------------------------------------------------------------------------
Fair value of options granted              $ 12.79        $ 10.88       $ 6.48
Assumptions used:
  Expected life (years)                          5             5            5
  Risk-free rate of return                    3.5%          3.2%         3.3%
  Volatility                                 29.0%         35.0%        35.0%
  Dividend yield                                0%            0%           0%
==============================================================================




                                       37



NET EARNINGS PER SHARE: Basic net earnings per share is computed by dividing net
earnings by the weighted average number of outstanding common shares during the
period, exclusive of restricted shares. Diluted net earnings per share is
computed by dividing net earnings by the weighted average number of outstanding
common shares and dilutive securities.

The table below sets forth the computation of basic and diluted net earnings per
share (in thousands, except per share amounts).



                                                              2004            2003             2002
- ----------------------------------------------------------------------------------------------------
                                                                                 
Numerator:
  Net earnings                                           $ 409,934       $ 336,779        $ 276,285

Denominator:
  Basic-weighted average shares outstanding                353,454         353,913          353,140
  Effect of dilutive securities:
    Employee stock options                                  17,525          16,819          12,820
    Restricted shares                                           13              21              44
- ----------------------------------------------------------------------------------------------------
  Diluted-weighted average shares outstanding              370,992         370,753          366,004
====================================================================================================
Basic net earnings per share                             $    1.16       $    0.95        $    0.78
====================================================================================================
Diluted net earnings per share                           $    1.10       $    0.91        $    0.75
====================================================================================================



Diluted-weighted average shares outstanding have not been adjusted for certain
employee stock options and awards where the effect of those securities would
have been anti-dilutive.

FOREIGN CURRENCY TRANSLATION: Sales and expenses denominated in foreign
currencies are translated at average exchange rates in effect throughout the
year. Assets and liabilities of foreign operations are translated at period-end
exchange rates. Gains and losses from translation of net assets of foreign
operations, net of related income taxes, are recorded in accumulated other
comprehensive income. Foreign currency transaction gains and losses are included
in other income (expense).

NEW ACCOUNTING PRONOUNCEMENTS: In December 2004, the Financial Accounting
Standards Board (FASB) issued FASB Statement No. 123(R), SHARE-BASED PAYMENT,
which is a revision of FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. Statement 123(R) supersedes APB Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO Employees, and amends FASB Statement No. 95, STATEMENT OF CASH
FLOWS. Generally, the approach in Statement 123(R) is similar to the approach
described in Statement 123. However, Statement 123(R) REQUIRES all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative.

Statement 123(R) must be adopted no later than July 1, 2005. We expect to adopt
Statement 123(R) on July 1, 2005. The Company plans to adopt Statement 123(R)
using the modified prospective method. The "modified prospective" method is a
method in which compensation cost is recognized beginning with the effective
date (a) based on the requirements of Statement 123(R) for all share-based
payments granted after the effective date and (b) based on the requirements of
Statement 123 for all awards granted to employees prior to the effective date of
Statement 123(R) that remain unvested on the effective date.


                                       38



As permitted by Statement 123, the Company currently accounts for share-based
payments to employees using Opinion 25's intrinsic value method and, as such,
generally recognizes no compensation cost for employee stock options.
 Accordingly, the adoption of Statement 123(R)'s fair value method will have a
significant impact on our consolidated results of operations, although it will
have no impact on our overall financial position. The impact of adopting
Statement 123(R) on future period earnings cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future.
However, had we adopted Statement 123(R) in prior periods, the impact of that
standard would have approximated the impact of Statement 123 as described in the
disclosure of pro forma net income and earnings per share.

In December 2004, the FASB issued two FASB staff positions (FSP): FSP FAS
109-1, "APPLICATION OF FASB STATEMENT NO. 109, ACCOUNTING FOR INCOME TAXES, FOR
THE TAX DEDUCTION PROVIDED TO U.S.-BASED MANUFACTURERS BY THE AMERICAN JOBS
CREATION ACT OF 2004"; and FSP FAS 109-2,"ACCOUNTING AND DISCLOSURE GUIDANCE FOR
THE FOREIGN EARNINGS REPATRIATION PROVISION WITHIN THE AMERICAN JOBS CREATION
ACT OF 2004." FSP FAS 109-1 clarifies that the tax deduction for domestic
manufacturers under the American Jobs Creation Act of 2004 (the Act) should be
accounted for as a special deduction in accordance with SFAS No. 109,
"ACCOUNTING FOR INCOME TAXES." FAS 109-2 provides enterprises more time (beyond
the financial-reporting period during which the Act took effect) to evaluate the
Act's impact on the enterprise's plan for reinvestment or repatriation of
certain foreign earnings for purposes of applying SFAS No. 109. Based on these
requirements, the Company has approximately $500 million of cash held outside
the United States which could be eligible for the special deduction in 2005
under the Act. Due to the complexity of the repatriation provision, the Company
is still evaluating the effects of the Act on our plan for repatriation of
foreign earnings and the related impact to our tax provision. It is anticipated
that this evaluation will be completed by the end of 2005. The range of possible
amounts that the Company is currently considering to be eligible for
repatriation is between zero and $500 million. The related potential range of
income tax is between zero and $26.0 million.

NOTE 2--ACQUISITIONS AND MINORITY INVESTMENT

ACQUISITIONS: On February 15, 2005, the Company announced that it signed a
definitive agreement to acquire the business of Velocimed, for $82.5 million
less approximately $8.5 million of cash expected to be on hand at Velocimed at
closing plus additional contingent payments tied to revenues in excess of
minimum future targets, and a milestone payment upon U.S. Food and Drug
Administration (FDA) approval of the Premere(TM) patent foramen ovale closure
system. Velocimed is a privately held company which develops and manufactures
specialty interventional cardiology devices. The first additional contingent
payment contemplated under the agreement would be paid in March 2007. The
results of operations of the Velocimed business acquisition are expected to be
included in the Company's consolidated results of operations beginning in the
second quarter of 2005.

On January 13, 2005, the Company completed its acquisition of Endocardial
Solutions, Inc. (ESI) for $280.5 million, which includes closing costs less $8.2
million of cash acquired. ESI had been publicly traded on the NASDAQ market
under the ticker symbol ECSI. ESI develops, manufactures, and markets the
EnSite(R) System used for the navigation and localization of diagnostic and
therapeutic catheters used by physician specialists to diagnose and treat
cardiac rhythm disorders. The Company expects to record a purchased in-process
R&D charge of approximately $12.0 million associated with the completion of this
transaction in the first quarter of 2005. The results of operations of ESI will
be included in the Company's consolidated results of operations beginning in the
first quarter of 2005.


                                       39



On October 7, 2004, the Company completed its acquisition of the remaining
capital stock of Irvine Biomedical, Inc. (IBI), a privately held company which
develops and sells electrophysiology (EP) catheter products used by physician
specialists to diagnose and treat cardiac rhythm disorders. In April 2003, the
Company had acquired a minority investment of 14% in IBI through the Company's
acquisition of Getz Bros. Co., Ltd. (Getz Japan). The Company paid approximately
$50.6 million to acquire the remaining 86% of IBI capital stock it did not
already own. The Company considered the future cash flows of the business when
it negotiated the purchase price of IBI. This amount was net of cash acquired
from IBI as well as consideration from the exercise of IBI stock options. The
original investment of $4.5 million was accounted for under the cost method
until the date the remaining shares were purchased. As a result, the Company did
not recognize any portion of IBI's losses during this period. At the date of the
subsequent acquisition, in accordance with step-acquisition accounting
treatment, the Company recorded a $0.8 million charge, net of tax, which
represents the portion of IBI's losses attributable to the Company's ownership
from the date of the purchase of Getz Japan until the final acquisition of IBI.
This amount was not reflected retroactively to prior periods as it was not
material. Net consideration paid for the total acquisition was $54.8 million,
which includes closing costs less $5.9 million of cash acquired.

The Company recorded a purchased in-process R&D charge of $9.1 million in the
fourth quarter of 2004 associated with the completion of this transaction.

The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed as a result of the IBI acquisition (in thousands):

=========================================================================
Current assets                                                  $  6,695
Goodwill                                                          21,745
Purchased technology                                              26,400
Purchased In-Process Research and Development                      9,100
Other long-term assets                                             1,452
- -------------------------------------------------------------------------
   Total assets acquired                                        $ 65,392

Deferred income taxes                                           $  7,588
Current liabilities                                                3,850
- -------------------------------------------------------------------------
   Total liabilities assumed                                    $ 11,438
- -------------------------------------------------------------------------
Net assets acquired                                             $ 53,954
=========================================================================

The goodwill recorded as a result of the IBI acquisition is not deductible for
income tax purposes and was allocated entirely to the Company's Daig reportable
segment. The Company acquired IBI to strengthen its product portfolio of
products used to treat heart rhythm disorders. The goodwill recognized as part
of the acquisition represents future product opportunities that did not have
regulatory approval at the date of acquisition and is not deductible for tax
purposes. In connection with the acquisition of IBI, the Company also recorded
purchased technology valued at $26.4 million that has a useful life of 12 and 14
years for developed and core technology, respectively. In addition, the purchase
agreement provides for additional contingent purchase consideration of up to
$13.0 million to the non-St. Jude Medical shareholders if IBI receives approval
by certain specified dates in 2005 and 2006 from the FDA of certain EP catheter
ablation systems currently in development. All future payments will be recorded
as additional goodwill.


                                       40



On June 8, 2004, the Company completed its acquisition of the remaining capital
stock of Epicor, a company focused on developing products which use high
intensity focused ultrasound (HIFU) to ablate cardiac tissue. In May 2003, the
Company made an initial $15.0 million minority investment in Epicor and acquired
an option to purchase the remaining ownership of Epicor prior to June 30, 2004
for $185.0 million. The Company considered the future cash flows of the business
when it negotiated the purchase price of Epicor. Pursuant to the option, the
Company paid $185.0 million in cash to acquire the remaining outstanding capital
stock of Epicor on June 8, 2004. The original investment was accounted for under
the cost method until the date the remaining shares were purchased. As a result,
the Company did not recognize any portion of Epicor's losses during this period.
At the date of the subsequent acquisition, in accordance with step-acquisition
accounting treatment, the Company's historical financial statements were
adjusted retroactively to reflect the portion of Epicor's operating losses
attributable to the Company's ownership from the date of the original investment
until the final purchase and the Company's portion of in-process research and
development that would have been recognized as of the date of the original
investment. These amounts totaled $3.6 million, net of tax, for the period
described, and were recognized in the income statement on the line item
captioned other income (expense). Net consideration paid for the total
acquisition was $198.0 million, which includes closing costs less $2.4 million
of cash acquired.

The Company acquired Epicor to strengthen its product portfolio of products used
to treat heart rhythm disorders. The goodwill recognized as part of the
acquisition represents future product opportunities that did not have regulatory
approval at the date of acquisition and is not deductible for tax purposes. The
goodwill recognized in connection with the Epicor acquisition was allocated
entirely to the Company's Cardiac Rhythm Management/Cardiac Surgery (CRM/CS)
reportable segment.


















                                       41



The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed as a result of the Epicor acquisition (in thousands):

===============================================================================
Current assets                                                       $   2,867
Goodwill                                                               159,121
Purchased technology                                                    21,700
Deferred income taxes                                                   15,086
Other long-term assets                                                     743
- -------------------------------------------------------------------------------
   Total assets acquired                                             $ 199,517

Current liabilities                                                  $   2,707
- -------------------------------------------------------------------------------
   Total liabilities assumed                                         $   2,707
- -------------------------------------------------------------------------------
Net assets acquired                                                  $ 196,810
===============================================================================

In connection with the acquisition of Epicor, the Company recorded purchased
technology valued at $21.7 million that has a useful life of 12 years. The
Epicor acquisition did not provide for the payment of any contingent
consideration.

On April 1, 2003, the Company completed its acquisition of Getz Bros. Co., Ltd.
(Getz Japan), a distributor of medical technology products in Japan and the
Company's largest volume distributor in Japan. The Company paid 26.9 billion
Japanese Yen in cash to acquire 100% of the outstanding common stock of Getz
Japan. Net consideration paid was $219.2 million, which includes closing costs
less $12.0 million of cash acquired. The Company also acquired the net assets of
Getz Bros. & Co. (Aust.) Pty. Limited and Medtel Pty. Limited (collectively
referred to as Getz Australia) related to the distribution of the Company's
products in Australia for $6.2 million in cash, including closing costs.

The Company acquired Getz Japan and Getz Australia (collectively referred to as
Getz) in order to further strengthen its presence in the Japanese and Australian
medical technology markets. The purchase price for Getz was based on the future
cash flows of the businesses. In addition, Getz Japan had equity securities
which traded on a Japanese stock exchange. The goodwill recognized as part of
the Getz acquisitions relates primarily to the operating efficiencies that these
businesses were able to achieve and the increased levels of efficiencies
anticipated in the future as the Company expands its presence in the Japanese
and Australian medical technology markets. The goodwill recorded in connection
with the Getz acquisitions was allocated entirely to the Company's Cardiac
Rhythm Management/Cardiac Surgery (CRM/CS) reportable segment.









                                       42



The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed as a result of these acquisitions (in thousands):

===============================================================================
Current assets                                                       $ 124,961
Goodwill                                                                67,465
Intangible assets                                                       64,106
Other long-term assets                                                  33,945
- -------------------------------------------------------------------------------
   Total assets acquired                                             $ 290,477

Current liabilities                                                  $  27,724
Deferred income taxes                                                   25,390
- -------------------------------------------------------------------------------
   Total liabilities assumed                                         $  53,114
- -------------------------------------------------------------------------------
Net assets acquired                                                  $ 237,363
===============================================================================

The goodwill recorded as a result of these acquisitions is not deductible for
income tax purposes.

In connection with the acquisitions of Getz, the Company recorded intangible
assets valued at $64.1 million that each have a weighted average useful life of
10 years. Total intangible assets subject to amortization include distribution
agreements of $44.9 million, customer lists and relationships of $9.5 million,
and licenses and other of $5.6 million. Intangible assets not subject to
amortization include trademarks of $4.1 million.

The Getz acquisitions did not provide for the payment of any contingent
consideration. The third-party appraisal used by the Company for purposes of the
purchase price allocation did not include any in-process research and
development. There are no material unresolved items relating to the purchase
price allocation.

During 2004, 2003 and 2002, the Company also acquired various businesses
involved in the distribution of the Company's products. Aggregate consideration
paid in cash during 2004, 2003 and 2002 was $21.8 million, $5.4 million and
$24.5 million, respectively.

In December 2002, the Company acquired the assets of a catheter business for $5
million in cash. Substantially the entire purchase price was allocated to
technology and patents with estimated useful lives of 15 years.

The results of operations of the above-mentioned business acquisitions have been
included in the Company's consolidated results of operations since the date of
acquisition. Pro forma results of operations have not been presented for these
acquisitions since the effects of these business acquisitions were not material
to the Company either individually or in aggregate.

MINORITY INVESTMENT: On January 12, 2005, the Company made an initial equity
investment of $12.5 million pursuant to the Preferred Stock Purchase and
Acquisition Option Agreement (the Purchase and Option Agreement) and an
Agreement and Plan of Merger (the Merger Agreement) entered into with ProRhythm,
Inc., (ProRhythm). The initial investment equated to a 9% ownership interest and
is accounted for under the cost method. ProRhythm is developing a HIFU
catheter-based ablation system for the treatment of AF. Under the terms of the
Purchase and Option Agreement, the Company has the option to make, or ProRhythm
can require, an additional $12.5 million equity investment through January 31,
2006 upon completion of specific clinical and regulatory milestones.


                                       43



The Purchase and Option Agreement also provides that the Company has the
exclusive right, but not the obligation, through the later of 3 months after the
date ProRhythm delivers certain clinical trial data or March 31, 2007 to acquire
ProRhythm for $125 million in cash consideration payable to the ProRhythm
stockholders (other than the Company) pursuant to the terms and conditions set
forth in the Merger Agreement (the Merger), with additional cash consideration
payable to the ProRhythm stockholders (other than the Company) after the
consummation of the acquisition, if ProRhythm achieves certain
performance-related milestones.

NOTE 3--GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for each of the Company's
reportable segments for the fiscal year ended December 31, 2004 are as follows
(in thousands):



                                                           CRM/CS            DAIG             TOTAL
- ----------------------------------------------------------------------------------------------------
                                                                           
Balance at December 31, 2003                            $ 352,144        $ 54,869         $ 407,013
Goodwill recorded from the Epicor acquisition             159,121              --           159,121
Goodwill recorded from the IBI acquisition                     --          21,745            21,745
Foreign currency translation                                5,440              44             5,484
Other                                                         436              --               436
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 2004                            $ 517,141        $ 76,658         $ 593,799
====================================================================================================


The following table provides the gross carrying amount of other intangible
assets and related accumulated amortization at December 31 (in thousands):



                                                                  2004                                 2003
- ----------------------------------------------------------------------------------------------------------------------
                                                          GROSS                                GROSS
                                                       CARRYING       ACCUMULATED           CARRYING      ACCUMULATED
                                                         AMOUNT      AMORTIZATION             AMOUNT     AMORTIZATION
- ----------------------------------------------------------------------------------------------------------------------
                                                                                                 
Amortized intangible assets:
  Purchased technology and patents                     $124,479          $ 26,610           $ 76,189         $ 21,253
  Distribution agreements                                46,852             8,199             49,348            3,701
  Customer lists and relationships                       73,873            13,590             50,511            7,278
  Licenses and other                                      6,921             1,300              6,679              610
- ----------------------------------------------------------------------------------------------------------------------
                                                       $252,125          $ 49,699           $182,727         $ 32,842
======================================================================================================================

Indefinite intangible assets:
  Trademarks                                           $  4,670                             $  4,519
======================================================================================================================


Amortization expense of other intangible assets was $17.5 million, $12.0 million
and $7.7 million for the fiscal years ended December 31, 2004, 2003 and 2002,
respectively. Estimated amortization expense for fiscal years 2005 through 2009
based on the current carrying value of other intangible assets is approximately
$20.8 million per year.




                                       44




NOTE 4--DEBT

The Company's long-term debt consisted of the following at December 31(in
thousands):

                                                       2004              2003
- ------------------------------------------------------------------------------
1.02% Yen-denominated notes, due 2010             $ 200,889         $ 194,413
Commercial paper borrowings                          33,900           157,400
Other                                                    76                --
- ------------------------------------------------------------------------------
                                                  $ 234,865         $ 351,813
==============================================================================

On December 31, 2004, the Company had $716.1 million of available borrowings
under existing lines of credit.

On April 1, 2003, the Company borrowed 24.6 billion Japanese Yen, or
approximately $208 million, under a short-term, unsecured bank credit agreement
to partially finance the Getz Japan acquisition. Borrowings under this agreement
bore interest at an average rate of 0.58% per annum and were repaid in May 2003.

In May 2003, the Company issued 7-year, 1.02% unsecured notes totaling 20.9
billion Yen, or $200.9 million at December 31, 2004. Interest payments are
required on a semi-annual basis and the entire principal balance of the 1.02%
unsecured notes is due in May 2010. The Company also obtained a short-term,
unsecured bank credit agreement that provided for borrowings of up to 3.8
billion Yen and was due in May 2004. Borrowings under the short-term, bank
credit agreement bore interest at the floating Yen London InterBank Offered Rate
(LIBOR) plus 0.50% per annum. The balance outstanding at December 31, 2003 was
$12.1 million. The Company repaid the remaining borrowings under the short term,
unsecured bank credit agreement in April 2004.

In July 2003, the Company obtained a $400 million short-term revolving credit
facility. Borrowings under this facility bore interest at an average rate of
1.73% per annum and were repaid in September 2003.

In September 2003, the Company obtained a $350 million unsecured revolving
credit agreement with a consortium of lenders that expires in September 2008.
This credit facility bears interest at the United States Dollar LIBOR plus 0.60%
per annum, subject to adjustment in the event of a change in the Company's debt
ratings. The credit agreement creates a $350 million unsecured revolving credit
facility that we can draw upon for general corporate purposes or use to support
our commercial paper program. There were no outstanding borrowings under this
credit facility at December 31, 2004 and 2003.

During September 2003, the Company began issuing short-term, unsecured
commercial paper with maturities up to 270 days. These commercial paper
borrowings bear interest at varying market rates. The weighted average effective
interest rate at December 31, 2004 was 2.3% and the weighted average original
maturity of commercial paper outstanding was 12 days. The weighted average
effective interest rate at December 31, 2003 was 1.2% and the weighted average
original maturity of commercial paper outstanding was 67 days.

In May 2004, the Company obtained a 1.0 billion Yen credit facility that expires
in June 2005. Borrowings under the credit facility bear interest at the floating
Tokyo InterBank Offered Rate


                                       45



(TIBOR) plus 0.50% per annum. There were no outstanding borrowings under this
credit facility at December 31, 2004.

In September 2004, the Company entered into a $400 million unsecured revolving
credit agreement with a consortium of lenders that expires in September 2009.
The credit agreement creates a $400 million unsecured revolving credit facility
that the Company can draw upon for general corporate purposes or use to support
its commercial paper program. This credit agreement replaced a $150 million
credit agreement which expired in September 2004. Borrowings under the credit
agreement bear interest at United States Dollar LIBOR plus 0.39%, or in the
event over half of the facility is drawn on, United States Dollar LIBOR plus
0.515%, in each case subject to adjustment in the event of a change in the
Company's credit ratings. There were no outstanding borrowings under this credit
facility at December 31, 2004.

The Company classifies all of its commercial paper borrowings as long-term on
its balance sheet as the Company has the ability to repay any short-term
maturity with available cash from its existing long-term, committed credit
facilities. Management continually reviews the Company's cash flow projections
and may from time to time repay a portion of the Company's borrowings.

The Company's 7-year, 1.02% notes, short-term bank credit agreement and
revolving credit facilities contain various operating and financial covenants.
Specifically, the Company must have a ratio of total debt to total
capitalization not exceeding 55%, have a leverage ratio (defined as the ratio of
total debt to EBITDA (net earnings before interest, income taxes, depreciation
and amortization) and the ratio of total debt to EBIT (net earnings before
interest and income taxes)) not exceeding 3.0 to 1.0, and an interest coverage
ratio (defined as the ratio of EBITDA to interest expense and the ratio of EBIT
to interest expense) not less than 3.0 to 1.0 and 3.5 to 1.0 for the Company's
1.02% notes and revolving credit facilities, respectively. The Company also has
limitations on additional liens or indebtedness and limitations on certain
acquisitions, investments and dispositions of assets. However, these agreements
do not include provisions for the termination of the agreements or acceleration
of repayment due to changes in the Company's credit ratings. The Company was in
compliance with all of its debt covenants at December 31, 2004.

NOTE 5--COMMITMENTS AND CONTINGENCIES

LEASES: The Company leases various facilities and equipment under noncancelable
operating lease arrangements. Future minimum lease payments under these leases
are as follows: $16.0 million in 2005; $11.8 million in 2006; $9.8 million in
2007; $8.3 million in 2008; $8.3 million in 2009; and $17.7 million in years
thereafter. Rent expense under all operating leases was $17.3 million, $16.5
million and $10.2 million in 2004, 2003 and 2002.

SILZONE(R) LITIGATION: In July 1997, the Company began marketing mechanical
heart valves which incorporated a Silzone(R) coating. The Company later began
marketing heart valve repair products incorporating a Silzone(R) coating. The
Silzone(R) coating was intended to reduce the risk of endocarditis, a bacterial
infection affecting heart tissue, which is associated with replacement heart
valves.

In January 2000, the Company voluntarily recalled all field inventories of
Silzone(R) devices after receiving information from a clinical study that
patients with a Silzone(R) valve had a small, but statistically significant,
increased incidence of explant due to paravalvular leak compared to patients in
that clinical study with non-Silzone(R) heart valves.


                                       46



Subsequent to the Company's voluntary recall, the Company has been sued in
various jurisdictions and, as of February 25, 2005, has cases pending in the
United States, Canada, the United Kingdom, Ireland and France, by some patients
who received a Silzone(R) device. Some of these claims allege bodily injuries as
a result of an explant or other complications, which they attribute to the
Silzone(R) devices. Others, who have not had their device explanted, seek
compensation for past and future costs of special monitoring they allege they
need over and above the medical monitoring all replacement heart valve patients
receive. Some of the lawsuits seeking the cost of monitoring have been initiated
by patients who are asymptomatic and who have no apparent clinical injury to
date. The Company has vigorously defended against the claims that have been
asserted, and expects to continue to do so with respect to any remaining claims.

The Company has settled a number of these Silzone(R)-related cases and others
have been dismissed. Cases filed in the United States in federal courts have
been consolidated in the federal district court for the district of Minnesota
under Judge Tunheim. A number of class-action complaints have been consolidated
into one case. Judge Tunehim ruled against the Company on the issue of
preemption and found that the plaintiffs' causes of action were not preempted by
the U.S. Food and Drug Act. The Company sought to appeal this ruling, but the
appellate court determined that it would not review the ruling at this point in
the proceedings.

Certain plaintiffs have requested Judge Tunheim to allow some cases to proceed
as class actions. In response these requests, Judge Tunheim has issued several
rulings concerning class action certification. Although more detail is set forth
in the orders issued by the court, the result of these rulings is that Judge
Tunheim declined to grant class-action status to personal injury claims, but
granted class-action status for claimants from seventeen states to proceed with
medical monitoring claims, so long as they do not have a clinical injury. The
court also indicated that a class action could proceed under Minnesota's
Consumer Protection statutes.

The Company requested the Eighth Circuit Court of Appeals to review Judge
Tunheim's class certification orders. In a September 2, 2004 order, the
appellate court indicated it would accept the appeal of Judge Tunheim's
certification orders. The issues have now been briefed and the parties are
awaiting a date for oral argument concerning the appeal. It is not expected that
the appellate court would complete its review and issue a decision concerning
the appeal of Judge Tunheim's rulings regarding class certification until
sometime in 2006.

In addition to the class-type claims, as of February 25, 2005, there are 18
individual Silzone(R) cases pending in various federal courts where plaintiffs
are each requesting damages ranging from $10 thousand to $120.5 million and, in
some cases, seeking an unspecified amount. These cases are proceeding in
accordance with the orders issued by Judge Tunheim. There are also 26 individual
state court suits pending as of February 25, 2005 involving 34 patients. The
complaints in these cases each request damages ranging from $50 thousand to $100
thousand and, in some cases, seek an unspecified amount. These state court cases
are proceeding in accordance with the orders issued by the judges in those
matters.

In addition, a lawsuit seeking a class action for all persons residing in the
European Economic Union member jurisdictions who have had a heart valve
replacement and/or repair procedure using a product with Silzone(R) coating has
been filed in Minnesota state court. The complaint seeks damages in an
unspecified amount for the class, and in excess of $50 thousand for the
representative plaintiff individually. The complaint also seeks injunctive
relief in the form of medical monitoring. The Company has filed motions in the
state court seeking to have the claims dismissed. These motions


                                       47



are presently under consideration by the judge handling this and other cases in
Ramsey County, Minnesota.

There are also four class-action cases and one individual case pending against
the Company in Canada. In one such case in Ontario, the court certified that a
class action may proceed involving Silzone(R) patients. The most recent decision
on certification was issued by the Ontario court on January 16, 2004, and the
Company's request for leave to appeal the rulings on certification was rejected.
A second case seeking class action in Ontario has been stayed pending resolution
of the other Ontario action, and the matter seeking class action in British
Columbia has been relatively inactive. A court in the Province of Quebec has
certified a class action.

In the United Kingdom, one case involving one plaintiff is pending as of
February 25, 2005. The Particulars of Claim in that case was served on December
21, 2004. The plaintiff in this case requests damages of approximately $365
thousand.

In Ireland, one case involving one plaintiff is pending as of February 25, 2005.
The complaint in this case was served on December 30, 2004, and seeks an
unspecified amount in damages.

In France, one case involving one plaintiff is pending as of February 25, 2005.
It was initiated by way of an Injunctive Summons to Appear that was served on
November 3, 2004, and requests damages in excess of 3 million Euros.

The Company is not aware of any unasserted claims related to Silzone(R) devices.
Company management believes that the final resolution of the Silzone(R) cases
will take several years. While management reviews the claims that have been
asserted from time to time and periodically engages in discussions about the
resolution of claims with claimants' representatives, management cannot
reasonably estimate at this time the time frame in which any potential
settlements or judgments would be paid out. The Company accrues for contingent
losses when it is probable that a loss has been incurred and the amount can be
reasonably estimated. The Company has recorded an accrual for probable legal
costs that it will incur to defend the various cases involving Silzone(R)
devices, and the Company has recorded a receivable from its product liability
insurance carriers for amounts expected to be recovered (see Note 7). The
Company has not accrued for any amounts associated with probable settlements or
judgments because management cannot reasonably estimate such amounts. However,
management believes that no significant claims will ultimately be allowed to
proceed as class actions in the United States and, therefore, that all
settlements and judgments will be covered under the Company's remaining product
liability insurance coverage (approximately $151.0 million at February 25,
2005), subject to the insurance companies' performance under the policies (see
Note 7 for further discussion on the Company's insurance carriers). As such,
management believes that any costs (the material components of which are
settlements, judgments, legal fees and other related defense costs) not covered
by the Company's product liability insurance policies or existing reserves will
not have a material adverse effect on the Company's statement of financial
position or liquidity, although such costs may be material to the Company's
consolidated results of operations of a future period.

GUIDANT 1996 PATENT LITIGATION: In November 1996, Guidant Corporation (Guidant)
sued the Company alleging that the Company did not have a license to certain
patents controlled by Guidant covering ICD products and alleging that the
Company was infringing those patents. The Company's contention was that it had
obtained a license from Guidant to the patents at issue when it acquired certain
assets of Telectronics in November 1996. In July 2000, an arbitrator rejected
the Company's


                                       48



position, and in May 2001, a federal district court judge also ruled that the
Guidant patent license with Telectronics had not transferred to the Company.

Guidant's suit originally alleged infringement of four patents by the Company.
Guidant later dismissed its claim on one patent and a court ruled that a second
patent was invalid. This determination of invalidity was appealed by Guidant,
and the Court of Appeals upheld the lower court's invalidity determination. In a
jury trial involving the two remaining patents (the `288 and `472 patents), the
jury found that these patents were valid and that the Company did not infringe
the `288 patent. The jury also found that the Company did infringe the `472
patent, though such infringement was not willful. The jury awarded damages of
$140.0 million to Guidant. In post-trial rulings, however, the judge overseeing
the jury trial ruled that the `472 patent was invalid and also was not infringed
by the Company, thereby eliminating the $140.0 million verdict against the
Company. The trial court also made other rulings as part of the post-trial
order, including a ruling that the `288 patent was invalid on several grounds.

In August 2002, Guidant commenced an appeal of certain of the trial judge's
post-trial decisions pertaining to the `288 patent. Guidant did not appeal the
trial court's finding of invalidity and non-infringement of the `472 patent. As
part of its appeal, Guidant requested that the monetary damages awarded by the
jury pertaining to the `472 patent ($140 million) be transferred to the `288
patent infringement claim.

On August 31, 2004, a three judge panel of the Court of Appeals for the Federal
Circuit (CAFC) issued a ruling on Guidant's appeal of the trial court decision
concerning the `288 patent. The CAFC reversed the decision of the trial court
judge that the `288 patent was invalid. The court also ruled that the trial
judge's claim construction of the `288 patent was incorrect and, therefore, the
jury's verdict of non-infringement was set aside. The court also ruled on other
issues that were raised by the parties. The Company's request for re-hearing of
the matter by the panel and the entire CAFC court was rejected. The case was
returned to the District Court in Indiana in November 2004, but the Company
plans to request the U.S. Supreme Court to review certain aspects of the CAFC
decision. It is not expected that the U.S. Supreme Court would rule on this
request until sometime during the second quarter of 2005.

The `288 patent expired in December 2003. Accordingly, the final outcome of the
appeal process cannot involve an injunction precluding the Company from selling
ICD products in the future. Sales of the Company's ICD products which Guidant
asserts infringed the `288 patent were approximately 18% and 16% of the
Company's consolidated net sales during the fiscal years ended December 31, 2003
and 2002, respectively.

The Company has not accrued any amounts for legal settlements or judgments
related to the Guidant 1996 patent litigation. Although the Company believes
that the assertions and claims in these matters are without merit, potential
losses arising from any legal settlements or judgments are possible, but not
estimable, at this time. The range of such losses could be material to the
operations, financial position and liquidity of the Company.

GUIDANT 2004 PATENT LITIGATION: In February 2004, Guidant sued the Company in
federal court in Delaware, alleging that the Company's Epic(TM) HF ICD,
Atlas(R)+ HF ICD and Frontier(TM) device infringe U.S Patent No. RE 38,119E (the
`119 patent). Guidant also sued the Company in February 2004 in federal court in
Minnesota alleging that the Company's QuickSite(TM) 1056K pacing lead infringes
U.S. Patent No. 5,755,766 (the `766 patent). Guidant is seeking an injunction
against the manufacture and sale of these devices by the Company in the United
States and compensation for


                                       49



what it claims are infringing sales of these products up through the effective
date of the injunction. At the end of the second quarter 2004, the Company
received FDA approval to market these devices in the United States. The Company
has not submitted a substantive response to Guidant's claims at this time.
Another competitor of the Company, Medtronic, Inc., which has a license to the
`119 patent, is contending in a separate lawsuit with Guidant that the `119
patent is invalid.

The Company has not accrued any amounts for legal settlements or judgments
related to the Guidant 2004 patent litigation. Potential losses arising from any
legal settlements or judgments are possible, but not estimable, at this time.
The range of such losses could be material to the operations, financial position
and liquidity of the Company.

SYMMETRY(TM) LITIGATION: As of February 25, 2005, there are sixteen cases in the
United States pending against the Company which allege that its Symmetry(TM)
Bypass System Aortic Connector (Symmetry(TM) device) caused bodily injury or
might cause bodily injury. In addition, a number of persons have made a claim
against the Company involving the Symmetry(TM) device without filing a lawsuit.
The first lawsuit involving the Symmetry(TM) device was filed against the
Company on August 5, 2003, and the most recently initiated case was served upon
the Company on September 24, 2004. Each of the complaints in these cases request
damages ranging from $50 thousand to $100 thousand and, in some cases, seeks an
unspecified amount. Four of the sixteen cases are seeking class-action status.
One of the cases seeking class-action status has been dismissed but the
dismissal is being appealed by the plaintiff. In a second case seeking class
action status, a Magistrate Judge has recommended that the matter not proceed as
a class-action, and the parties are presently awaiting the Court to review the
Magistrate's decision. A third case seeking class action status has been
indefinitely stayed by the Court, and is presently inactive. The Company
believes that the plaintiffs in those cases seeking class-action status seek or
will seek damages for injuries and monitoring costs.

The Company's Symmetry(TM) device was cleared through a 510(K) submission to the
FDA, and therefore, is not eligible for the defense under the doctrine of
federal preemption that such suits are prohibited. Given the Company's
self-insured retention levels under its product liability insurance policies,
the Company expects that it will be solely responsible for these lawsuits,
including any costs of defense, settlements and judgments. Company management
believes that class-action status is not appropriate for the claims asserted
based on the facts and case law.

During the third quarter of 2004, the number of lawsuits involving the
Symmetry(TM) device increased, and the number of persons asserting claims
outside of litigation increased as well. With this background, the Company
determined that it was probable that future legal fees to defend the cases will
be incurred and the amount of such fees was reasonably estimable. As a result,
the Company recorded a pretax charge of $21.0 million in the third quarter of
2004 to accrue these costs.

No lawsuits involving the product were initiated against the Company during the
fourth quarter of 2004, and the number of claims asserted outside of the
litigation has been minimal since the third quarter of 2004.

Potential losses arising from settlements or judgments are possible, but not
estimable, at this time. The range of such losses could be material to the
operations, financial position and liquidity of the Company. However, management
believes that no significant claims will ultimately be allowed to proceed as
class actions in the United States.


                                       50



Management currently believes that any costs (the material components of which
are settlements, judgments, legal fees and other related defense costs) not
covered by its reserves will not have a material adverse effect on the Company's
statement of financial position or liquidity, although such costs may be
material to the Company's consolidated results of operations of a future period.

OTHER LITIGATION MATTERS: The Company is involved in various other product
liability lawsuits, claims and proceedings that arise in the ordinary course of
business.

OTHER CONTINGENCIES: The Company has the option to make, or ProRhythm can
require an additional $12.5 million of investment in ProRhythm upon completion
of specific clinical and regulatory milestones (see Note 2 for further
discussion on ProRhythm). Under the terms of the IBI purchase agreement (see
Note 2 for futher discussion on IBI) , the Company, is obligated to pay
contingent consideration of up to $13.0 million to the non-St. Jude Medical
shareholders if IBI receives approval by certain specified dates in 2005 and
2006 from the FDA of certain EP catheter ablation systems currently in
development. The Company also has contingent commitments to acquire various
businesses involved in the distribution of its products that could total
approximately $54 million in aggregate during 2004 to 2010, provided that
certain contingencies are satisfied. The purchase prices of the individual
businesses range from approximately $0.4 million to $5.8 million.

NOTE 6--SHAREHOLDERS' EQUITY

CAPITAL STOCK: The Company has 500,000,000 authorized shares of $0.10 par value
per share common stock. The Company also has 25,000,000 authorized shares of
$1.00 par value per share preferred stock. The Company has designated 1,100,000
of the authorized preferred shares as a Series B Junior Preferred Stock for its
shareholder rights plan (see SHAREHOLDERS' RIGHTS PLAN below for further
discussion). There were no shares of preferred stock issued or outstanding
during 2004, 2003 or 2002.

STOCK SPLITS: On October 11, 2004 and May 16, 2002, the Company's Board of
Directors declared two-for-one stock splits effected in the forms of a 100%
stock dividend payable on November 22, 2004 and June 28, 2002 to shareholders of
record on November 1, 2004 and June 10, 2002, respectively. Net earnings per
share, shares outstanding and weighted average shares outstanding have been
restated to reflect the stock dividend.

SHARE REPURCHASE: On October 11, 2004, the Company's Board of Directors
authorized a share repurchase program of up to $300 million of the Company's
outstanding common stock. The share repurchases can be made through transactions
in the open market and/or privately negotiated transactions, including the use
of options, futures, swaps and accelerated share repurchase contracts. This
authorization expires on December 31, 2006. The Company did not repurchase any
of its common stock during 2004.

On July 22, 2003, the Company's Board of Directors authorized a share repurchase
program of up to $500 million of the Company's outstanding common stock. On
August 7, 2003, the Company repurchased approximately 18.5 million shares, or
about five percent of its outstanding common stock, for $500 million under a
privately-negotiated transaction with an investment bank. The investment bank
borrowed the 18.5 million shares to complete the transaction and purchased
replacement shares in the open market over a three month period which ended on
November 7, 2003. The Company entered into a related accelerated stock buyback
contract with the same investment bank which, in return for a separate payment
to the investment bank, included a price-protection feature. The
price-protection feature provided that if the investment bank's per share
purchase price of


                                       51



the replacement shares was lower than the initial share purchase price for the
18.5 million shares ($27.03), then the investment bank would, at the Company's
election, make a payment or deliver additional shares to the Company in the
amount of the difference between the initial share purchase price and their
replacement price, subject to a maximum amount. In addition, the
price-protection feature provided that if the investment bank's replacement
price was greater than the initial share purchase price, the Company would not
be required to make any further payments.

The Company recorded the cost of the shares repurchased and the payment for the
price-protection feature, totaling $520 million, as a reduction of shareholders'
equity on the date of share repurchase (August 7, 2003). On November 7, 2003,
the investment bank completed its purchase of replacement shares. The market
price of the Company's shares during this replacement period exceeded the
initial purchase price, resulting in no additional exchange of consideration.

SHAREHOLDERS' RIGHTS PLAN: The Company has a shareholder rights plan that
entitles shareholders to purchase one-tenth of a share of Series B Junior
Preferred Stock at a stated price, or to purchase either the Company's shares or
shares of an acquiring entity at half their market value, upon the occurrence of
certain events which result in a change in control, as defined by the Plan. The
rights related to this plan expire in 2007.

EMPLOYEE STOCK PURCHASE SAVINGS PLAN: The Company's employee stock purchase
savings plan allows participating employees to purchase, through payroll
deductions, newly issued shares of the Company's common stock at 85% of the fair
market value at specified dates. Employees purchased 0.6 million, 0.6 million
and 0.4 million shares in 2004, 2003 and 2002, respectively, under this plan. At
December 31, 2004, 1.8 million shares of additional common stock were available
for purchase under the plan.

STOCK COMPENSATION PLANS: The Company's stock compensation plans provide for the
issuance of stock-based awards, such as restricted stock or stock options, to
directors, officers, employees and consultants. Stock option awards under these
plans generally have an eight to ten year life, an exercise price equal to the
fair market value on the date of grant and a four-year vesting term. Under the
Company's current stock plans, a majority of the stock option awards have an
eight-year life. At December 31, 2004, the Company had 5.5 million shares of
common stock available for grant under these plans.


                                       52



Stock option transactions under these plans during each of the three years in
the period ended December 31, 2004 are as follows:

                                              OPTIONS      WEIGHTED AVERAGE
                                          OUTSTANDING        EXERCISE PRICE
- ----------------------------------------------------------------------------
Balance at January 1, 2002                 57,366,004               $ 11.23
      Granted                              10,082,680                 17.80
      Canceled                             (1,432,904)                13.45
      Exercised                            (6,625,936)                 8.33
- ----------------------------------------------------------------------------
Balance at December 31, 2002               59,389,844                 12.61
      Granted                               9,104,672                 30.02
      Canceled                             (1,442,492)                15.77
      Exercised                            (7,925,730)                10.15
- ----------------------------------------------------------------------------
Balance at December 31, 2003               59,126,294                 15.55
      Granted                               5,136,877                 40.88
      Canceled                             (2,086,285)                10.90
      Exercised                           (12,157,626)                19.51
- ----------------------------------------------------------------------------
Balance at December 31, 2004               50,019,260               $ 19.11
============================================================================

Stock options totaling 30.7 million, 32.6 million and 30.8 million were
exercisable at December 31, 2004, 2003 and 2002, respectively.















                                       53



The following tables summarize information concerning currently outstanding and
exercisable stock options at December 31, 2004:



                                                                                  OPTIONS OUTSTANDING
- ------------------------------------------------------------------------------------------------------
                            WEIGHTED AVERAGE
             RANGES OF                NUMBER             REMAINING CONTRAC-          WEIGHTED AVERAGE
       EXERCISE PRICES            OUSTANDING               TUAL LIFE (YEARS)           EXERCISE PRICE
- ------------------------------------------------------------------------------------------------------
                                                                                      
        $  5.02 - 7.84             9,906,419                            2.8                    $ 7.50
          7.85 - 13.80             9,860,938                            4.0                     12.22
         13.81 - 18.25             7,890,530                            5.8                     17.12
         18.26 - 30.42             9,811,848                            5.3                     19.04
         30.43 - 41.84            12,549,525                            7.4                     35.01
- ------------------------------------------------------------------------------------------------------
                                  50,019,260                            5.2                    $19.11
======================================================================================================


                                                                                  OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------------------------
             RANGES OF                NUMBER                                         WEIGHTED AVERAGE
       EXERCISE PRICES           EXERCISABLE                                           EXERCISE PRICE
- ------------------------------------------------------------------------------------------------------
        $  5.02 - 7.84             9,832,259                                                   $ 7.50
          7.85 - 13.80             9,176,688                                                    12.33
         13.81 - 18.25             3,636,708                                                    17.14
         18.26 - 30.42             6,094,015                                                    18.69
         30.43 - 41.84             1,937,177                                                    31.09
- ------------------------------------------------------------------------------------------------------
                                  30,676,847                                                   $13.80
======================================================================================================


The Company also granted 29,024 shares of restricted common stock during the
three years ended December 31, 2004, under the Company's stock compensation
plans. The value of restricted stock awards as of the date of grant is charged
to expense over the periods during which the restrictions lapse.

NOTE 7--PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT AND SPECIAL CHARGES

PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES

IRVINE BIOMEDICAL INC.: In October 2004, the Company acquired the remaining
capital stock of IBI (see further discussion in Note 2.) At the date of
acquisition, $9.1 million of the purchase price was expensed for IPR&D related
to therapeutic catheters that had not yet reached technological feasibility and
had no future alternative use. These devices are part of an ablation system in
which the catheters are connected to a generator which delivers radiofrequency
or ultrasound energy through the catheter to create lesions through ablation of
cardiac tissue. The acquisition of IBI is expected to further enhance the
Company's portfolio of products used to treat heart rhythm disorders. The
Company incurred $0.3 million in costs in 2004 and expects to incur an
additional $3.4 million to bring these products to


                                       54



commercialization in various markets. These costs are being funded by internally
generated cash flows.

2004 SPECIAL CHARGES

EDWARDS LIFESCIENCES CORPORATION: In December 2004, the Company settled a patent
infringement lawsuit with Edwards LifeSciences Corporation and recorded a
pre-tax charge of $5.5 million.

SYMMETRY BYPASS SYSTEM AORTIC CONNECTOR PRODUCT LINE DISCONTINUANCE: On
September 23, 2004, management committed the Company to a plan to discontinue
developing, manufacturing, marketing and selling its Symmetry(TM) device. The
decision to discontinue developing, manufacturing, marketing and selling the
Symmetry device was primarily based on losses incurred related to the product
over the previous three years and the prospect of ongoing operating losses,
resulting from a decrease in the number of coronary artery bypass graft surgery
cases and an apparent slow down in the adoption of off-pump procedures for which
the Symmetry(TM) device was developed.

In conjunction with the plan, the Company recorded a pretax charge in the third
quarter of 2004 of $14.4 million. The charge was comprised of $4.4 million of
inventory write-offs, $4.1 million of fixed asset write-offs, $3.6 million of
sales returns, $1.3 million of contract termination and other costs, primarily
related to a leased facility, and $1.0 million in workforce reduction costs.
These activities have been completed and all payments required in connection
with the charge are expected to be made by June 30, 2005. The portion of the
charges that are expected to result in future cash expenditures is estimated to
be $2.9 million. In addition, the Company expects to incur additional future
expense for related matters totaling approximately $6.5 million in periods prior
to 2007. A summary of the activity related to the remaining accruals for
customer returns, contract termination, and workforce reduction costs during the
year ended December 31, 2004 is as follows (in thousands):



                                              CUSTOMER             CONTRACT              WORKFORCE
                                           RETURNS AND      TERMINATION AND          REDUCTION AND
                                         RELATED COSTS        RELATED COSTS          RELATED COSTS            TOTAL
- --------------------------------------------------------------------------------------------------------------------
                                                                                                
Accrual for Product Discontinuance             $ 3,600              $ 1,308                $ 1,002          $ 5,910
Cash payments or credits issued                 (1,356)              (1,140)                  (428)          (2,924)
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004                   $ 2,244              $   168                $   574          $ 2,986
====================================================================================================================


SYMMETRY BYPASS SYSTEM AORTIC CONNECTOR LITIGATION: In addition, as discussed in
Note 5, there are sixteen legal cases in the United States pending as of
February 25, 2005, alleging that the Company's Symmetry(TM) device caused bodily
injury or might cause bodily injury. Four of these matters seek class-action
status (one of these has already been dismissed, but is now on appeal, another
is presently stayed). There are also a number of persons who have made a claim
against the Company involving the Symmetry(TM) device without filing a lawsuit.
During the third quarter of 2004, the number of cases increased, and the number
of persons asserting claims outside of litigation increased as well. With this
background, the Company determined that it was probable that a liability for
future legal fees to defend the cases had been incurred and the amount of such
fees was reasonably estimable. As a result, the Company recorded a pre-tax
charge in the third quarter of 2004 of $21.0 million to reflect this liability.
No lawsuits involving the product were initiated against the Company during the
fourth quarter of 2004, and the number of claims asserted outside of the
litigation has been minimal since the third quarter of 2004.


                                       55



SILZONE(R) SPECIAL CHARGES

On January 21, 2000, the Company initiated a worldwide voluntary recall of all
field inventories of heart valve replacement and repair products incorporating
Silzone(R) coating on the sewing cuff fabric. The Company concluded that it
would no longer utilize Silzone(R) coating. As a result of the voluntary recall
and product discontinuance, the Company recorded a special charge totaling $26.1
million during the first quarter of 2000. The $26.1 million special charge
consisted of asset write-downs ($9.5 million), legal and patient follow-up costs
($14.4 million) and customer returns and related costs ($2.2 million).

The $9.5 million of asset write-downs related to inventory write-offs associated
with the physical scrapping of inventory with Silzone(R) coating ($8.6 million),
and to the write-off of a prepaid license asset and related costs associated
with the Silzone(R) coating technology ($0.9 million). The $14.4 million of
legal and patient follow-up costs related to the Company's product liability
insurance deductible ($3.5 million) and patient follow-up costs ($10.9 million)
related to contractual and future monitoring activities directly related to the
product recall and discontinuance. The $2.2 million of customer returns and
related costs represented costs associated with the return of customer-owned
Silzone(R) inventory.

In the second quarter of 2002, the Company determined that the Silzone(R)
reserves should be increased by $11.0 million as a result of difficulties in
obtaining certain reimbursements from the Company's insurance carriers under its
product liability insurance policies ($4.6 million), an increase in management's
estimate of the costs associated with future patient follow-up as a result of
extending the time period in which it planned to perform patient follow-up
activities ($5.8 million) and an increase in other related costs ($0.6 million).

The Company's product liability insurance coverage for Silzone(R) claims
consists of a number of policies with different carriers. During 2002, Company
management observed a trend where various insurance companies were not
reimbursing the Company or outside legal counsel for a variety of costs
incurred, which the Company believed should be paid under the product liability
insurance policies. These insurance companies were either refusing to pay the
claims or had delayed providing an explanation for non-payment for an extended
period of time. Although the Company believes it has legal recourse against
these insurance carriers for the costs they are refusing to pay, the additional
costs the Company would need to incur to resolve these disputes may exceed the
amount the Company would recover. As a result of these developments, the Company
increased the Silzone(R) reserves by $4.6 million in the second quarter of 2002,
which represented the existing disputed costs already incurred at that time plus
the anticipated future costs where the Company expects similar resistance from
the insurance companies on reimbursement.

During the fourth quarter of 2003, the Company reclassified $15.7 million of
receivables from the Company's insurance carriers recorded in the Silzone(R)
special charge accrual to other current assets. This amount related to probable
future legal costs associated with the Silzone(R) litigation.







                                       56



A summary of the legal and monitoring costs and customer returns and related
costs activity is as follows (in thousands):



                                             LEGAL AND                CUSTOMER
                                            MONITORING             RETURNS AND
                                                 COSTS           RELATED COSTS             TOTAL
- -------------------------------------------------------------------------------------------------
                                                                               
Initial expense and accrual in 2000           $ 14,397                 $ 2,239          $ 16,636
Cash payments                                   (5,955)                 (2,239)           (8,194)
- -------------------------------------------------------------------------------------------------
Balance at December 31, 2000                     8,442                      --             8,442

Cash payments                                   (3,042)                     --            (3,042)
- -------------------------------------------------------------------------------------------------
Balance at December 31, 2001                     5,400                      --             5,400

Additional expense                              10,433                     567            11,000
Cash payments                                   (2,442)                    (59)           (2,501)
- -------------------------------------------------------------------------------------------------
Balance at December 31, 2002                    13,391                     508            13,899

Cash payments                                   (1,206)                    (22)           (1,228)
Reclassification of legal accruals              15,721                       -            15,721
- -------------------------------------------------------------------------------------------------
Balance at December 31, 2003                    27,906                     486            28,392

Cash payments                                   (1,471)                   (305)           (1,776)
- -------------------------------------------------------------------------------------------------
Balance at December 31, 2004                  $ 26,435                 $   181          $ 26,616
=================================================================================================




The Company's product liability insurance for Silzone(R) claims consists of a
number of layers, each of which is covered by one or more insurance companies.
The Company's present layer of insurance, which is a $30 million layer of which
approximately $11 million has been reimbursed as of February 25, 2005, is
covered by Lumberman's Mutual Casualty Insurance, a unit of the Kemper Insurance
Companies (collectively referred to as Kemper). Kemper's credit rating by A.M.
Best has been downgraded to a "D" (poor). Kemper is currently in "run off,"
which means that it is not issuing new policies and is, therefore, not
generating any new revenue that could be used to cover claims made under
previously-issued policies. In the event Kemper is unable to pay part or all of
the claims directed to it, the Company believes the other insurance carriers in
its program will take the position that the Company will be directly liable for
any claims and costs that Kemper is unable to pay, and that insurance carriers
at policy layers following Kemper's layer will not provide coverage for Kemper's
layer. Kemper also provides part of the coverage for Silzone(R) claims in the
Company's final layer of insurance ($20 million of the final $50 million layer).

It is possible that Silzone(R) costs and expenses will reach the limit of one or
both of the Kemper layers of insurance coverage, and it is possible that Kemper
will be unable to meet its obligations to the Company. If this were to happen,
the Company could incur a loss of up to approximately $39 million as of February
25, 2005. The Company has not accrued for any such losses as potential losses
are possible, but not estimable, at this time.







                                       57



NOTE 8--OTHER INCOME (EXPENSE)

Other income (expense) consists of the following (in thousands):

                                           2004           2003            2002
- -------------------------------------------------------------------------------
Equity method losses                  $  (2,091)      $ (3,530)      $      --
Interest income                          10,093          7,031           5,481
Interest expense                         (4,810)        (3,746)         (1,754)
Other                                    (1,958)          (593)           (324)
- -------------------------------------------------------------------------------
Other income (expense)                $   1,234       $   (838)      $   3,403
===============================================================================

NOTE 9--INCOME TAXES

The Company's earnings before income taxes were generated from its U.S. and
international operations as follows (in thousands):

                                           2004            2003           2002
- -------------------------------------------------------------------------------
U.S.                                  $ 327,617       $ 281,684      $ 270,595
International                           209,575         173,423        102,763
- -------------------------------------------------------------------------------
Earnings before income taxes          $ 537,192       $ 455,107      $ 373,358
===============================================================================

Income tax expense consists of the following (in thousands):

                                           2004            2003           2002
- -------------------------------------------------------------------------------
Current:
      U.S. federal                    $  96,156       $  55,823      $  48,459
      U.S. state and other                9,814           4,213          4,732
      International                      30,628          25,146          6,187
- -------------------------------------------------------------------------------
      Total current                     136,598          85,182         59,378
Deferred                                 (9,340)         33,146         37,695
- -------------------------------------------------------------------------------
Income tax expense                    $ 127,258       $ 118,328      $  97,073
===============================================================================

The tax effects of the cumulative temporary differences between the tax bases of
assets and liabilities and their carrying amounts for financial statement
purposes are as follows (in thousands):









                                       58


                                                          2004           2003
- ------------------------------------------------------------------------------
Deferred income tax assets:
  Net operating loss carryforwards                    $ 22,442        $ 3,088
  Tax credit carryforwards                              51,104         20,272
  Inventories                                           58,408         53,395
  Accrued liabilities and other                             --         16,801
- ------------------------------------------------------------------------------
    Deferred income tax assets                         131,954         93,556
- ------------------------------------------------------------------------------
Deferred income tax liabilities:
  Unrealized gain on available-for-sale securities      (9,816)        (6,782)
  Property, plant and equipment                        (22,835)       (30,955)
  Intangible assets                                    (61,287)       (33,162)
  Accrued liabilities and other                         (1,820)             -
- ------------------------------------------------------------------------------
    Deferred income tax liabilities                    (95,758)       (70,899)
- ------------------------------------------------------------------------------
Net deferred income tax asset                         $ 36,196       $ 22,657
==============================================================================

The increase in the Company's current deferred income taxes during 2004 was due
primarily to an increase in net operating loss and tax credit carryforwards from
business acquisitions made during 2004. The change in the Company's long-term
deferred income tax asset/liability during 2004 was due primarily to the
acquisitions of IBI and Epicor. The Company has not recorded any valuation
allowance for its deferred tax assets as of December 31, 2004 or 2003 as the
Company believes that its deferred tax assets, including the net operating loss
and tax credit carryforwards, will be fully realized based upon its estimates of
future taxable income.

A reconciliation of the U.S. federal statutory income tax rate to the Company's
effective income tax rate is as follows (in thousands):



                                                              2004            2003            2002
- ---------------------------------------------------------------------------------------------------
                                                                                
Income tax expense at the U.S. federal
  statutory rate of 35%                                  $ 188,017       $ 159,287       $ 130,675
U.S. state income taxes, net of federal tax benefit         12,917          12,427           8,378
International taxes at lower rates                         (40,409)        (39,032)        (29,972)
Tax benefits from extraterritorial income exclusion         (7,945)         (7,173)         (3,675)
Research and development credits                           (14,031)        (11,013)         (9,467)
Non-deductible purchased in-process research
  and development charges                                    3,185              --              --
Finalization of tax examination                            (13,982)             --              --
Other                                                         (494)          3,832           1,134
- ---------------------------------------------------------------------------------------------------
Income tax expense                                       $ 127,258       $ 118,328        $ 97,073
===================================================================================================


The 2004 effective income tax rate includes the reversal of approximately $14.0
million previously recorded tax expense due to the finalization of certain tax
examinations.

The Company's effective income tax rate is favorably affected by Puerto Rican
tax exemption grants which result in Puerto Rico earnings being partially tax
exempt through the year 2012.

At December 31, 2004, the Company has $59.6 million of U.S. federal net
operating loss carryforwards and $20.6 million of U.S. tax credit carryforwards
that will expire from 2005 through


                                       59



2024 if not utilized. The Company also has state net operating loss
carryforwards of $26.4 million that will expire from 2006 through 2013 and tax
credit carryforwards of $37.6 million that have an unlimited carryforward
period. These amounts are subject to annual usage limitations. The Company's net
operating loss carryforwards arose primarily from acquisitions. The Company also
has alternative minimum tax credit carryforwards of $5.8 million that have an
unlimited carryforward period.

The Company has not recorded U.S. deferred income taxes on $733 million of its
non-U.S. subsidiaries' undistributed earnings, because such amounts are intended
to be reinvested outside the United States indefinitely.

NOTE 10--RETIREMENT PLANS

DEFINED CONTRIBUTION PLANS: The Company has a 401(k) profit sharing plan that
provides retirement benefits to substantially all full-time U.S. employees.
Eligible employees may contribute a percentage of their annual compensation,
subject to Internal Revenue Service limitations, with the Company matching a
portion of the employees' contributions. The Company also contributes a portion
of its earnings to the plan based upon Company performance. The Company's
matching and profit sharing contributions are at the discretion of the Company's
Board of Directors. In addition, the Company has defined contribution programs
for employees in certain countries outside the United States. Company
contributions under all defined contribution plans totaled $27.7 million, $24.0
million and $18.8 million in 2004, 2003 and 2002, respectively.

DEFINED BENEFIT PLANS: The Company has funded and unfunded defined benefit plans
for employees in certain countries outside the United States. The Company had an
accrued liability totaling $17.1 million and $16.0 million at December 31, 2004
and 2003, respectively, which approximated the actuarially calculated unfunded
liability. The related pension expense was not material.

NOTE 11--SEGMENT AND GEOGRAPHIC INFORMATION

SEGMENT INFORMATION: The Company develops, manufactures and distributes
cardiovascular medical devices for the global cardiac rhythm management (CRM),
cardiac surgery (CS) and cardiology and vascular access (C/VA) therapy areas.
The Company has three operating segments, Cardiac Rhythm Management (CRM),
Cardiac Surgery (CS) and Daig, which focus on the development and manufacture of
products for the three therapy areas. The primary products produced by each
segment are: CRM - pacemaker and ICD systems; CS - mechanical and tissue heart
valves; Daig - electrophysiology catheters, vascular closure devices and other
cardiology and vascular access products. The Company has aggregated the CRM and
CS segments into one reportable segment based primarily upon their similar
operational and economic characteristics.

The Company's reportable segments include end customer revenues from the sale of
products they each develop and manufacture. The costs included in each of the
reportable segments' operating results include the direct costs of the products
sold to end customers and operating expenses managed by each of the segments.
Certain costs of goods sold and operating expenses managed by the Company's
selling and corporate functions are not included in segment operating profit.


                                       60



The following table presents certain financial information about the Company's
reportable segments (in thousands):



                                                 CRM/CS              DAIG              OTHER            TOTAL
- --------------------------------------------------------------------------------------------------------------
                                                                                       
FISCAL YEAR ENDED DECEMBER 31, 2004
  Net sales                                 $ 1,729,862         $ 470,720         $   93,591       $2,294,173
  Operating profit (a)                        1,015,621           254,270           (733,933)         535,958
  Depreciation and
    amortization expense                         39,705             9,933             36,117           85,755
  Total assets (b)(c)                           877,448           156,972          2,196,327        3,230,747
- --------------------------------------------------------------------------------------------------------------

FISCAL YEAR ENDED DECEMBER 31, 2003
  Net sales                                 $ 1,499,425         $ 366,433         $   66,656       $1,932,514
  Operating profit (a)                          873,904           202,007           (619,966)         455,945
  Depreciation and
    amortization expense                         29,836             8,307             38,540           76,683
  Total assets (b)(c)                           639,724           147,270          1,766,488        2,553,482
- --------------------------------------------------------------------------------------------------------------

FISCAL YEAR ENDED DECEMBER 31, 2002
  Net sales                                 $ 1,305,750         $ 284,179         $       --       $1,589,929
  Operating profit (a)                          713,341           149,592           (492,978)         369,955
  Depreciation and
    amortization expense                         33,819             7,158             33,943           74,920
  Total assets (b)(c)                           723,414           134,610          1,093,355        1,951,379
==============================================================================================================


     (a)  Other operating profit includes certain costs of goods sold and
          operating expense managed by the Company's selling and corporate
          functions. In fiscal year 2004, the Company recorded $40.9 million of
          special charges that are included in the Other operating profit.
          Additionally, the Company recorded $9.1 million of purchased
          in-process research and development in conjunction with the IBI
          acquisition that is included in the Daig operating profit.
     (b)  Other total assets include the assets managed by the Company's selling
          and corporate functions, including end customer receivables,
          inventory, corporate cash and equivalents and deferred income taxes.
     (c)  The Company does not compile expenditures for long-lived assets by
          segment and, therefore, has not included this information as it is
          impracticable to do so.

Net sales by class of similar products were as follows (in thousands):

NET SALES                                2004            2003             2002
- -------------------------------------------------------------------------------
Cardiac rhythm management         $ 1,630,610     $ 1,365,212      $ 1,147,489
Cardiac surgery                       274,979         270,933          250,957
Cardiology and vascular access        388,584         296,369          191,483
- -------------------------------------------------------------------------------
                                  $ 2,294,173     $ 1,932,514      $ 1,589,929
===============================================================================

GEOGRAPHIC INFORMATION: The following tables present certain geographical
financial information (in thousands):


                                       61


NET SALES (A)                       2004              2003               2002
- ------------------------------------------------------------------------------
  United States              $ 1,264,756       $ 1,129,055        $ 1,042,766
  International
     Europe                      577,058           465,369            347,936
     Japan                       267,723           207,431             95,813
     Other (B)                   184,636           130,659            103,414
- ------------------------------------------------------------------------------
                               1,029,417           803,459            547,163
- ------------------------------------------------------------------------------
                             $ 2,294,173       $ 1,932,514        $ 1,589,929
==============================================================================

LONG-LIVED ASSETS (C)               2004              2003               2002
- ------------------------------------------------------------------------------
  United States              $ 1,042,690       $   744,445        $   674,119
  International
     Europe                      102,172            96,520             88,194
     Japan                       163,736           152,772                267
     Other                        74,356            70,020             62,213
- ------------------------------------------------------------------------------
                                 340,264           319,312            150,674
- ------------------------------------------------------------------------------
                             $ 1,382,954       $ 1,063,757        $   824,793
==============================================================================

(A)  NET SALES ARE ATTRIBUTED TO GEOGRAPHIES BASED ON LOCATION OF THE CUSTOMER.
(B)  NO ONE GEOGRAPHIC MARKET IS GREATER THAN 5% OF CONSOLIDATED NET SALES.
(C)  LONG-LIVED ASSETS EXCLUDE DEFERRED INCOME TAXES.

NOTE 12--QUARTERLY FINANCIAL DATA (UNAUDITED)

Quarterly financial data for 2004 and 2003 is as follows (in thousands, except
per share amounts):



                                                                     QUARTER
                                             FIRST           SECOND             THIRD           FOURTH
- -----------------------------------------------------------------------------------------------------------
                                                                                 
FISCAL YEAR ENDED DECEMBER 31, 2004:
     Net sales                           $ 548,576        $ 556,602         $ 578,319        $ 610,676
     Gross profit                          384,331          395,151           400,328          435,313
     Net earnings                           95,154           98,843            91,178 (a)      124,759 (b)
     Basic net earnings per share             0.27             0.28              0.26             0.35
     Diluted net earnings per share         $ 0.26           $ 0.27            $ 0.25           $ 0.33

FISCAL YEAR ENDED DECEMBER 31, 2003:
     Net sales                           $ 441,384        $ 495,093         $ 477,454        $ 518,583
     Gross profit                          301,920          333,793           330,741          362,969
     Net earnings                           79,987           80,333            84,136           92,323
     Basic net earnings per share             0.22             0.22              0.24             0.27
     Diluted net earnings per share         $ 0.21           $ 0.21            $ 0.23           $ 0.25
===========================================================================================================


(a)  INCLUDES SPECIAL CHARGES OF $21.9 MILLION, NET OF TAXES, RELATING TO THE
     DISCONTINUANCE OF SYMMETRY(TM) BYPASS AORTIC CONNECTOR PRODUCT LINE AND
     SYMMETRY(TM) BYPASS AORTIC CONNECTOR LITIGATION.

(b)  INCLUDES $9.1 MILLION CHARGE FOR PURCHASED IN PROCESS RESEARCH AND
     DEVELOPMENT IN CONJUNCTION WITH THE IRVINE BIOMEDICAL, INC. ACQUISITION, A
     SPECIAL CHARGE RELATED TO SETTLEMENT OF A PATENT INFRINGEMENT LAWSUIT WITH
     EDWARDS LIFESCIENCES CORPORATION OF $3.4 MILLION, NET OF TAXES, AND THE
     REVERSAL OF $14.0 MILLION OF PREVIOUSLY RECORDED INCOME TAX EXPENSE DUE TO
     THE FINALIZATION OF CERTAIN TAX EXAMINATIONS.


                                       62



FIVE-YEAR SUMMARY FINANCIAL DATA
(In thousands, except per share amounts)



                                                 2004(A)             2003        2002 (B)        2001 (C)         2000 (D)
- ---------------------------------------------------------------------------------------------------------------------------
                                                                                                
SUMMARY OF OPERATIONS FOR THE FISCAL YEAR:
Net sales                                    $ 2,294,173      $ 1,932,514     $ 1,589,929     $ 1,347,356      $ 1,178,806
Gross profit                                 $ 1,615,123      $ 1,329,423     $ 1,083,983     $   888,197      $   787,657
    Percent of net sales                            70.4%            68.8%           68.2%           65.9%            66.8%
Operating profit                             $   535,958      $   455,945     $   369,955     $   235,816      $   202,359
    Percent of net sales                            23.4%            23.6%           23.3%           17.5%            17.2%
Net earnings                                 $   409,934      $   336,779     $   276,285     $   172,592      $   129,094
    Percent of net sales                            17.9%            17.4%           17.4%           12.8%            11.0%
Diluted net earnings per share               $      1.10      $      0.91     $      0.75     $      0.49      $      0.38
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION AT YEAR END:
Cash and equivalents                         $   688,040      $   461,253     $   401,860     $   148,335      $   50,439
Working capital (E)                            1,257,824          982,022         739,665         475,692          388,322
Total assets                                   3,230,747        2,553,482       1,951,379       1,628,727        1,532,716
Long-term debt                                   234,865          351,813              --         123,128          294,500
Shareholders' equity                         $ 2,333,928      $ 1,601,635     $ 1,576,727     $ 1,183,745      $   940,849
- ---------------------------------------------------------------------------------------------------------------------------
OTHER DATA:
Diluted weighted average
    shares outstanding                           370,992          370,753         366,004         357,534          343,268
===========================================================================================================================


FISCAL YEAR 2003 CONSISTED OF 53 WEEKS. ALL OTHER FISCAL YEARS NOTED ABOVE
CONSISTED OF 52 WEEKS. THE COMPANY DID NOT DECLARE OR PAY ANY CASH DIVIDENDS
DURING 2000 THROUGH 2004.

(A)  RESULTS FOR 2004 INCLUDE PRE-TAX $35.4 MILLION SPECIAL CHARGES RELATING TO
     THE DISCONTINUANCE OF SYMMETRY(TM) BYPASS AORTIC CONNECTOR PRODUCT LINE AND
     SYMMETRY(TM) BYPASS AORTIC CONNECTOR LITIGATION. ADDITIONALLY, THE COMPANY
     RECORDED $9.1 MILLION OF PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT IN
     CONJUNCTION WITH THE ACQUISITION OF IBI AND A PRE-TAX $5.5 MILLION CHARGE
     RESULTING FROM THE SETTLEMENT OF CERTAIN PATENT INFRINGEMENT LITIGATION.
     ALSO, THE COMPANY RECORDED THE REVERSAL OF $14.0 MILLION OF PREVIOUSLY
     RECORDED INCOME TAX EXPENSE DUE TO THE FINALIZATION OF CERTAIN TAX
     EXAMINATIONSS. THE IMPACT OF THESE ITEMS ON 2004 NET EARNINGS WAS $20.5
     MILLION, OR $0.06 PER DILUTED SHARE.

(B)  RESULTS FOR 2002 INCLUDE A CASH RECEIPT OF $18.5 MILLION RELATING TO THE
     SETTLEMENT OF CERTAIN PATENT LITIGATION, WHICH WAS RECORDED AS A REDUCTION
     OF SG&A EXPENSE. ALSO, THE COMPANY RECORDED IN SG&A AN $11 MILLION CHARGE
     TO INCREASE THE RESERVE FOR EXPENSES RELATED TO THE SILZONE(R) RECALL AND A
     $7.5 MILLION DISCRETIONARY CONTRIBUTION TO THE COMPANY'S CHARITABLE
     FOUNDATION, THE ST. JUDE MEDICAL FOUNDATION. IN THE AGGREGATE THERE WAS NO
     IMPACT OF THESE ITEMS ON 2002 NET EARNINGS

(C)  RESULTS FOR 2001 INCLUDE A $32.8 MILLION SPECIAL CHARGE AND PURCHASED
     IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES OF $10 MILLION. THE IMPACT OF
     THESE ITEMS ON 2001 NET EARNINGS WAS $30.5 MILLION, OR $0.17 PER DILUTED
     SHARE.

(D)  RESULTS FOR 2000 INCLUDE A $26.1 MILLION SPECIAL CHARGE AND A PURCHASED
     IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF $5 MILLION. THE IMPACT OF
     THESE ITEMS ON 2000 NET EARNINGS WAS $27.2 MILLION, OR $0.16 PER DILUTED
     SHARE.

(E)  TOTAL CURRENT ASSETS LESS TOTAL CURRENT LIABILITIES.




                                       63


CERTIFICATIONS
The Company has filed as exhibits to its Annual Report on Form 10-K for the year
ended December 31, 2004, the Chief Executive Officer and Chief Financial Officer
certifications required by section 302 of the Sarbanes-Oxley Act. The Company
has also submitted the required annual Chief Executive Officer certifications to
the New York Stock Exchange.

TRANSFER AGENT
Requests concerning the transfer or exchange of shares, lost stock certificates,
duplicate mailings, or change of address should be directed to the Company's
Transfer Agent at:

EquiServe Trust Company, N.A.
P.O. Box 43023
Providence, Rhode Island 02940-3023
1.877.498.8861
www.equiserve.com (Account Access Availability)
Hearing impaired #TDD: 1.800.952.9245


ANNUAL MEETING OF SHAREHOLDERS
The annual meeting of shareholders will be held at
9:30 a.m. on Wednesday, May 11, 2005, at the Minnesota Historical Center,
345 Kellogg Boulevard West,
St. Paul, Minnesota, 55102.  Parking is available.


INVESTOR CONTACT
Laura C. Merriam, Director, Investor Relations

To obtain information about the Company call 1.800.552.7664, visit our Web site
at WWW.SJM.COM, or write to:

Investor Relations
St. Jude Medical, Inc.
One Lillehei Plaza
St. Paul, Minnesota 55117-9983

The Investor Relations (IR) section on St. Jude Medical's
Web site includes all SEC filings, a list of analyst coverage, and a calendar of
upcoming earnings announcements and IR events. St. Jude Medical's Newsroom
features news releases, company background information, fact sheets, executive
bios, a product photo portfolio, and other media resources. Patient profiles can
be found on our Web site, including the patients featured in this year's annual
report.


CORPORATE GOVERNANCE
(SEE COMPANY INFORMATION ON WEB SITE- WWW.SJM.COM)

o Principles of Corporate Governance -
o Board Committee Charters
o Shareholder Communications with Directors
o Shareholder Suggestions for Director Nominees
o Code of Business Conduct
o SEC Filings


COMPANY STOCK SPLITS
2:1 on 4/27/79, 1/25/80, 9/30/86, 3/15/89, 4/30/90, 6/10/02 and 11/1/04;
3:2 on 11/16/95


STOCK EXCHANGE LISTINGS
New York Stock Exchange
Symbol: STJ

The range of high and low prices per share for the Company's common stock for
fiscal 2004 and 2003 is set forth below. As of February 14, 2005, the Company
had 3,130 shareholders of record.


Fiscal Year Ended December 31             2004                   2003
- -------------------------------------------------------------------------
Quarter                          High        Low        High        Low
- -------------------------------------------------------------------------
First                          $ 39.52     $ 29.90    $ 24.74    $ 19.38
Second                         $ 39.45     $ 35.00    $ 31.80    $ 23.75
Third                          $ 38.07     $ 31.13    $ 29.55    $ 24.05
Fourth                         $ 42.90     $ 35.65    $ 32.00    $ 26.25





TRADEMARKS
Aescula(TM), AF Suppression(TM), Alliance(TM), Angio-Seal(TM),
Apeel(TM), Atlas(R), BiLinx(TM), Biocor(TM), EnSite(R), Epic(TM),
Epicor(TM), Fast Cath(TM), Fast Cath Duo(TM), FlexCuff(TM),
Frontier(TM), GuideRight(TM), Housecall Plus(TM), HydraSteer(TM),
Identity(R), Inquiry(TM), Intersept(TM), Integrity(R), IsoFlex(R),
Linx(TM), Livewire(TM), Livewire Cannulator(TM), Livewire Spiral
HP(TM), Livewire TC(TM), Maximum(TM), Merlin(TM), Microny(R), NavX(R),
Optima(TM), Pacel(TM), Passive Plus(R), Photon(R), QuickSite(R),
Reflexion(TM), Response(TM), Riata(R), Silzone(R), SJM(R),
SJM Biocor(R), SJM Epic(TM), SJM Regent(R), SJM Tailor(R),
St. Jude Medical(R), StasyPatch(TM), Supreme(TM), Swartz(TM),
Symmetry(TM), Telesheath(TM), Tendril(R), Toronto Root(TM),
Toronto SPV(R), Trio(TM), Ultimum(TM), Valsalva(TM), Vascutek(R),
Verity(TM), Victory(TM).


(C)2005 ST. JUDE MEDICAL, INC.

EX-21

                                                                      EXHIBIT 21



                             ST. JUDE MEDICAL, INC.

                         SUBSIDIARIES OF THE REGISTRANT


St. Jude Medical, Inc. Wholly Owned Subsidiaries:
- -------------------------------------------------

o    Pacesetter, Inc. - Sylmar, California, Scottsdale, Arizona, and Maven,
     South Carolina (Delaware corporation) (doing business as St. Jude Medical
     Cardiac Rhythm Management Division)
o    St. Jude Medical S.C., Inc. - St. Paul, Minnesota (Minnesota corporation)
          -    Bio-Med Sales, Inc. (Pennsylvania corporation)
          -    HeartBeat Medical, Inc. (Utah corporation)
          -    Pacesetter Associates II, Inc. (Ohio corporation)
o    St. Jude Medical Europe, Inc. - St. Paul, Minnesota (Delaware corporation)
          -    Brussels, Belgium branch
o    St. Jude Medical Canada, Inc. - Mississauga, Ontario and St. Hyacinthe,
     Quebec (Ontario, Canada corporation)
o    St. Jude Medical (Shanghai) Co., Ltd. - Shanghai, China (Chinese
     corporation)
          -    Beijing, Shanghai and Guangzhou representative offices
o    St. Jude Medical (Hong Kong) Limited - Central, Hong Kong (Hong Kong
     corporation)
          -    Beijing, China representative office
          -    Korean and Taiwan branch offices
          -    Mumbai, New Delhi, Calcutta, Chennai and Bangalore, India branch
               offices
          -    Singapore representative office
o    St. Jude Medical, Inc., Cardiac Assist Division - St. Paul, Minnesota
     (Delaware corporation) (Assets of St. Jude Medical, Inc., Cardiac Assist
     Division sold to Bard 1/19/96)
o    St. Jude Medical Australia Pty., Ltd. - Sydney, Australia (Australian
     corporation)
o    St. Jude Medical Brasil, Ltda. - Sao Paulo and Belo Horizonte, Brazil
     (Brazilian corporation)
o    St. Jude Medical, Daig Division, Inc.- Minnetonka, Minnesota (Minnesota
     corporation)
o    St. Jude Medical Colombia, Ltda. - Bogota, Colombia (Colombian corporation)
o    St. Jude Medical ATG, Inc. - Maple Grove, Minnesota (Minnesota corporation)
o    St. Jude Medical (Thailand) Co., Ltd. - Bangkok, Thailand (Thailand
     corporation)
o    Epicor Medical, Inc. - Sunnyvale, California (Delaware corporation)
o    Irvine Biomedical, Inc. - Irvine, California (California corporation)
o    Frank Merger Corporation - (Delaware corporation)
o    SJM International, Inc. - St. Paul, Minnesota (Delaware corporation)
          -    Tokyo, Japan branch






SJM International, Inc. Wholly Owned Legal Entities (Directly and Indirectly):
- ------------------------------------------------------------------------------

o    St. Jude Medical Puerto Rico, Inc. - Caguas, Puerto Rico (Delaware
     corporation)
          -    St. Jude Medical Delaware Holding LLC (Delaware limited liability
               company) (wholly owned subsidiary of St. Jude Medical Puerto
               Rico, Inc.)
o    St. Jude Medical Holland Finance C.V. (Netherlands limited partnership)
     (ownership of St. Jude Medical Holland Finance C.V. is shared by SJM
     International, Inc., St. Jude Medical Delaware Holding LLC, and the general
     partner, St. Jude Medical Puerto Rico, Inc.)
          -    St. Jude Medical Luxembourg S.a r.l. (Luxembourg corporation)
               (wholly owned subsidiary of St. Jude Medical Holland Finance
               C.V.)
               -    St. Jude Medical Investments B.V. (Netherlands corporation
                    headquartered in Luxembourg) (wholly owned subsidiary of St.
                    Jude Medical Luxembourg
               -    S.a r.l.)
                    -    St. Jude Medical Nederland B.V. (Netherlands
                         corporation) (wholly owned subsidiary of St. Jude
                         Medical Investments B.V.)
                         -    Telectronics B.V. (Netherlands corporation)
                              (wholly owned subsidiary of St. Jude Medical
                              Nederland B.V.)
                    -    St. Jude Medical Enterprise AB (Swedish corporation
                         headquartered in Luxembourg) (wholly owned subsidiary
                         of St. Jude Medical Investments B.V.)
                         -    St. Jude Medical Puerto Rico B.V. (Netherlands
                              corporation) (wholly owned subsidiary of St. Jude
                              Medical Enterprise AB)
                              -    Puerto Rico branch of St. Jude Medical
                                   Puerto Rico B.V.
                         -    St. Jude Medical Coordination Center (Belgium
                              branch of St. Jude Medical Enterprise AB)
                         -    St. Jude Medical AB (Swedish corporation) (wholly
                              owned subsidiary of St. Jude Medical
                              Enterprise AB)
                    -    St. Jude Medical Holdings B.V. (Netherlands
                         corporation) (wholly owned subsidiary of St. Jude
                         Medical Investments B.V.)
                         -    Getz Bros. Co. Ltd. (Japanese corporation)
                              (wholly owned subsidiary of St. Jude Medical
                              Holdings B.V.)
o    St. Jude Medical Sweden AB (Swedish corporation)
o    St. Jude Medical Danmark A/S (Danish corporation)
o    St. Jude Medical (Portugal) - Distribuicao de Produtos Medicos, Lda.
     (Portuguese corporation)
o    St. Jude Medical Export Ges.m.b.H. (Austrian corporation)
o    St. Jude Medical Medizintechnik Ges.m.b.H. (Austrian corporation)
o    St. Jude Medical Italia S.p.A. (Italian corporation)
o    N.V. St. Jude Medical Belgium, S.A. (Belgian corporation)
o    St. Jude Medical Espana, S.A. (Spanish corporation)
o    St. Jude Medical France S.A.S. (French corporation)
o    St. Jude Medical Finland O/y (Finnish corporation)
o    St. Jude Medical Sp.zo.o. (Polish corporation)
o    St. Jude Medical GmbH (German corporation)
o    St. Jude Medical Kft (Hungarian corporation)
o    St. Jude Medical UK Limited (United Kingdom corporation)
o    St. Jude Medical AG (Swiss corporation)

EX-23

                                                                      EXHIBIT 23

            CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in this Annual Report (Form 10-K)
of St. Jude Medical, Inc. of our reports dated February 16, 2005, with respect
to the consolidated financial statements of St. Jude Medical, Inc., St. Jude
Medical, Inc. management's assessment of the effectiveness of internal control
over financial reporting, and the effectiveness of internal control over
financial reporting of St. Jude Medical, Inc., included in the 2004 Annual
Report to Shareholders of St. Jude Medical, Inc.

Our audits also included the financial statement schedule of St. Jude Medical,
Inc. listed in Item 15(a). This schedule is the responsibility of St. Jude
Medical, Inc.'s management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

We also consent to the incorporation by reference in the Registration Statement
No. 33-9262, Registration Statement No. 33-41459, Registration Statement No.
33-48502, Registration Statement No. 33-54435, Registration Statement No.
333-42945, Registration Statement No. 333-42658, Registration Statement No.
333-42668 and Registration Statement No. 333-96697 on Form S-8 of St. Jude
Medical, Inc. of our reports dated February 16, 2005, with respect to the
consolidated financial statements and schedule of St. Jude Medical, Inc., St.
Jude Medical, Inc. management's assessment of the effectiveness of internal
control over financial reporting, and the effectiveness of internal control over
financial reporting of St. Jude Medical, Inc., included and incorporated by
reference in this Annual Report (Form 10-K) for the year ended December 31,
2004.


/s/ Ernst & Young LLP
Minneapolis, MN
March 8, 2005

EX-24

                                                                      EXHIBIT 24

                               POWER OF ATTORNEY

KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Daniel J. Starks, John C. Heinmiller and Kevin T.
O'Malley, each with full power to act without the other, his or her true and
lawful attorney-in-fact and agent with full power of substitution, for him or
her and in his or her name, place and stead, in any and all capacities, to sign
the Annual Report on Form 10-K of St. Jude Medical, Inc. for the fiscal year
ended December 31, 2004, and any or all amendments to said Annual Report, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, and to file the same
with such other authorities as necessary, granting unto each such
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that each such attorney-in-fact and
agent, or his substitute, may lawfully do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, this Power of Attorney has been signed on this 11th day of
March, 2005, by the following persons.

/s/ DANIEL J. STARKS                       /s/ MICHAEL A. ROCCA
- ---------------------------------          ---------------------------------
Daniel J. Starks                           Michael A. Rocca
Chairman, President and                    Director
Chief Executive Officer
(Principal Executive Officer)

/s/ JOHN C. HEINMILLER                     /s/ DAVID A. THOMPSON
- ---------------------------------          ---------------------------------
John C. Heinmiller                         David A. Thompson
Executive Vice President and               Director
Chief Financial Officer
(Principal Financial and
Accounting Officer)

/s/ RICHARD R. DEVENUTI
- ---------------------------------          ---------------------------------
Richard R. Devenuti                        Stefan K. Widensohler
Director                                   Director

/s/ STUART M. ESSIG                        /s/ WENDY L. YARNO
- ---------------------------------          ---------------------------------
Stuart M. Essig                            Wendy L. Yarno
Director                                   Director

/s/ THOMAS H. GARRETT III                  /s/ FRANK C-P YIN
- ---------------------------------          ---------------------------------
Thomas H. Garrett III                      Frank C-P Yin
Director                                   Director

EX-31.1

                                                                    EXHIBIT 31.1

                      CERTIFICATION PURSUANT TO SECTION 302
                        OF THE SARBANES-OXLEY ACT OF 2002

I, Daniel J. Starks, certify that:

     1.   I have reviewed this annual report on Form 10-K of St. Jude Medical,
          Inc.;

     2.   Based on my knowledge, this report does not contain any untrue
          statement of a material fact or omit to state a material fact
          necessary to make the statements made, in light of the circumstances
          under which such statements were made, not misleading with respect to
          the period covered by this report;

     3.   Based on my knowledge, the financial statements, and other financial
          information included in this report, fairly present in all material
          respects the financial condition, results of operations and cash flows
          of the registrant as of, and for, the periods presented in this
          report;

     4.   The registrant's other certifying officer and I are responsible for
          establishing and maintaining disclosure controls and procedures (as
          defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
          control over financial reporting (as defined in Exchange Act Rules
          13a-15(f) and 15d - 15(f) for the registrant and have:

               a)   Designed such disclosure controls and procedures, or caused
                    such disclosure controls and procedures to be designed under
                    our supervision, to ensure that material information
                    relating to the registrant, including its consolidated
                    subsidiaries, is made known to us by others within those
                    entities, particularly during the period in which this
                    report is being prepared;

               b)   designed such internal control over financial reporting, or
                    caused such internal control over financial reporting to be
                    designed under our supervision, to provide reasonable
                    assurance regarding the reliability of financial reporting
                    and the preparation of financial statements for external
                    purposes in accordance with generally accepted accounting
                    principles;

               c)   Evaluated the effectiveness of the registrant's disclosure
                    controls and procedures and presented in this report our
                    conclusions about the effectiveness of the disclosure
                    controls and procedures, as of the end of the period covered
                    by this report based on such evaluation; and

               d)   Disclosed in this report any change in the registrant's
                    internal control over financial reporting that occurred
                    during the registrant's most recent fiscal quarter (the
                    registrant's fourth fiscal quarter in the case of an annual
                    report) that has materially affected, or is reasonably
                    likely to materially affect, the registrant's internal
                    control over financial reporting; and

     5.   The registrant's other certifying officer and I have disclosed, based
          on our most recent evaluation of internal controls over financial
          reporting, to the registrant's auditors and the audit committee of the
          registrant's board of directors (or persons performing the equivalent
          functions):

               a)   All significant deficiencies and material weaknesses in the
                    design or operation of internal control over financial
                    reporting which are reasonably likely to adversely affect
                    the registrant's ability to record, process, summarize and
                    report financial information; and

               b)   Any fraud, whether or not material, that involves management
                    or other employees who have a significant role in the
                    registrant's internal control over financial reporting.

Date: March 11, 2005

/s/ DANIEL J. STARKS
- -----------------------------------------------
Daniel J. Starks
Chairman, President and Chief Executive Officer

EX-31.2

                                                                    EXHIBIT 31.2

                      CERTIFICATION PURSUANT TO SECTION 302
                        OF THE SARBANES-OXLEY ACT OF 2002

I, John C. Heinmiller, certify that:

     1.   I have reviewed this annual report on Form 10-K of St. Jude Medical,
          Inc.;

     2.   Based on my knowledge, this report does not contain any untrue
          statement of a material fact or omit to state a material fact
          necessary to make the statements made, in light of the circumstances
          under which such statements were made, not misleading with respect to
          the period covered by this report;

     3.   Based on my knowledge, the financial statements, and other financial
          information included in this report, fairly present in all material
          respects the financial condition, results of operations and cash flows
          of the registrant as of, and for, the periods presented in this
          report;

     4.   The registrant's other certifying officer and I are responsible for
          establishing and maintaining disclosure controls and procedures (as
          defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
          control over financial reporting (as defined in Exchange Act Rules
          13a-15(f) and 15d - 15(f) for the registrant and have:

               a)   Designed such disclosure controls and procedures, or caused
                    such disclosure controls and procedures to be designed under
                    our supervision, to ensure that material information
                    relating to the registrant, including its consolidated
                    subsidiaries, is made known to us by others within those
                    entities, particularly during the period in which this
                    report is being prepared;

               b)   designed such internal control over financial reporting, or
                    caused such internal control over financial reporting to be
                    designed under our supervision, to provide reasonable
                    assurance regarding the reliability of financial reporting
                    and the preparation of financial statements for external
                    purposes in accordance with generally accepted accounting
                    principles;

               c)   Evaluated the effectiveness of the registrant's disclosure
                    controls and procedures and presented in this report our
                    conclusions about the effectiveness of the disclosure
                    controls and procedures, as of the end of the period covered
                    by this report based on such evaluation; and

               d)   Disclosed in this report any change in the registrant's
                    internal control over financial reporting that occurred
                    during the registrant's most recent fiscal quarter (the
                    registrant's fourth fiscal quarter in the case of an annual
                    report) that has materially affected, or is reasonably
                    likely to materially affect, the registrant's internal
                    control over financial reporting; and

     5.   The registrant's other certifying officer and I have disclosed, based
          on our most recent evaluation of internal control over financial
          reporting, to the registrant's auditors and the audit committee of the
          registrant's board of directors (or persons performing the equivalent
          functions):

               a)   All significant deficiencies and material weaknesses in the
                    design or operation of internal control over financial
                    reporting which are reasonably likely to adversely affect
                    the registrant's ability to record, process, summarize and
                    report financial information; and

               b)   Any fraud, whether or not material, that involves management
                    or other employees who have a significant role in the
                    registrant's internal control over financial reporting.

Date: March 11, 2005

/s/ JOHN C. HEINMILLER
- ----------------------------------------------------
John C. Heinmiller
Executive Vice President and Chief Financial Officer

EX-32.1

                                                                    EXHIBIT 32.1


                            CERTIFICATION PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Annual Report of St. Jude Medical, Inc. (the "Company")
on Form 10-K for the period ended December 31, 2004 as filed with the Securities
and Exchange Commission (the "Report"), I, Daniel J. Starks, Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     1.   The Report fully complies with the requirements of Section 13(a) or
          15(d) of the Securities Exchange Act of 1934; and

     2.   The information contained in the Report fairly presents, in all
          material respects, the financial condition and results of operations
          of the Company.


                                      /s/ DANIEL J. STARKS
                                      -------------------------------------
                                      Daniel J. Starks
                                      Chairman, President and
                                      Chief Executive Officer
                                      March 11, 2005

EX-32.2

                                                                    EXHIBIT 32.2



                            CERTIFICATION PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Annual Report of St. Jude Medical, Inc. (the "Company")
on Form 10-K for the period ended December 31, 2004 as filed with the Securities
and Exchange Commission (the "Report"), I, John C. Heinmiller, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     1.   The Report fully complies with the requirements of Section 13(a) or
          15(d) of the Securities Exchange Act of 1934; and

     2.   The information contained in the Report fairly presents, in all
          material respects, the financial condition and results of operations
          of the Company.



                                      /s/ JOHN C. HEINMILLER
                                      --------------------------------------
                                      John C. Heinmiller
                                      Executive Vice President and
                                      Chief Financial Officer
                                      March 11, 2005