Partners in Medical Innovation

1

Partners inMedical

Innovation

1998 Annual ReportCompany Overview

Corporate Profile

Medtronic, Inc., is the world’s leading medicaltechnology company specializing in implantableand interventional therapies. The companycreates innovative solutions for the health careneeds of medical professionals and their patients.Our products and services are used in treatingmore than 1.5 million people each year in morethan 120 countries.

The company is headquartered in Minneapolis,Minnesota and employs nearly 14,000 peopleworldwide. Our operations are primarilyfocused on providing therapeutic, diagnostic,and monitoring systems for the cardiac rhythmmanagement, cardiovascular and neurologicalmarkets.

Company Overviewand Financial Review

Medtronic’s 1998 Annual Report consists of twoparts: the Company Overview and FinancialReview. If you have received only one part, youmay obtain the other section by contactingMedtronic Investor Relations, m.s. 206, 7000Central Avenue NE, Minneapolis, Minnesota55432, USA, 612-514-3035.

You may also contact us through the Internet at“www.medtronic.com”.

On the Cover

Pictured here are just a few of the people whohave benefited from Medtronic’s partnershipwith customers and researchers worldwide.

Table of Contents

Letter to Shareholders ..................... 2

Partners in Medical Innovation ...... 5

Cardiac Rhythm Management........ 6

Cardiac Surgery ...............................10

Vascular ...........................................12

Neurological ....................................14

Therapy Overview ............................18

Mission.............................................20

Medtronic in the Community .........22

Investor Information.......................23

Board of Directors............................24

Medtronic Leadership ................InsideBack Cover

Net sales $370.4 $411.5 $515.4

Net earnings 38.1 54.0 75.3

Basic earnings per share 0.07 0.11 0.16

Earnings per share assuming dilution 0.07 0.11 0.16

Total assets 473.2 540.9 580.0

Additions to PP&E 23.0 15.2 24.7

Debt-to-total capital 10.9% 15.2% 8.9%

Dividends per share 0.025 0.025 0.025

Return on equity 11.2% 15.5% 19.8%

R & D expense 39.5 40.1 43.6

Stock closing price 7/8 2 1/32 2 25/32

Year ended April 30, 1985 1986 1987

Financial Highlights(in millions of dollars, except per share)

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$669.9 $765.8 $865.9 $1,021.4 $1,176.9 $1,328.2 $1,390.9 $1,742.4 $2,172.1 $2,438.2 $2,604.8

86.6 100.3 112.9 133.4 161.5 197.2 232.4 294.0 428.3 530.0 594.3*

0.18 0.22 0.24 0.28 0.34 0.41 0.51 0.64 0.90 1.11 1.27*

0.18 0.22 0.23 0.27 0.33 0.41 0.50 0.63 0.89 1.09 1.25*

661.3 783.0 885.3 1,024.1 1,163.5 1,292.5 1,623.3 1,946.7 2,554.7 2,409.2 2,774.7

35.4 52.0 56.1 65.8 77.2 77.1 60.8 96.9 165.1 171.3 148.2

13.1% 14.0% 14.3% 12.6% 10.1% 10.9% 6.9% 3.4% 4.0% 6.4% 5.1%

0.030 0.035 0.045 0.053 0.060 0.070 0.085 0.103 0.130 0.190 0.220

21.2% 22.2% 21.3% 21.4% 21.8% 24.1% 24.5% 24.6% 27.0% 29.6% 30.3%*

55.1 67.7 81.5 89.5 109.2 133.0 156.3 191.4 243.8 280.2 297.2

2 3/8 2 31/32 4 6 31/32 8 3/16 8 3/16 9 13/32 18 19/32 26 9/16 34 5/8 53

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

In Millions of Dollars13 yr. CAGR† 16.2% NET SALES

0

300

600

900

1200

1500

1800

2100

2400

2700

86 88 90 92 94 96 98

In Millions of Dollars13 yr. CAGR† 23.5% NET EARNINGS

0

75

150

225

300

375

450

525

600

86 88 90 92 94 96 98*

In Dollars13 yr. CAGR† 25.0% BASIC EARNINGS PER SHARE

0

.15

.30

.45

.60

.75

.90

1.05

1.20

1.35

86 88 90 92 94 96 98*

In Percentage13 yr. Avg. 23.3% RETURN ON EQUITY

0

5

10

15

20

25

30

35

86 88 90 92 94 96 98*

In Millions of Dollars13 yr. CAGR† 16.8% RESEARCH AND DEVELOPMENT

0

40

80

120

160

200

240

280

320

86 88 90 92 94 96 98

Year-End in Dollars13 yr. CAGR† 37.1% STOCK CLOSING PRICE

0

201510

5

2530

3540455055

86 88 90 92 94 96 98

* Net Earnings, EPS, and Return on Equity exclude the impact of $205.3 million pre-tax non-recurring charges recorded in the third quarter of fiscal 1998.† Compound Annual Growth Rate

Financial Highlights

William W. George,seated, Chairmanof the Board andChief ExecutiveOfficer, Arthur D.Collins, Jr., left,President andChief OperatingOfficer, and GlenD. Nelson, M.D.,Vice Chairman

Behind every decisionour executives makeare the patients whoreceive the therapies wedevelop. Pictured withBill George is T.J. Flackof Turtle Creek,Pennsylvania, whobenefits from theIntrathecal Baclofentherapy for treatmentof severe spasticity;with Art Collins isParas Sahu, ofMadras, India, whosedoctor used ourcardiopulmonary per-fusion products whenParas underwent openheart surgery; andwith Glen Nelson isDenise Bouchard, apatient who participat-ed in the clinical trialof the InterStim conti-nence control system,and her daughter,Dominique, of Îles dela Madeleine, Canada.

We are pleased to report that fiscal 1998 was a year of continuingaccomplishments for Medtronic. It was our 13th consecutive year ofrecord revenues and earnings before a special charge we tookprimarily to position the company for significant revenue andearnings growth in fiscal 1999 and beyond.

Medtronic continues to introduce technologically advanced prod-ucts to markets worldwide. These products are accelerating salesmomentum and increasing our market share in cardiac rhythmmanagement, neurological products, cardiac surgery and vascular.

Fiscal 1998 Results

Excluding the effects of a non-recurring charge taken in the thirdquarter, fiscal 1998 earnings per share of $1.25 (diluted) increased14.7 percent over the $1.09 per share (diluted) recorded in the pre-vious fiscal year. Total pre-charge earnings were $594.3 million onrevenues of more than $2.6 billion. Net earnings and constant-currency revenues increased 12.1 percent and 11.1 percent,respectively, over last year’s $530.0 million and $2.4 billion totals.

We took our first special charge to earnings in 13 years to facilitatemajor cost reductions for fiscal 1999 and beyond. The chargeresulted from actions taken to streamline global manufacturingoperations and administrative functions, restructure our Vascularoperations and fund the Medtronic Foundation. The restructuringof our Cardiac Rhythm Management and Vascular operationsreinforces our commitment to these areas as we achieve acompetitive advantage in these product lines.

Partners in Medical Innovation

As we approach Medtronic’s 50th anniversary on April 29, 1999, thisyear’s annual report features partnerships we have formed withphysicians over the years. Through partnerships, these physiciansand Medtronic people have restored millions of people to full lifeand health.

Therapy Highlights

In 1992, we embarked on an ambitious program to fund newventures, leveraging Medtronic technology to create new therapiesthat would address unmet medical needs. With the benefit of a 12-year royalty agreement, we expanded our research and develop-ment funding from nine percent of revenues to more than 11 per-cent to fully fund these ventures, as well as product development inour core business.

The success of these efforts resulted in five pre-market approval(PMA) applications being cleared by the U.S. Food and DrugAdministration in fiscal 1998: Activa tremor control therapy, theWiktor coronary stent, InterStim continence control therapy for uri-nary urge incontinence, the Freestyle aortic root bioprosthesis, andthe Medtronic.Kappa 400 pacing systems. This set a company recordfor breakthrough therapies cleared by the rigorous PMA process.

In addition, more than a dozen other major new products werelaunched or entered clinical trials in various countries this fiscalyear, including:

• Medtronic.Kappa 700 pacing systems,

• Gem DR defibrillation systems,

• AneuRx endovascular stent graft,

• AlgoMed and IsoMed infusion systems,

• Mosaic tissue heart valve,

• Octopus tissue stabilization system for “beating heart”cardiac surgery,

• Neurostimulation treatment for angina pain,

• Activa Parkinson’s control therapy,

• Presario single-operator exchange balloon catheter,

• Reveal insertable loop recorder,

• Champion pacing system for China and Asia,

• Maxima Forté membrane blood oxygenator,

• CSS cardioplegia safety system,

• autoLog autotransfusion system.

These new technologies will have a major impact on the patientswe serve and on our business in fiscal 1999 and the years to come.

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A year of continuing accomplishments…

To Our Shareholders

Global Operations

Medtronic management is dedicated to enhancing our ability tocreate the most innovative, highest quality medical devices in themost cost-effective manner.

Our new, highly automated manufacturing facility in Tolochenaz,Switzerland, began operations this year. The same facility housesour new European headquarters. Our new pacemaker facility inShanghai, China, also opened its doors this year, making afford-able pacing therapies available to the people of China.

We have signed more than 190 major U.S. health care providers toCardiovascular Alliance agreements, allowing us to leverage thebreadth of our cardiovascular product lines and provide value-added services.

We expect continuing rapid growth in Latin America, our fastestgrowing region in fiscal 1998, and the emergence of India, Chinaand Asia as major markets for our products. The remaining mar-kets of Europe, North America and Australia also will experienceaccelerating growth throughout 1999.

Product Line Review

Fiscal 1998 was a year of solid performance and of preparation for the truly exciting opportunities we have in fiscal 1999 and theyears to follow.

We are launching breakthrough platforms in both bradycardia pac-ing and tachyarrhythmia management, with the Medtronic.Kappa700 pacing systems, the world’s first “fully adaptive” pacemakerfamily, and the Gem DR dual chamber, rate responsive implantabledefibrillation systems. Also, Vitatron, our Dutch pacing company willlaunch its Clarity product line in Europe in the last half of fiscal 1999.

Our cardiac rhythm management strategy–to use our technologicalexpertise in bradycardia and tachyarrhythmia as common platformsto address brady, tachy, atrial fibrillation and heart failure separatelyor together–will help customers treat complex forms of cardiacdisorders as they evolve. This strategy is focusing our R&D andmarketing activities on a comprehensive approach to cardiac care.

The strategy will be especially evident this year as we address atrial fibrillation and heart failure by introducing the Jewel AFsystems, the InSync heart failure systems and new tachyarrhythmiaablation catheters.

Vascular products will incorporate major improvements in balloontechnology. The new Presario and Achiever balloon families forangioplasty will also become the delivery systems for the beStent coro-nary stent. AneuRx will accelerate its international growth andsubmit its U.S. pre-market approval application for what we believe tobe the finest endovascular stent graft for abdominal aortic aneurysms.

Cardiac Surgery has augmented its product line to serve all forms ofheart surgery, including minimally invasive and conventionalapproaches. We believe we will move into a clear leadership positionin heart valves this year as the Freestyle and Mosaic tissue valvesencourage the market’s trend toward tissue valves.

Our Neurological platform grew rapidly in fiscal 1998. In 10 years,Neuro implantables has achieved a compound growth rate of 30.9%per year. The demand–current and potential–for its therapies andproducts is opening major new applications for stimulators anddrug delivery systems. We expect continuing rapid growth frompain and spasticity applications, the acceleration of therapies fortremor and Parkinson’s disease and the expanding use of stimula-tion for incontinence and other indications. In the wings are newerventures addressing sleep apnea, gastroparesis, and epilepsy. PSMedical’s neurosurgery products, as well as our FunctionalDiagnostics operations, also should expand with the introductionof new products and software offerings.

Board and Executive Changes

Two new directors were elected to our Board this year–Paul W.Chellgren, Chairman and Chief Executive Officer of Ashland Inc.,and William R. Brody, President of The Johns Hopkins University, inBaltimore, Maryland. We are delighted that they will be providingtheir expertise and insight to Medtronic as we create innovativesolutions for the health care needs of medical professionals andtheir patients in an ever-changing health care environment.

After 25 years of valued service to Medtronic, Bobby Griffin,Executive Vice President and President, Pacing, has announced hisintention to retire in early August 1998. Bobby created and led ateam unparalleled in the industry. He is succeeded by Steve Mahle,as President of Cardiac Rhythm Management, who for 25 years hasbuilt Medtronic’s bradycardia pacing franchise.

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Medtronic is dedicated to creating the most innovative, highest quality medical devices in the most cost-effective manner.

Vital Contributions

Fiscal 1998 was a year of preparation for what we believe will be agreat fiscal 1999 and beyond as we bring exciting medical break-throughs to market. Our key to success: Medtronic is dedicated toproviding patients and their physicians with advanced products andtherapies of unsurpassed quality.

Our growth and success have been made possible by the commit-ment, creativity, enthusiasm and hard work of Medtronic peoplearound the world. We appreciate their vital contributions.

William W. GeorgeChairman and Chief Executive Officer

Glen D. Nelson, M.D.Vice Chairman

Arthur D. Collins, Jr.President and Chief Operating Officer

July 22, 1998

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Partners in Medical Innovation

This annual report

celebrates the partnerships

Medtronic people form

with medical professionals

around the world.

The vision, teamwork

and ingenuity of these

partners color patients’

lives with better health

and full life.

Medtronic.Kappa 400 and 700 series

pacing systems

9790C programmer

CapSure SP Novuspacing lead

InSync bi-ventricularcardiac stimulation

system

Dr. Anne Gillis,Medical Director ofPacing and Electro-physiology atFoothills Hospitaland the Universityof Calgary, seated,and Sue Wilson,Cardiac RhythmManagementMarketing Manager,work together tobring the mosteffective pacingtherapy in the worldto Canadianpatients such asMick Kiddle, inset,of Calgary, Alberta.

Dependent on pacemakers for five years, Mick Kiddle’s heart conditionbegan to worsen three years ago. The Calgary, Alberta, father of twobegan experiencing palpitations whenever his heart rate increased.

Mick, 38, who works at the Olympic Skating Oval in Calgary, says hehad “huge arrhythmias and almost died at one point. I was too scaredto leave town. I never knew when another episode would strike.”

Assessing Mick’s condition, his cardiologist, Dr. Anne Gillis ofFoothills Hospital, selected a Medtronic.Kappa 700 pacing system asthe perfect solution. The 700 series adapts automatically to Mick’sneeds, using pacing therapy to stop his frequent tachyarrhythmias.

Today, Mick no longer needs his arrhythmia control medication.Best of all, he says, his physical condition continues to improve,and he has gradually stopped worrying about his health. “Finally,I can get on with my life. I’m more focused at work, and Ithoroughly enjoy traveling and camping with my family.”

Mick is a younger patient who, over the course of his lifetime, mayexperience changes in his cardiac disease. These changes willrequire Dr. Gillis to use a comprehensive, managed approach witha variety of therapies over the years.

Cardiac Rhythm Management

As always, our approach is being driven by the physician customerswe serve. Instead of looking at the various cardiac rhythm disordersas distinct indications that are treated separately, the medicalcommunity views many cardiac problems as interrelated. Heartproblems take on a variety of forms and evolve over time. This viewof cardiac disease requires a comprehensive strategy and innovativesolutions that let physicians manage their patients’ changingcardiac conditions over a lifetime.

Medtronic is uniquely positioned to succeed in this area. We arebuilding on our current market leadership by developing adaptivetherapies and diagnostic systems to treat and monitor bradycardia(too-slow heartbeat), tachyarrhythmia (too-fast heartbeat), atrialfibrillation (rapid, uncontrolled heartbeats in upper chambers)and heart failure (the inability of the heart to maintain its work-load of pumping blood to the body).

There is no single solution for these specific disorders. We areinvestigating a variety of solutions for each indication, researchingand refining our approaches as we work with physiciansand researchers to discover the most effective diagnostic and therapeutic answers.

Bradycardia Pacing

The Medtronic.Kappa generation of pacing systems is at thevanguard of our cardiac rhythm management products. WithMedtronic.Kappa systems, patients benefit from therapies thatbetter fit their needs; clinicians spend less time adjusting the pacingsystem to attain therapeutic objectives.

The Medtronic.Kappa 400 systems entered the U.S. market inFebruary 1998. They brought to the world of pacing the first auto-matic integrated sensor technology with both activity and minuteventilation sensing input. The dual sensor and enhancedprogrammability allow greater flexibility to meet patient needs.

Outside the United States, the big news was the launch in April 1998of the Medtronic.Kappa 700 series. This system offers full adapt-ability and greatly expanded patient management information tooptimize pacing therapy for patients on a real-time, day-to-daybasis. The fully adaptive system is expected to be released in theUnited States this fiscal year.

The 400 and 700 series will be followed by new generations of pac-ing systems that will continue to advance the state of the art inpatient treatment and streamlined clinician care.

As a full system provider, Medtronic is also the world leader in pac-ing leads. More than one million Medtronic steroid-eluting pacingleads have been implanted since their introduction in the 1980s,making them the most implanted lead systems in the world.

Our latest family of leads, the Novus family, was released in Europe,Canada, and the United States early in fiscal 1999. MedtronicCapSure SP Novus leads offer the benefit of small diameters, while

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Managing the entire spectrum of cardiac rhythm disorders opens new opportunities to improve long-term patient care.

Bradycardia

AtrialFibrillation

Heart Failure

Tachyarrhythmias

Addressingcardiac

disorders asthey exist

alone, together,and as they

progress

Cardiac Rhythm Management

Cardiac Rhythm Management Strategy

continuing to build on the proven steroid performance of theMedtronic CapSure SP lead family. CapSure Z Novus offers smallsize, steroid performance and high impedance to increase thelongevity of the pacing system. The addition of the SureFix lead, ourfirst fixed helix lead with steroid, completes this line of new leads.

Medtronic.Vision software for the 9790 programmer is the firstwithin our industry to use a graphical, icon-based user interface. Itis designed to provide easier navigation through ergonomic designand clearer presentation of clinical patient information. TheMedtronic.Vision software adds to the strength of the 9790 pro-

grammer, which has become the industry’s “gold standard.” Thenewest feature being incorporated into our programmers is calledThe Analyzer. This tool simplifies the implant procedure throughvisual lead assessment on the programmer during pacemaker ordefibrillator implantation or during lead system troubleshooting.

Tachyarrhythmia Management

As a busy sales manager with three children, René Baumberger, 39,has no room in his life for a debilitating disease. Nevertheless, hehad a history of atrial fibrillation (AF) and ventricular tachycardia

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Dr. Jürg Fuhrer, left,electrophysiologist atUniversity Hospital inBern, Switzerland,participated in theEuropean clinicalstudies for the GemDR arrhythmiamanagement system.Shown with Ulla Strobel,TachyarrhythmiaManagement fieldclinical monitor,Dr. Fuhrer wasable to treat RenéBaumberger’s, inset,tachyarrhythmiasand atrial fibrillation.

Gem DR ICD

Jewel AF ICD

Reveal insertableloop recorder

(VT) and had suffered dizziness, palpitations and syncope (unex-plained fainting). Dr. Jürg Fuhrer of University Hospital in BernSwitzerland, implanted a Gem DR device in November 1997. Renéstill experiences ventricular tachycardia episodes, but he has hadmore than 300 successful anti-tachycardia pacing therapies sincereceiving the device. René and his family feel secure now that hehas a device to treat his tachycardias. Due to dual chamber pacing,he no longer has atrial fibrillation. Happily, he has returned to hisactive lifestyle, which includes skiing and soccer.

The Gem family of implantable defibrillators builds on the successof the Micro Jewel II, a single chamber defibrillator that continuesto enjoy global market share leadership in the single chamber seg-ment. We believe the Gem family of products consists of the world’smost advanced defibrillation systems and offers the best combina-tion of size, output and functionality in the market. The Gemfamily incorporates Medtronic’s advanced rate responsive featuresin both dual and single chamber versions.

The Gem DR dual chamber system also incorporates an advancedtachyarrhythmia detection capability called PR Logic. Thisalgorithm is designed to reduce inappropriate treatment of non-life-threatening atrial arrhythmias to permit the device to make amore complete analysis of cardiac electrical activity. The Gem DRsystem includes a new dual chamber, rate responsive pacing capa-bility and advanced diagnostic tools designed for better patientmanagement. This innovative device also includes patient alertfeatures designed to monitor automatically the defibrillator’s per-formance. The device alerts the patient with an audible tone whenphysician attention is required. Currently launched outside theUnited States, we expect to receive U.S. Food and DrugAdministration clearance in fiscal 1999.

Gem, the single chamber offering, has a volume of 49cc and incor-porates many of the features of the Gem DR system. It is the firstsingle chamber defibrillator to incorporate rate responsive pacing.The Gem system is scheduled for worldwide release in fiscal 1999.

In addition, during the past year we completed the full line ofsteroid-eluting Sprint leads that provides physicians with thebroadest range of options for defibrillation leads. We now offersingle and dual defibrillation coils in one lead. We also offer activeand passive fixation systems. The Sprint family is the broadest lineof tachy leads available in the marketplace.

Atrial Fibrillation

While not immediately life-threatening, atrial fibrillation is themost common sustained cardiac arrhythmia and is associated withan increased risk of embolism, stroke, heart failure, and early death.

We are currently investigating several therapies to address atrialfibrillation. One approach is the Jewel AF system now in clinical

trials that is designed to sense, pace, cardiovert and defibrillate inboth the ventricle and the atrium. It enables physicians to treatpatients who suffer from AF only and those with VT and AF. TheJewel AF, now launched outside the United States for patients withboth VT and AF, will offer a new perspective on prevention and treat-ment of atrial fibrillation.

Another approach we are evaluating to treat atrial fibrillation isablation of the heart’s upper chambers using CardioRhythm’sAmazr RF (radio frequency) multi-electrode ablation system. Thesystem is currently under evaluation in a multi-center clinical trialfor the treatment of chronic or paroxysmal atrial fibrillation.Medtronic is also in partnership with Endocardial Solutions, Inc.,to develop advanced mapping and ablation systems that diagnoseand treat certain complex arrhythmias.

Heart Failure

We continue to develop relationships with heart failure specialists,as we research how cardiac stimulation may benefit their patients.

InSync, a bi-ventricular cardiac stimulation system, paces bothsides of the heart through a proprietary transvenous lead approach.Our first 70-patient clinical trial has been completed in Europe andCanada. Data from the trial were presented at the Cardiostimconference in Nice, France, in June 1998 and are very encouraging.Other devices to treat heart failure are also in development.

Diagnostic and Monitoring Systems

Implantable diagnostic and monitoring systems are targeted for anemerging field that may change the way medicine is practiced.These systems chronically monitor patients in their home environ-ment, providing their physicians with more complete informationabout their patients’ changing cardiac conditions.

The Reveal insertable loop recorder, our first entry into theimplantable cardiac monitoring field, has been launched world-wide. Simply inserted under the skin, the device is designed to diag-nose syncope (unexplained episodes of fainting) without usingelectrical leads. The monitor features a continuous loopingmemory that can record up to 42 minutes of the heart’s electricalactivity before and following a fainting episode. This informationhelps physicians determine the cause of the syncope.

Another system, named Chronicle, is an implantable hemodynamicmonitor that uses a unique lead with a miniature hemodynamicsensor. By constantly monitoring the heart’s performance, theChronicle system is designed to give physicians an earlier and morecomplete picture of the status of heart failure patients and helpthem design appropriate medication regimens. Clinicals for thissystem will begin in the first half of fiscal 1999.

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The quilts 81-year-old Marian Jones creates are often so large shemust lay the pieces out in her basement and bring them up sectionby section to the sewing machine. Before January 1994, whenMarian received a Medtronic Freestyle aortic root bioprosthesis, shewas barely able to make one trip to the basement without feelingout of breath and fatigued. Dr. Donald Doty, Director of theDepartment of Surgery at LDS Hospital in Salt Lake City, Utah,asked Marian if she wanted to participate in a clinical trial for theFreestyle valve. He explained that the absence of a stent (frame) inthe new valve allowed the optimum amount of oxygenated blood toflow through and be distributed to her body.

Thanks to the Freestyle valve, today Marian has plenty of energy tospend with her four grandchildren, five great-grandchildren and two

great-great-grandchildren. “I feel great," chuckles Marian, “I’mready for many more trips up and down the basement stairs!”

The Freestyle valve is the leading stentless valve in the world. It fea-tures a combination of implant versatility and several advanced tech-nologies that give surgeons and patients a replacement valve thatcomes close to the natural human aortic valve. The valve is createdusing a proprietary zero-pressure fixation process, developed byMedtronic, that is designed to maintain natural leaflet structure. Inaddition, the Freestyle valve is the only valve cleared by the U.S. Foodand Drug Administration (FDA) that is treated with AOA.1 AOA’santimineralization potential has only been evaluated in animals.

Dr. Donald Doty,seated, has been animportant partnerin the clinicalstudies andintroduction of theFreestyle aortic rootbioprosthesis. Shownwith Ann Cafferty,Senior ClinicalEvaluationManager, and FelixHsu, Heart ValvesMarketing Director,Dr. Dotyrecommended aFreestyle valve forpatient MarianJones, inset, so shecould return to heractive lifestyle.

Freestyle aortic rootbioprosthesis

Cardiac SurgeryDLP cannulae

1No clinical data are available which evaluate the long-term impact of the AOAtreatment in patients.

The Medtronic Mosaic valve, a stented tissue valve designed withthe same advanced technology as the Freestyle valve, has receivedoutstanding acceptance in Europe and Canada. U.S. approval isexpected next year. We anticipate FDA approval of the Hancock IIvalve in fiscal 1999, while our Hancock valve continues to performextremely well with its successful clinical record for quality andreliability. In the mechanical valve segment, the Medtronic Hallvalve has superb performance with a low incidence of anticoagu-lant-related complications and excellent hemodynamics.

Minimally Invasive Cardiac Surgery

Medtronic, already the overall market leader in conventional car-diac surgery, is well positioned to also be a leader in minimallyinvasive cardiac surgery (MICS). We are actively pursuing promis-ing growth opportunities through the development of enablingtechnologies for the MICS area. To address the shifting needs of car-diac surgeons, the InCardia program, a comprehensive system ofMICS products and training programs, has been initiated. InCardiaproducts allow surgeons to adapt their techniques to meet the needsof individual patients to ensure the best possible outcomes.

The Medtronic Octopus tissue stabilizer system is a critical compo-nent of the InCardia coronary artery bypass grafting system. TheOctopus uses suction to immobilize a small area of the beatingheart to enable the surgeon to complete a bypass graft. Since itsintroduction in May 1997, the Octopus has been utilized in over5,000 procedures in more than 200 centers worldwide. The ClinicalOutcomes, Related Economics (CO-RE) study involves 20 to 30medical centers worldwide and will record clinical outcomes andcost savings related to the procedure.

Enhancing the InCardia program are three new products slated forlaunch in fiscal 1999 including the Grinfeld cannula, the TLAStemporary luminal arteriotomy seal and the next generationOctopus system.

DLP Cannulae

Revolutionary surgical techniques require revolutionary cannula-tion standards. By broadening our scientific advisory relationshipsand partnering with customers, we remain the leader in specializedcardiac cannulae. With smaller surgical incisions and an increasein surgery on the beating heart, clear vision at the surgical site is

essential. Two products launched in March 1998 address this need.The Medtronic DLP Oval MC2 two-stage venous cannula is shapedto improve visibility in the surgical field. The Medtronic ClearViewblower/mister, which sweeps blood from the surgical site with a pre-cise irrigation action, is designed to improve the surgeon's view.

The introduction of two high performance cannulae–theCarpentier bi-caval femoral cannula and a two-stage venouscannula–in May 1998 offers the promise of strong market sharegains in this market segment.

Perfusion Systems–Cardiopulmonary and Blood Management

Our Cardiopulmonary and Blood Management products providecardiac surgeons with a coordinated system of products for pump-ing, oxygenating and monitoring blood when it is routed outsidethe body during surgery.

In June 1998, we introduced the Medtronic CSS cardioplegia safetysystem, part of the perfusion circuit known as the “heart-lungmachine.” This versatile system allows the surgical team to maxi-mize delivery options in a single step. This, along with theMedtronic CardioTherm heat exchanger also launched in 1998,constitutes a coordinated, streamlined system to protect the heartand to meet the evolving needs of the surgical team.

In the area of Blood Management, the Medtronic autoLog auto-transfusion system was launched internationally this fiscal year. It joins the full-featured Sequestra 1000 to increase the clinician'sability to manage a patient's own blood components duringsurgery and to reduce dependence on banked blood.

The hemoSTATUS 2 platelet function test, scheduled for introduc-tion in fiscal 1999, provides quick, simple, decisive results with asingle cartridge inserted in the Hepcon hemostasis managementsystem (HMS).

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No matter how the global cardiac surgery market evolves, we will be positioned to provide clinicians with the broadest and most innovative product portfolio.

autoLog autotransfusionsystem

CSS cardioplegiasafety system

Octopus tissue stabilizer system

AneuRx endovascularstent graft

Vascular surgeonDr. Kevin Hanel,left, recognized AnnJones, inset, as anideal patient for theminimally invasiveMedtronic AneuRxstent graft system.Dr. Hanel and hisassociates, vascularsurgeon Dr. RayEnglund, center,and interventionalradiologist Dr. PaulSalmon, in Sydney,Australia, haveteamed withJennifer Morrin,Product Managerfor the AneuRx stentgraft in Australia,on more than onedozen AneuRxprocedures.

Wiktor-i Hepamedcoronary stent and

delivery system

Zuma and Archerguiding catheters

Presario, top, andAchiever angioplasty

catheters

When Ann Jones’ abdominal aortic aneurysm (AAA) was diagnosed,her vascular surgeon held out little hope for recovery. Her severe car-diac condition did not allow extensive abdominal surgery, the tradi-tional procedure used for repairing an AAA. Yet, without surgicalrepair, her aneurysm could burst at any time, threatening her life.

“Other doctors had given me no hope for the future. When Dr. Kevin Hanel and his partners suggested this new product for me,they gave me another chance at life,” she said. The 77-year-old fromHuntsville, New South Wales, recovered from the AneuRx procedurein just a few weeks and has returned to her normal daily activities.“Even the doctors were amazed at my progress after the procedure,”said Ann, “It has really been a miracle. I feel on top of the world.”

An abdominal aortic aneurysm is a weakening and subsequent bal-looning of the wall of the aorta that extends through the abdomen. Ifan aneurysm ruptures, the mortality rate typically is 50 percent.Traditional repair procedures have proven to be safe and effective, butfor patients who cannot tolerate or choose not to undergo extensiveabdominal surgery, the AneuRx stent graft may be the ideal solution.

Our AneuRx stent graft is implanted via a small incision in a patient’supper thigh. It is delivered on catheters through femoral arteries tothe aneurysm site. Once in place, the stent graft self-expands to fitwithin the diameter of the artery and provides a new path for bloodflow. The modular, flexible design of the AneuRx stent graft allowsphysicians to customize the device to fit the patient’s anatomy.

Focus on the Future

The AneuRx stent graft is one of many minimally invasive,cost-effective products designed, manufactured and marketed byour Vascular organization. Our goal is to work with physicians aspartners to help them closely match new and innovative productswith their patients’ needs. In addition to products used to treatperipheral vascular disease, Vascular offers a complete line oftherapeutic systems to treat coronary artery disease.

Coronary Stents

Early this summer, we commercially launched the Wiktor Rivalcoronary stent delivery system in the United States. A stent is a tinycylindrical metal structure used to hold open coronary vessels follow-ing angioplasty. The Wiktor Rival system answers many needs of ourinterventional cardiology partners. Its low crossing profile is designedto be suitable for quick and accurate access to distal lesions in tortu-ous anatomies. The Wiktor Rival delivery system also minimizes theneed for additional time-consuming high-pressure balloon inflations.

Another important stent introduction this year was our Wiktor-iHepamed coronary stent, available in international markets. Thisstent is coated with an exclusive Medtronic time-released coatingtechnology containing a blood compatible material that retardsblood clotting upon implantation.

Other new products in our coronary stent offerings include the beStentfamily. Strong and flexible, the beStent device is appropriate for bothroutine and complex cases. Several new generations of beStent stentswill be pre-mounted on modified Medtronic angioplasty ballooncatheters for efficient delivery of the stents to lesion sites.

Angioplasty Balloon Catheters, Guidewires and Guiding Catheters

Percutaneous transluminal coronary angioplasty (PTCA) ballooncatheters are designed to open blockages in arteries that nourishthe heart muscle. We have continued to upgrade our ballooncatheters to meet the changing needs of our physician partners.

Launched in markets outside the United States in April 1998,our new Presario is a single-operator exchange, semi-compliant balloon catheter. It features a balloon and tip that areseamlessly bonded from the same polymer to enhance flexibilityand tracking and to promote lesion crossability. Leveraging thesame technology, the Medtronic Achiever, an over-the-wire,semi-compliant balloon catheter, is scheduled to be commerciallyavailable in the United States this fall. We anticipate commercialavailability of the next generation of semi-compliant balloonssometime in 1999. Semi-compliant balloon catheters are designedto deliver controlled growth and moderate pressure capabilities andto be suitable as stent delivery systems.

Our coronary guiding catheters, featuring the Vector and Vector Xproduct lines, are market leaders, offering both variety and quality.Two new catheter product lines, Zuma and Archer, were introduced inthe summer of 1998. Zuma catheters offer a larger lumen in a smallcatheter and are designed to provide easier placement of devices andoptimal patient comfort. Archer guiding catheters are available in twosizes and offer superb handling characteristics for a variety ofanatomical situations.

We also offer a full line of steerable guidewires, which are used inthe introduction and placement of PTCA catheters. Our family ofMustang guidewires was recently completed and now offers a fullrange of tip styles to meet a variety of physician preferences.

Our goal is to work with physicians as partners to help them closely match new and innovative products with their patients’ needs.

Vascular

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Dr. Stig Rehncrona’s20-year associationwith Medtronicincludes clinicaltrials and researchon using neuro-stimulation systemsto relieve both thesymptoms ofParkinson’s diseaseand pain. For thepast 12 years,Gunilla Svanteson,NeurologicalManager inScandinavia, hasbeen the criticallink betweenMedtronic and Dr.Rehncrona as hemeets the needs ofParkinson’s diseasepatients such asAnita Axelsson, inset.

Activa Parkinson’scontrol therapy

Delta valve, top, and NeuroPEN

neuroendoscope

Itrel 3neurostimulator

Our neurological products include neurostimulation systems, drugdelivery systems, neurosurgical implant devices, surgical accessproducts and diagnostic and therapeutic systems for chronic painand neurologic, urologic and gastrointestinal disorders. We contin-ually seek new opportunities to apply our neurostimulation, drugdelivery and neurosurgery systems through our research on treat-ments for chronic pain and significant neurological disorders.

Working with leading physicians such as Dr. Stig Rehncrona, asso-ciate professor at the department of Neurosurgery, UniversityHospital in Lund, Sweden, we bring life-enhancing relief to patientssuch as Anita Axelsson, 60, who has suffered from Parkinson’s dis-ease for almost half her life. The severity of her symptoms madeeveryday tasks impossible and she could no longer walk or eat byherself. Since she received Activa Parkinson’s control therapy inFebruary 1998, she has experienced a remarkable transformationto a fuller life. She is once again walking, cooking, accompanyingher husband on shopping trips and even knitting. Feeling theActiva control her symptoms for the first time was like “flipping aswitch to a new life,” she says. She vacationed in Spain this sum-mer and for the first time in 15 years traveled without a wheelchair.

Advances in Neurostimulation

Last year brought the first new treatments in more than 30 years forpatients with movement disorders such as essential tremor, tremorassociated with Parkinson’s disease and the major symptoms ofadvanced Parkinson’s disease. Essential tremor is the most commonmovement disorder in the United States, affecting at least one millionpeople. Medtronic’s Activa tremor control therapy, which uses special-ized leads connected to an implanted device to block tremor-causingbrain signals, received market clearance from the U.S. Food and DrugAdministration (FDA) in fiscal 1998. When turned on by a hand-heldmagnet, the implanted Activa system stops the involuntary shaking oflimbs or other parts of the body almost instantly, allowing patients toresume normal life activities.

During fiscal 1998, Activa therapy was also released in Europe fortreatment of the most disabling symptoms of advanced Parkinson’sdisease. Leads are implanted slightly deeper in other areas of thebrain such as the sub-thalamic nucleus or globus pallidus. ActivaParkinson’s control therapy controls major symptoms of Parkinson’sdisease such as rigidity, akinesia (immobility), postural instabilityand involuntary abnormal movements. Work continues with theFDA for clearance of Activa Parkinson’s control therapy in theUnited States.

In other pain management developments, the Itrel 3 spinal cordstimulation system was launched in Europe, Canada and Australiato treat angina pain. Patients who benefit most are those for whomtraditional therapies such as medication, bypass grafting andangioplasty have been unsuccessful in controlling the chronic,crushing pain caused by coronary disease.

We are also leveraging our neurostimulation experience as we pursuetherapies for incontinence. InterStim continence control therapy, thefirst implantable treatment to use electrical stimulation of the sacralnerves to manage urinary urge incontinence, received marketclearance from the FDA during fiscal 1998. InterStim therapy is a newtreatment option that can improve the quality of life for many of the13 million Americans–mainly women aged 30-59–who suffer fromthe embarrassing and confining effects of incontinence. Therapies forfecal incontinence, urinary urgency/frequency, and urinary retentionare currently marketed in Europe, and clinical trials continue in theUnited States.

Looking Ahead

Major new markets for neurostimulation are on the horizon. We areresponding with ventures to treat sleep apnea, gastroparesis andepilepsy. For those with epilepsy, we are focusing on early seizuredetection and therapies aimed at controlling and preventing seizures.

Our next generation of neurostimulation products includes:

• Restore, the world’s first rechargeable pain management system,expected to begin clinical trials later in fiscal 1999. The system isdesigned to eliminate the need for battery replacement surgery;

• Synergy, a fully implantable, two-lead system that providesbroader pain coverage for more complex pain patterns; and

• The Kinetra stimulator, currently marketed outside the UnitedStates. It will be used with Activa tremor and Parkinson’s controltherapies to provide bilateral, dual-channel stimulation.

Advanced Pain Therapies Designedto Provide Comprehensive Solutions

In response to increased awareness of the undertreatment ofchronic pain, we launched the Advanced Pain Therapies (APT)initiative that encompasses pain management therapies from bothour neurostimulation and drug delivery areas. Both APT Neuro-stimulation and APT Intrathecal therapies can be effective optionsfor patients with pain who are experiencing inadequate pain reliefor uncomfortable side effects from their current pain treatments.

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Neurological

Breakthrough therapies improve quality of life for patients worldwide.

Products under the APT Neurostimulation and APT Intrathecalumbrella include:

• Itrel 3, a fully implantable spinal cord stimulation system thatallows patients to customize pain control;

• Mattrix external, dual lead, neurostimulation system for morecomplex pain patterns;

• SynchroMed infusion system, the only externally programmable,implantable pump on the market;

• IsoMed infusion system, a fixed-rate drug delivery system,currently in clinical trials in the United States and released to othermarkets last year; and

• AlgoMed, a patient-activated infusion system, currently in clinicaltrials in the United States and released to other markets last year.

To supplement our pain management efforts, we are broadening ourmedical professional network to include orthopedic spine surgeonswhile continuing to develop our relationships with anesthesiologists,oncologists, neurologists, neurosurgeons and interventional pain

management specialists. Our work with these key customer groupsincludes introducing our pain therapies as an alternative to surgicalinterventions or high doses of oral medications.

Strategic Alliances Lead to Solutions for Pain and Spasticity

Colon and prostate cancer hit Augie Roth with a one-two punch lastyear. Roth, a retired truck driver from East Dubuque, Illinois, expe-rienced excruciating pain in his lower abdomen. When oral med-ications failed, his physician referred him to the University of IowaNeurosurgery Clinic, where he received a SynchroMed infusion sys-tem that delivered pain medication directly to his intrathecal space,the fluid-filled area surrounding the spinal cord. Within a fewmonths, Roth drove to visit his daughter in Texas, stopping in theresort town of Branson, Missouri, to enjoy a few days of music.“Before the pump, I wouldn’t have been able to drive even 10miles,” Roth says.

Roth’s more comfortable life is due, in part, to strong alliances formedover the years between Medtronic and physician partners such as

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Dr. Kenneth Follett,a neurosurgeon atthe University ofIowa, worked withMedtronicNeurologicalDistrict ManagerMike Quinn to findthe best painmanagementsolution for AugieRoth, inset, apatient with cancer.

SynchroMedinfusion system

Digitrapper Deltaambulatory pH recorder

Dr. Kenneth Follett. A research pioneer in the field of drug delivery andpain, Dr. Follett has published on the subject of intrathecal drugdelivery in the treatment of cancer pain and has taught many train-ing sessions and educational programs.

Drug Delivery Highlights

The drug delivery area of our Neurological platform focuses onusing implantable drug delivery systems to control spasticity andchronic cancer pain and nonmalignant pain. Our drug deliveryactivities grew dramatically last year following expansion of oursales coverage in the United States.

In Intrathecal Baclofen (ITB) therapy, a drug (baclofen injection)is delivered by the SynchroMed infusion system in precise dosesdirectly into fluid surrounding the spinal cord. ITB therapy is thefirst medical therapy in decades that eases intractable spasticity inpatients with cerebral palsy, traumatic brain injury and stroke, andis also effective in treating spasticity due to multiple sclerosis andspinal cord injury. In fiscal 1999, we expect to introduce programsto expand awareness of ITB therapy into Europe and Australia,using the knowledge we have gained from our success in raisingawareness of the therapy in the United States. In addition, we willmove forward with ITB therapy phase IV post-approval studiesdesigned specifically to measure outcomes in patients with spastic-ity due to stroke.

The SynchroMed infusion system is our flagship drug delivery prod-uct. In addition, the IsoMed infusion system was introduced outsidethe United States in fiscal 1998, and is currently in clinical studiesin the United States.

These systems deliver medication directly into the spinal fluid.Through site-specific drug delivery, these systems are designed toreduce pain and spasticity with very low doses of medication, whichreduce the common side effects that can occur with oral medica-tions. Patients may remain more alert, more comfortable and canoften enjoy enhanced quality of life.

Drug Alliances

Our drug delivery activities depend on innovative alliances withpharmaceutical companies. Through these alliances we evaluateand pursue opportunities in high-potential, undertreated, neurolog-ical disorders. Our successful collaboration with NovartisPharmaceuticals Corp. on Lioresal Intrathecal, the drug used in ITBtherapy, has resulted in improved quality of life for thousands ofpatients with severe spasticity. Progress was also made during fiscal1998 on non-opiate analgesics for chronic cancer pain and non-malignant pain. We are collaborating with Neurex, Inc., to developziconotide (SNX-111), a pain reliever derived from snail venom thatprevents nerve cells from sending pain messages to the brain.Together with Amgen, Inc., we are pursuing development of brain-derived neurotrophic factor (BDNF) for the treatment of amyotrophiclateral sclerosis (ALS), or Lou Gehrig’s disease, and glial derivedneurotrophic factor (GDNF) for Parkinson’s disease.

Patient Partners

We advance our work by actively listening to medical professionalswho work most closely with our therapies and to the patients who ben-efit from them. Our work with patient advocacy groups such as theParkinson’s Action Network, the United Cerebral Palsy Association, theNational Spinal Cord Injury Association, the International CancerAlliance and others, helps raise awareness and educates patients andtheir families about neurological disorders.

Neurosurgery

Medtronic PS Medical is the world’s leader in neurosurgery prod-ucts. It focuses on implantable therapy for the treatment of hydro-cephalus, interventional neurological monitoring and critical careproducts, such as external drainage and pressure sensing cathetersfor the treatment of head injury. PS Medical also concentrates onneurosurgical access products, such as neuroendoscopes andsurgical instruments.

Our Delta valve is part of a shunt system that diverts excess cere-brospinal fluid from the brain to another area of the body. Thissystem allows patients to participate in normal activities while con-trolling hydrocephalus. Many of our shunt products include thepatented BioGlide, a covalently bonded surface modification, whichallows easier implantation. A new product for the neurosurgicalaccess market is the NeuroPEN, a flexible neuroendoscope thatallows minimally invasive placement of the Delta valve system.

New avenues in the field of hydrocephalus management and criti-cal care treatment include the Kronos valve, which gives the sur-geon a non-invasive means to address changing patient needs, anda reusable/disposable external drainage and monitoring systemdesigned to give the critical care staff more options in the intensivecare unit.

Additional therapies available from PS Medical include theAlgoMed infusion system, a drug pump developed primarily forcancer patients with chronic, intractable pain. The AlgoMed systemis currently in clinical trials in the United States, and was releasedto other markets last year.

Functional Diagnostics

The new Medtronic Functional Diagnostics organization, formerlySynectics/Dantec, recently consolidated its headquarter operationsin Copenhagen, Denmark. Medtronic Functional Diagnosticsdevelops products to assist health care providers in the selection ofeffective therapies for gastrointestinal, urologic and neuromuscu-lar disorders. In the gastroenterological area, the new DigitrapperDelta ambulatory pH recorder, a Windows CE device for evaluationof gastroesophageal reflux exposure over a 24-hour period, hasbeen released to the European market.

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18

Major Therapy and Product Pipeline 1

Marketed worldwide Marketed internationally In final development New advances

Bradyarrhythmia Medtronic.Kappa 400 pacing systems Vitatron pacing systems CapSure SP pacing leads 9790 programmers

CapSure SP Novus, CapSure Z Novus and SureFix pacing leadsMedtronic.Kappa 700 pacing systems

9790C programmer with Medtronic.Vision and Analyzer software Next generation pacing systems

Tachyarrhythmia Sprint family of tachyarrhythmia leads 9790 programmers

Ablation catheters

Next generation defibrillation systems

Micro Jewel II implantable cardioverter defibrillators

Gem DR implantable defibrillators

Gem single chamber implantable defibrillators

Atrial Fibrillation Amazr RF ablation and mapping systemsJewel AF systems

AV nodal ablation Next generation atrial fibrillation systems

Vitatron Selection preventative pacing systems

Heart Failure InSync bi-ventricular stimulators Next generation heart failure management systemsChronicle hemodynamic monitors

Unexplained Syncope (fainting) Reveal insertable loop recorders Next generation monitoring systems

Heart Valve Disease Freestyle aortic root bioprosthesis Hall mechanical valves Hancock tissue valves Duran annuloplasty rings

Cardiovascular Disease

Coronary Vascular Disease

Presario single-operator exchange, semi-compliant balloon catheters

beStent coronary stents

Achiever over-the-wire, semi-compliant balloon catheters Next generation coronary stents and catheters

Wiktor-i Hepamed coronary stents

Zuma and Archer guiding catheters

Wiktor Rival coronary stent delivery systems Vector and Vector X guiding catheters Mustang guidewires

Peripheral Vascular Disease AneuRx endovascular stent grafts Femoral-popiteal peripheral stents

Next generation peripheral stents

Iliac peripheral stents

Hancock II tissue valves Mosaic tissue valves Next generation heart valves

Perfusion Systems and Instruments to Support Surgical Treatment of Heart Valve and Coronary Artery Disease

Cardiopulmonary perfusion systems including the Bio-Pump blood pump, Maxima Forté membrane bloodoxygenator, Maxima hardshell reservoir, Biotrend oxygen saturation and hematocrit monitor, custom tubingpacks and filters, CSS cardioplegia safety system, CardioTherm heat exchanger, Sequestra and autoLogautotransfusion systems, hemoSTATUS platelet function test, and Hepcon hemostasis management systems.Perfusion systems are available with and without the Carmeda bioactive surface

InCardia minimally invasive coronary artery bypass graft and valve systems including theOctopus tissue stabilization systems, HemoDoppler device and other enabling technologies

Grinfeld cannula TLAS temporary luminal arteriotomy seal

Next generation perfusion systems, cannulae, less invasive support systems and biocompatible surfaces

DLP cannulae including specialized devices for less invasive procedures

Cardiac Rhythm Disorders

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Major Therapy and Product Pipeline 1

Nonmalignant Pain Itrel 3 neurostimulation systems

SynchroMed programmable infusion systems

Restore rechargeable neurostimulator

Synergy two-lead pain systems

Next generation neurostimulator and infusion systems

Mattrix dual-lead neurostimulation systems

Cancer Pain IsoMed fixed-rate infusion systems

AlgoMed patient-activated infusion systems Next generation infusion systems


Essential Tremor

Angina Pain Itrel 3 spinal cord stimulation systems

Spasticity Intrathecal Baclofen (ITB) therapy using SynchroMed programmable infusion systems

IsoMed fixed-rate infusion system Next generation infusion systems

Neurodegenerative Disorders

Parkinson’s Disease (rigidity, akinesia, postural instability)

Alzheimer’s Disease SynchroMed programmable infusion systems

ALS SynchroMed programmable infusion systems

Huntington’s Disease

Hydrocephalus Shunts with Delta valves

Head Trauma and Cancer ImPort vascular access ports

Voiding Dysfunction

Epilepsy Itrel neurostimulation systems

Gastroparesis Gastric stimulators

Obstructive Sleep Apnea Inspire upper airway stimulators

Urology, Gastroenterology andNeuromuscular Disorders

Keypoint portable neuromuscular diagnostic systems

Digitrapper Delta ambulatory pH recorders Next generation diagnostic and therapeutic systems

Duet urodynamics testing systems

InterStim continence control therapy for urinary urge incontinence

InterStim continence control therapy for fecal, urinary urgency/frequency and urinary retention

Next generation continence systems

Becker II external drainage and monitoring systemsRIVAS vascular access catheters

Shunts/catheters with BioGlide NeuroPEN flexible neuroendoscopes


Activa Parkinson’s control therapy using Itrel II stimulation systems

Activa Parkinson’s control therapy using Kinetra bilateral stimulation systems


Therapies to Treat Symptoms of Parkinson’s Disease - Tremor Activa tremor control therapy using Itrel II stimulation systems

Activa tremor control therapy using Kinetra bilateral stimulation systems

Activa tremor control therapy using Itrel II stimulation systems

Activa tremor control therapy using Kinetra bilateral stimulation systems

IsoMed fixed-rate infusion systems

Neurological Disorders, Chronic Pain and Other Disorders

Next generation external drainage and monitoring system Microtransducer catheters for intracranial pressure monitoring

Next generation shunts with Kronos valves


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MISSION• To contribute to humanwelfare by application ofbiomedical engineering inthe research, design,manufacture, and sale ofinstruments or appliancesthat alleviate pain, restorehealth and extend life.

• To direct our growth inthe areas of biomedicalengineering where wedisplay maximum strengthand ability; to gather peopleand facilities that tend toaugment these areas; tocontinuously build on theseareas through education andknowledge assimilation; toavoid participation in areaswhere we cannot makeunique and worthycontributions.

• To strive without reservefor the greatest possiblereliability and quality inour products; to be theunsurpassed standard ofcomparison and to berecognized as a company ofdedication, honesty, integrity,and service.

• To make a fair profit oncurrent operations to meetour obligations, sustain ourgrowth and reach our goals.

• To recognize the personalworth of employees byproviding an employmentframework that allowspersonal satisfaction in workaccomplished, security,advancement opportunityand means to share in thecompany’s success.

• To maintain goodcitizenship as a company.

MISIÓN• Contribuir al bienestar delhombre aplicando la inge-niería biomédica a la in-vestigación,el diseño, lafabricación y la venta deinstrumentos o dispositivospara aliviar el dolor, restaurarla salud y prolongar la vida.

• Encauzar nuestro crecimiento hacia las especialidades de laingeniería biomédica dondepodamos ofrecer más fuerzay mayor capacidad; reunirpersonal y recursos paraperfeccionar estasespecialidades; capitalizarcontinuamente nuestraexperiencia en este campomediante la enseñanza y laasimilación deconocimientos; y evitar laparticipación en áreas en lasque no podamos ofrecercontribuciones exclusivasy valiosas.

• Esforzarnos todo lo posiblepara alcanzar la máxima fiabilidad y calidad en nues-tros productos; llegar a marcar la pauta en nuestroramo y ser reconocidos comouna empresa que ofrecededicación, honestidad,integridad y servicio.

• Lograr una rentabilidadadecuada para las opera-ciones actuales, de modoque podamos cumplir connuestras obligaciones finan-cieras, mantener nuestrocrecimiento y alcanzarnuestros objetivos.

• Reconocer el valor individual de nuestros empleados ofreciéndoles un ambiente de trabajo que promueva la satisfacciónpersonal en el cumplimientode sus deberes y que propor-cione seguridad, oportuni-dades de progreso y mediospara participar en los triunfosde la empresa.

• Contribuir como empresa al bienestar de la comunidad.

DOELSTELLINGEN• Een bijdrage leveren aanhet welzijn van de mensheiddoor biomedische techno-logieën toe te passen bijonderzoek, ontwerp, fabri-kage en verkoop van instru-menten of apparaten die pijnverlichten, genezen en delevensduur verlengen.

• Onze groei richten op die gebieden van de biomedische technologie waar onze kracht enbekwaamheid ligt; mensenen faciliteiten bijeenbrengendie bijdragen tot de uit-breiding van deze gebieden;voortdurend werken aandeze gebieden d.m.v.opleiding en het vergarenvan kennis; het mijden van gebieden waaraan we geenunieke en waardevollebijdrage kunnen leveren.

• Onvoorwaardelijk strevennaar de hoogst mogelijkebetrouwbaarheid en kwaliteitvan onze produkten; hetongeëve- naarde voorbeeldzijn en door anderen erkendte worden als een bedrijf datstaat voor toewijding, eerlijkheid, integriteit en dienstverlening.

• Een redelijke winst makenuit de huidige werkzaam-heden zodat we onze verplichtingen kunnen nako-men, onze groei kunnenvoortzetten en onzedoelstellingen kunnenverwezenlijken.

• De individuele bijdrage vanwerknemers erkennen d.m.v.een werkstruktuur waarbijpersoonlijke tevredenheidover de volbrachte taak, ze-kerheid, promotiekansen ende middelen om in hetsucces van het bedrijf tedelen, mogelijk zijn.

• Zich als bedrijf maatschap-pelijk verantwoord blijvengedragen.

Mission Statement

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MISSION• Contribuer au bien-êtrede l’homme en appliquantles principes de l’ingénieriebiomédicale à la recherche,à la conception, à lafabrication et à ladistribution de matériels oud’appareillages qui sou-lagent, guérissent, et pro-longent la vie.

• Orienter notre croissancevers les secteurs de l’ingé-nierie biomédicale danslesquels nous possédonsune expertise incontestée.Rassembler les personnes etcréer les conditions quifavorisent le développementde ces secteurs; assurer laformation et l’assimilationdes connaissances dans cesdomaines. Ne nous engagerque dans des secteurs oùnotre apport serait uniqueet significatif.

• Tout mettre en œuvre ets’investir à fond pouratteindre une fiabilité et unequalité au-dessus desnormes, pour devenir lemodèle de référence et êtreune entreprise reconnuepour son engagement et sesvaleurs d’honnêteté,d’intégrité et de service.

• Dégager un profitraisonnable de nos activitéspour pouvoir faire face ànos obligations, maintenir notre taux de croissance etatteindre nos objectifs.

• Reconnaître la valeurpersonnelle des employés etcréer un environnement detravail satisfaisant, offrantsécurité, possibilités d’avan-cement et participation ausuccès de la société.

• Remplir nosresponsabilités civiques entant qu’entreprise.

MISSIONE• Contribuire al benessereumano applicando l’inge-gneria biomedica allaricerca, alla progettazione,alla fabbricazione e allavendita di strumenti oapparecchi che alleviano ildolore, ridonano la salute eprolungano la vita.

• Dirigere la nostracrescita nelle aree dellabioingegneria medica nellequali dimostriamo ilmassimo della nostra forza ecapacità; mettere insiemeindividui e strumenti chetendono a far crescerequeste aree; rinforzarleattraverso l’istruzione el’assimilazione culturale;evitare la partecipazione inaree nelle quali nonpossiamo dare uncontributo unico e valido.

• Sforzarci senza riserve diraggiungere l’affidabilitàe la qualità più elevate neinostri prodotti; diventareil modello di paragoneinsuperabile ed esserericonosciuti comeun’azienda devota, onesta,integra e fornitrice di servizi.

• Ricavare un equo profittodalle attività correnti inmodo da far fronte ai nostriimpegni, sostenere la nostracrescita e raggiungere inostri obiettivi.

• Riconoscere il valorepersonale dei dipendentioffrendo un ambiente dilavoro che permetta lasoddisfazione personale nellavoro compiuto, nellasicurezza, nelle opportunitàdi avanzamento e nei mezziper condividere il successodella azienda.

• Mantenere una presenzasociale come azienda.

UNTERNEHMENS-LEIT-SÄTZE• Einen Beitrag zum Wohleder Menschen zu leistendurch angewandte bio-medizinische Technik zurRehabilitation, Lebensver-längerung, Schmerz-linderung und Steigerungder Lebensqualität.

• ErfolgsorientiertesWachstum dort, wo wirstark sind, im Bereich derbiomedizinischen Technik.Kein Engagement inBereichen, in denen wirkeine wesentlichen undwertvollen Beiträge leistenkönnen. Steigerung derMitarbeiter-Qualifikationdurch Weiterbildung.Ständige Verbesserungunserer Einrichtungen.

• Kompromißlose Zuver-lässigkeit und Qualitätunserer Produkte.Anerkennung zu finden alsengagiertes, integres undinnovatives Unternehmenmit hervorragendem Service.

• Profitabel zu wirtschaften,um unsere Verpflichtung zuerfüllen, unser Wachstum zusichern und unsere Ziele zurealisieren.

• Anerkennung des Wertesund der Leistungen jedeseinzelnen Mitarbeiters.Wahrung und Schaffungvon Rahmenbedingungen,die zur persönlichenZufriedenheit unsererMitarbeiter beitragen, z.B.Aufstiegschancen, Sicherheitdes Arbeitsplatzesund Beteiligung am Unternehmenserfolg.

• Als verantwortungs-bewußtes Mitglied derGesellschaft zu agieren.

Medtronic has a multi-dimensional community partnership withWay to Grow–Camden’s Future, a Minneapolis organization thatreadies children for school. Employee volunteers recently refur-bished and installed surplus computers for its drop-by center tohelp preschoolers become familiar with technology before they startschool. Our relationship with Way to Grow–Camden’s Futurealso includes charitable contributions and volunteer leadership atmany of the organization’s events.

Way to Grow - Camden’s Future is one of the hundreds of com-munity partners we support with grants, primarily from theMedtronic Foundation, through volunteer time and talents andproduct donations. Our focus is on health, education and commu-nity organizations.

1998 Highlights:

• HeartRescue, a program that funds automatic external defibril-lators (AEDs) in police and fire departments in selected communi-ties. The use of AEDs can increase the chances of recovery for themore than 350,000 people in the United States each year who expe-rience an episode of cardiac arrest. Our HeartRescue program iscurrently in place in 15 cities around the world.

• Healthy Countries, our grant program in four developing coun-tries is aimed at directly impacting peoples’ lives and increasing thecountries’ capacities to meet local health needs.

• Product donations. Last year we donated products totaling $1.3 mil-lion to organizations that link medical device companies with patientsin developing countries who can benefit most from these therapies.

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Medtronic employeesValerie Scott, farleft, Karin Klarer,and Doug Claggettpartnered with KayCunningham,right, ProjectCoordinator at Way to Grow–Camden’s Future, toset up a preschoolcomputer learningcenter, inset.

Medtronic in the Community

Health28%

Education37%

Community35%

MEDTRONICPHILANTHROPYFISCAL 1998

MedtronicFoundation$8.1 Million

Product Donations$1.3 Million

Medtronic, Inc. $0.9 Million

TOTAL GIVING$10.3 MILLION

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You may also learn more about Medtronic via the Internet. Visit us at “www.medtronic.com”.

Annual Meeting

The annual meeting of Medtronic shareholders will take place onWednesday, August 26, 1998, beginning at 10:30 a.m. at theCorporate Center, 7000 Central Avenue, NE, Minneapolis (Fridley),Minnesota. The Notice of Annual Meeting and Proxy Statement aremailed to shareholders with the Annual Report.

Investor Information

Shareholders, securities analysts and investors seeking additionalinformation about the company should call Investor Relations at612-514-3035. The following information may be obtained uponrequest from the Medtronic Investor Relations Department, m.s. 206,7000 Central Avenue NE, Minneapolis, Minnesota 55432, USA:

• News releases describing significant company events and salesand earnings results for each quarter and the fiscal year;

• Form 10-K Annual and Form 10-Q Quarterly Reports to theSecurities and Exchange Commission detailing Medtronic's busi-ness and financial condition.

You may also learn more about Medtronic via the Internet. Visit usat “www.medtronic.com”.

Stock Exchange Listing

New York Stock Exchange (symbol: MDT)

Price Range of Medtronic Stock

Fiscal Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.

1998High $46.00 $50.50 $52.50 $57.75Low 33.13 42.63 44.94 49.75

1997High 28.75 33.13 35.25 35.69Low 23.69 25.00 30.69 29.19

Prices are closing quotations. On July 2, 1998 there were 32,850holders of record of the company's common stock. The regularquarterly cash dividend was 5.5 cents per share for 1998 and 4.75cents per share for 1997.

Independent Accountants

Price Waterhouse LLP, Minneapolis

Stock Transfer Agent and Registrar

Norwest Bank Minnesota, N.A., acts as transfer agent and registrar,dividend paying agent and dividend reinvestment plan agent forMedtronic and maintains all shareholder records for the company.If you have questions regarding the Medtronic stock you own, stocktransfers, address or name changes, direct deposit of dividends, lostdividend checks, lost stock certificates or duplicate mailings, pleasecontact Norwest's Shareowner Services by writing or calling:

Norwest Bank Minnesota, N.A.Shareowner Services161 North Concord ExchangeP.O. Box 64854St. Paul, MN 55164-0854Telephone: 1-800-468-9716 or 1-612-450-4064Fax: 1-612-450-4078

Dividend Reinvestment Plan

Medtronic shareholders can take advantage of this plan thatpermits automatic reinvestment of dividends to purchase whole orfractional shares of Medtronic stock. The plan also permits cashcontributions ranging from $25 to $4,000 per month to purchaseadditional stock. All registered holders of Medtronic stock mayparticipate. Cash contributions may be made by mail or throughautomatic deductions from your bank account.

To enroll in the Dividend Reinvestment Plan or obtain additionalinformation, call the transfer agent, Norwest, at 1-800-468-9716 or612-450-4064. You may also send inquiries to Norwest via e-mail [email protected] for more information regarding dividendreinvestment.

The following are registered, unregistered and service trademarks of Medtronic, Inc., and its affiliat-ed companies: Achiever™, Activa™, AlgoMed™, Amazr™ RF, Analyzer™, AneuRx™, APTSM, Archer™,autoLOG™, beStent™, Bio-Pump®, BioGlide®, CapSure® SP, CapSure® Z, CardioTherm™, Champion™,Chronicle™, Clarity™, ClearView™, The Collection™ II, CSS™, Delta®, Digitrapper™, DLP®, Duet™,Duran™, Freestyle®, Gem™, Gem™ DR, Grinfeld™, Hancock®, hemoSTATUS™ 2, Hepamed™, Hepcon®,ImPort®, Inspire™, InSync™, InterStim®, IsoMed™, ITB™, Itrel®3, Itrel®II, Jewel® AF, Keypoint®,Kinetra™, Kronos™, Mattrix®, Maxima Forté®, Medtronic Hall™, Medtronic.Kappa™,Medtronic.Vision™, Micro Jewel® II, Mosaic®, Mustang®, Novus™, Octopus®, Oval™MC2, Presario™,PR Logic™, PS Medical®, Restore™, Reveal®, Rival™, Rivas™, Selection™, Sequestra™, Sprint™,SynchroMed®, Synergy™, TLAS™, Vector™ X, Vitatron®, Wiktor®, Wiktor®-i, Zuma™.

AOA® is a registered trademark of Biomedical Design, Inc., Atlanta, Ga.

Carmeda® is a registered trademark of Carmeda AB, Sweden.

Carpentier® bi-caval femoral cannula is a registered trademark of Baxter International, Inc., Deerfield, Ill.

Lioresal® is a registered trademark of Novartis Pharmaceutical Corporation of Summit, NJ, USA.

NeuroPEN® is a registered trademark of Clarus Medical, Minneapolis, Minn..

Investor Information

Chairman of the BoardWilliam W. George

Audit CommitteeJack W. Schuler (Chair)William R. Brody, M.D., Ph.D.Bernadine P. Healy, M.D.Thomas E. Holloran Richard A. Swalin, Ph.D.

Corporate Governance CommitteeRichard L. Schall (Chair)William R. Brody, M.D., Ph.D.Paul W. ChellgrenAntonio M. Gotto, Jr., M.D.Bernadine P. Healy, M.D.Thomas E. HolloranJack W. SchulerGerald W. SimonsonGordon M. SprengerRichard A. Swalin, Ph.D.

Technology and Quality CommitteeBernadine P. Healy, M.D.(Chair)William R. Brody, M.D., Ph.D.Antonio M. Gotto, Jr., M.D.Thomas E. HolloranGordon M. SprengerRichard A. Swalin, Ph.D.

Finance CommitteeGordon M. Sprenger (Chair)Paul W. ChellgrenAntonio M. Gotto, Jr., M.D.Richard L. SchallGerald W. Simonson

Compensation CommitteeGerald W. Simonson (Chair)Paul W. Chellgren Bernadine P. Healy, M.D.Richard L. SchallJack W. SchulerRichard A. Swalin, Ph.D.

The Board of Directors held its May 1998meeting at Medtronic Europe head-quarters in Tolochenaz, Switzerland.

William R. Brody, M.D., Ph.D.President, The Johns Hopkins UniversityDirector since 1998

Paul W. ChellgrenChairman & Chief Executive Officer, Ashland Inc.Director since 1997

Arthur D. Collins, Jr.President & Chief Operating Officer, Medtronic, Inc.Director since 1994

William W. GeorgeChairman & Chief Executive Officer, Medtronic, Inc.Director since 1989

Antonio M. Gotto, Jr., M.D.Dean, Cornell University MedicalCollege and Medical Affairs Provost,Cornell UniversityDirector since 1992

Bernadine P. Healy, M.D.Dean, College of Medicineand Public Health Ohio State UniversityDirector 1987-1991 andre-elected 1993

Thomas E. HolloranProfessor, Graduate Schoolof Business, University of St. ThomasDirector since 1960

Glen D. Nelson, M.D.Vice Chairman, Medtronic, Inc.Director since 1980

Richard L. SchallConsultant, Retired Vice Chairman, Dayton Hudson CorporationDirector since 1971

Jack W. SchulerChairman, Stericycle, Inc.and Ventana Medical Systems, Inc.Director since 1990

Gerald W. SimonsonPresident & Chief Executive Officer, Omnetics Connector CorporationDirector since 1962

Gordon M. SprengerExecutive Officer, Allina Health SystemDirector since 1991

Richard A. Swalin, Ph.D.Professor Emeritus of MaterialsScience and TechnologyManagement, University of ArizonaDirector 1973-1977 andre-elected 1980

Board of Directors

12

34

65 7

89

10

1112

13

1. William R. Brody, M.D., Ph.D. 2. Richard A. Swalin, Ph.D.3. Arthur D. Collins, Jr. 4. Antonio M. Gotto, Jr. M.D. 5. Gordon M. Sprenger 6. Bernadine P. Healy, M.D. 7. Richard L. Schall 8. William W. George 9. Glen D. Nelson, M.D. 10. Paul W. Chellgren 11. Jack W. Schuler 12. Thomas E. Holloran 13. Gerald W. Simonson

Executive Committee

12 3 4 6

5 7 89 10 11

12 13

1. Bill K. Erickson 2. Bobby I. Griffin3. Janet S. Fiola 4. Ronald E. Lund 5. Stephen H. Mahle 6. Glen D. Nelson, M.D.7. Arthur D. Collins, Jr. 8. B. Kristine Johnson9. John A. Meslow 10. William W. George 11. Robert L. Ryan 12. Philip M. Laughlin 13. Barry W. Wilson

William W. GeorgeChairman of the Board andChief Executive Officer


Glen D. Nelson, M.D.Vice Chairman

Bobby I. Griffin*Executive Vice President

Bill K. EricksonSenior Vice President and President,Americas

Janet S. FiolaSenior Vice President,Human Resources

B. Kristine JohnsonSenior Vice President andChief Administrative Officer

Philip M. LaughlinSenior Vice President and President,Cardiac Surgery

Ronald E. LundSenior Vice President,General Counsel and Secretary

Stephen H. MahleSenior Vice President and President,Cardiac Rhythm Management

John A. MeslowSenior Vice President and President,Neurological

Robert L. RyanSenior Vice President andChief Financial Officer

Barry W. WilsonSenior Vice President and President,Europe/Middle East/Africa

*Retires August 1998

Cardiac Rhythm ManagementStephen H. MahlePresident

Michael A. JamesVice President, Strategic Marketing

Kenneth M. Riff, M.D.Vice President, Research and Monitoring Systems

Kathleen M. StabyVice President, Human Resources

Gordon W. SteereVice President and General Manager, Micro-Rel

Lester J. SwensonVice President, Finance and Business Systems

Bradycardia Pacing

William V. MurrayVice President and General Manager

Donald L. DeyoVice President, Pacing Systems Operations

Tachyarrhythmia Management

Jon T. TremmelPresident

John (Jack) G. KeimelVice President, Defibrillator Systems Operations

Atrial Fibrillation Management

Ursula GebhardtVice President

Heart Failure Management

Bonnie L. LaboskyVice President and General Manager

CardioRhythm

Steve R. LaPorteVice President and General Manager

VascularDavid J. LentzVice President and General Manager,Coronary Vascular

Mel SchatzVice President and General Manager,Peripheral Vascular

Jerome F. PietriniVice President, Human Resources

Zach CybulskiVice President and General Manager

Cardiac SurgeryPhilip M. LaughlinPresident

Clifton W. OwensVice President, Marketing andMinimally Invasive Cardiac Surgery

Thomas L. RooneyVice President, Finance

Heart Valves

James G. FosterVice President and General Manager

Walter A. CuevasVice President, Operations

Cardiopulmonary

Skip McDanielVice President and General Manager

Frederick M. BauerVice President, Operations

Medtronic DLP Cannulae

Michael J. CostelloVice President and General Manager

Blood Management

Clifton W. OwensVice President and General Manager

NeurologicalJohn A. MeslowPresident

Scott D. BronsonVice President,Finance and Administration

Gary P. EastVice President and General Manager,Medtronic PS Medical

Kim E. McEachronVice President, Human Resources

Michael M. SelzerVice President and General Manager,Neurostimulation

Gary E. TaylorVice President, U.S. Sales

Scott R. WardVice President and General Manager,Drug Delivery

Warren S. WatsonVice President and General Manager,InterStim

AmericasBill K. EricksonPresident

Tom S. AndersonVice President, U. S. Southeast Region

Donald P. BrownVice President, U.S. Southern Region

Charles R. BrynelsenVice President, U.S. Midwest Region

Dennis D. DietzVice President, U.S. Western Region

Lee P. EricksonVice President, Finance and Operations

Richard J. FaleschiniVice President,Health Care Systems Marketing

Larry W. FoundVice President, Human Resources

H. Russell HammVice President, U.S. Eastern Region

Jodi L. HarpsteadVice President, Cardiac Rhythm ManagementSales and Marketing, U.S. Cardiovascular

Robert J. HermannVice President, Coronary Vascular Salesand Marketing, U.S. Cardiovascular

Donald A. HurleyVice President, Canada

Raymond L. LavoieVice President, U.S. Cardiovascular

Emilio R. LopezVice President, Latin America

Daniel A. PelakVice President, Cardiac Surgery Salesand Marketing, U.S. Cardiovascular

David R. RaichVice PresidentU.S. Southwest Region

Medtronic Leadership

Europe/Middle East/AfricaBarry W. WilsonSenior Vice President and President

Drago A. CerchiariVice President, Iberia, Austria and Switzerland

Deborah L. DenzVice President, Human Resources

Lars HolmkvistVice President, Coronary Vascular

Fred LindemansVice President and General Manager, Bakken Research Center

Gerard B. MahoudeauVice President, Cardiac Surgery

Jo W. MerkunVice President, Northern Region, France, Italy

Stanton D. Myrum Vice President, Technology and Operations

Randolph C. RaettigVice President, Country Manager, Germany

Frank E.M. SprengersVice President and General Manager,European Service and Technology Center andInterim General Manager, Vitatron

Oern StugeVice President, Neurological, Europe/Middle East/Africa

Thomas M. TefftVice President and Controller

Asia/PacificKeith E. WilliamsPresident

Hiroshi KudoVice President, Commercial Operations, Japan

CorporateDale F. BeumerVice President, Treasury and Investor Relations

John W. BorgVice President, Assistant General Counsel,Corporate Law

Peter A. ChevalierVice President, Chief Quality and RegulatoryOfficer

Paul CitronVice President, Science & Technology

Mary Ann DonahueVice President, Human Development

M. Jacqueline EastwoodVice President, Venture Investing

Gary L. EllisVice President, Corporate Controller

Michael D. EllweinVice President and Chief Development Officer

Susan A. FrankVice President, Information Technology

John GossmannVice President, Corporate Strategic Sourcing andProcurement

Frederick S. HalversonVice President, International Regulatory Strategyand Reimbursement Policy

Sue R. HalversonVice President, Assistant General Counsel,Litigation

Steven B. KelmarVice President, Government Affairs andCorporate Relations

Marcea Bland LloydVice President and Assistant General Counsel

Rodger P. McCombsVice President, Business Shared Services

David A. NessVice President, Compensation and Benefits

J. Robert Paulson, Jr.Vice President, Corporate Strategy and Planning

Harold R. PattonVice President and Chief Patent Counsel

Richard A. PloetzVice President, Corporate Human Resources

Lawrence W. ShearonVice President, Corporate Technology

Charles H. SwansonVice President, Corporate Regulatory Affairs

UC9800665EN© Medtronic, Inc. 1998All Rights ReservedPrinted in USA

1

World HeadquartersMedtronic, Inc.7000 Central Avenue NEMinneapolis, MN 55432-3576USAInternet:www.medtronic.comTelephone: (612) 514-4000FAX: (612) 514-4879

Europe Medtronic Europe S.A.Route du MolliauCH-1131 TolochenazSwitzerlandTelephone: (41 21) 802 7000FAX: (41 21) 802 7900

Asia/PacificMedtronic Asia/PacificShuwa Kioi-cho Park Bldg., 5Fl.3-6 Kioi-cho, Chiyoda-kuTokyo 102JapanTelephone: (81-3) 3230-2919FAX: (81-3) 3230-2625

2

1

Partners inMedical

Innovation

1998 Annual ReportFinancial Review

1

Management’s Discussion and Analysis

SummaryMedtronic is the world’s leading medical technology company specializing in implantable and interventional therapies. Primary productsinclude those for bradycardia pacing, tachyarrhythmia management, atrial fibrillation management, heart failure management, coronary andperipheral vascular disease, heart valves replacement, extracorporeal cardiac support, minimally invasive cardiac surgery, malignant and non-malignant pain, movement disorders, neurosurgery, and neurodegenerative disorders.

Fiscal 1998 was a solid year for the company, as evidenced by the 13th consecutive year of increases in revenues. Net sales of $2.60 billion rep-resent a 6.8% increase over the $2.44 billion in fiscal 1997. Net sales excluding the effects of foreign currency translation increased 11.1% com-pared to increases of 15.2% in fiscal 1997 and 23.5% in fiscal 1996. The growth during fiscal 1998 was led by the performance of core productlines, particularly Cardiac Rhythm Management and Neurological. The decrease in the growth rates from year to year is primarily the resultof the timing of new product introductions during fiscal years 1996, 1997, and 1998 as well as declining growth rates in certain markets.

Fiscal 1998 marked a year in which the company announced significant management initiatives to reduce manufacturing and administrativecosts throughout the company. These initiatives include restructuring the vascular organization and reducing global infrastructure by streamlin-ing certain manufacturing and administrative operations within the United States, Europe, and Japan. The company believes these actions willsignificantly strengthen the company’s competitive position in the global health care market, which itself is under increasing cost pressures. Netearnings and earnings per share (diluted) for fiscal 1998 were $457.4 million and $0.96, respectively, compared to $530.0 million and $1.09,respectively, for fiscal 1997. Excluding the effects of the $205.3 million pre-tax non-recurring charges taken in the third quarter, fiscal 1998 earn-ings per share would have been $1.25 (diluted), representing an increase of 14.7%.

Net SalesThe increase in net sales from fiscal 1997 to fiscal 1998 was primarily the result of continued unit volume increases. With the exception ofangioplasty catheters, selling prices for the company’s products during fiscal 1998 remained relatively stable overall, although certain products expe-rienced low single-digit declines in selling prices as a result of the medical market’s continued focus on cost controls and competitive pricing. Salesin the United States in fiscal 1998 increased 12.8% over the prior year, compared to 14.6% in fiscal 1997. Sales outside the United States increased8.7% on a constant currency basis compared to 16.0% in fiscal 1997. Sales in non-U.S. markets accounted for 38.6% of worldwide net sales, com-pared with 41.8% in fiscal 1997 and 43.0% in fiscal 1996. Foreign exchange rate movements had an unfavorable year-to-year impact on interna-tional net sales of $103.2 million and $64.4 million in fiscal 1998 and fiscal 1997, respectively, and a favorable year-to-year impact of $21.3 millionin fiscal 1996. These exchange rate movements are caused primarily by the impact of the stronger U.S. dollar in fiscal 1998 and 1997 and the rel-atively weaker U.S. dollar in fiscal 1996 versus major European currencies and the Japanese yen. The impact of foreign currency fluctuations on netsales is not necessarily indicative of the impact on net earnings due to the offsetting foreign currency impact on operating costs and expenses andthe company’s hedging activities (see also Market Risk and Note 4 to the consolidated financial statements for further details on foreign currencyinstruments and the company’s risk management strategies with respect thereto). As reflected in Note 4, realized gains and losses on the company’shedging activities were offset by the transactions being hedged and are therefore consistent with the company’s risk management strategies.

The following is a summary of sales by product line as a percentage of total net sales:


Cardiac Rhythm Management 64.2% 65.6% 67.9%Other Cardiovascular 21.0 22.0 23.6Neurological & Other 14.8 12.4 8.5

Net sales of Cardiac Rhythm Management products, which consist primarily of products for bradycardia pacing and tachyarrhythmia man-agement, increased 8.7% in fiscal 1998 after removing the impact of foreign exchange rate fluctuations, versus growth of 11.5% in fiscal 1997.This growth was led by strong contributions from Tachyarrhythmia Management’s Micro Jewel II implantable cardioverter defibrillator, whichcontinues to hold a strong market share position in the highly competitive defibrillator marketplace. The company has applied for U.S. Foodand Drug Administration (FDA) regulatory clearance for the Gem and Gem DR, part of the next generation Gem family of defibrillators.In June 1998, the company launched the Gem DR in Europe and certain markets outside the U.S. Unit sales of bradycardia implantable pulsegenerators (IPGs) achieved more than 8.0% growth in fiscal 1998. Bradycardia unit sales continued to reflect strong growth in both U.S. andnon-U.S. markets, primarily on the strength of the new Medtronic.Kappa 400 series pacemakers, which were released in Europe in January 1997 and which received FDA clear-ance in late January 1998. In addition, the Medtronic.Kappa 700 series, a full family of pacemakers to replace the Thera (i-Series), was launched in Europe in early April 1998.

In Millions of Dollars

US

U.S. VS.INTERNATIONAL

SALES

0

300

600

900

1200

1500

1800

2100

2400

2700

96 97 98Int’l


NET SALES BY PRODUCT LINE

0

300

600

900

1200

1500

1800

2100

2400

2700

96 97 98Cardiac Rhythm Mgmt.Other CVNeuro & Other

Company Overview and Financial ReviewMedtronic’s 1998 Annual Report consists of two parts: the Company Overview and Financial Review. If you have received onlyone part, you may obtain the other section by contacting Medtronic Investor Relations, m.s. 206, 7000 Central Avenue NE,Minneapolis, Minnesota 55432, USA, 612-514-3035. You may also contact us through the Internet at “www.medtronic.com”.

Sales within the Other Cardiovascular product line, consisting of heart valves, perfusion and blood management systems, cannulae, surgicalaccessories, balloon and guiding catheters and stents, increased 6.6% and 8.4% in fiscal 1998 and fiscal 1997, respectively, after excluding theeffects of foreign currency translation. The fiscal 1998 growth is attributable in significant part to sales of the Wiktor Prime coronary stent inthe first half of fiscal 1998 and by strong growth in sales of tissue values and surgical cannulae products. The Medtronic Freestyle stentless aor-tic tissue heart valve, which received FDA clearance in November 1997, also contributed to accelerated sales growth of tissue valves. However,balloon catheter sales decreased significantly from the prior year as significant competition for balloon catheters continued, resulting in declin-ing unit sales and continued declining average selling prices. The stent market has also become increasingly competitive, particularly in theUnited States. As a result of recent launches of competitive stents, the last two quarters of fiscal 1998 marked sequential declines in stent sales.These disappointing sales results for balloon catheters and stents necessitated management initiatives during the third quarter of fiscal 1998 toreduce costs in the vascular organization and focus on new products as discussed in Note 3 to the consolidated financial statements. The firstof several new coronary vascular products, the Presario single-operator exchange balloon catheter, was released internationally late in thefourth quarter of fiscal 1998. The endovascular stent-graft system, launched outside the United States in the second quarter of fiscal 1998, con-tinues to gain rapid medical acceptance for minimally-invasive treatment of abdominal aortic aneurysms. Sales of cardiac perfusion and bloodmanagement systems were relatively flat as compared to the prior fiscal year.

Net sales of Neurological and Other products, consisting primarily of implantable neurostimulation devices, drug administration systems, neu-rosurgery products, and diagnostic systems, continued to experience significant growth. Exclusive of the effects of foreign currency translation,net sales grew 31.4% over the previous year compared to growth of 63.4% in fiscal 1997. Particularly strong sales growth during fiscal 1998 wasachieved in the drug delivery product line as a result of continued increased demand for the SynchroMed drug infusion system for delivery ofmorphine for chronic pain and for delivery of Lioresal (baclofen, USP) Intrathecal for treatment of cerebral and spinal spasticity. Another stronggrowth factor was the continued rapid sales growth in Europe of Medtronic Activa neurostimulation therapy for control of essential tremor andtremor associated with Parkinson’s disease. This therapy received U.S. FDA clearance in August 1997. Significant progress was made during thelatter part of fiscal 1998 in training physicians and gaining reimbursement for this therapy in the majority of states. In September 1997, thecompany received FDA clearance to market its InterStim continence control therapy. The company is currently training centers to develop thismarket. In addition, neurosurgical shunts for hydrocephalus contributed to the strong growth. The November 1995 and April 1996 acquisitionsof PS Medical and Synectics, respectively, contributed significantly to the fiscal 1997 growth rate.

Costs and ExpensesThe following is a summary of major costs and expenses as a percentage of net sales:


Cost of Products Sold 25.7% 25.0% 27.2%Research & Development 11.4 11.5 11.2Selling, General & Administrative 29.1 31.3 32.3Non-recurring Charges 7.4 — —

Cost of products sold as a percentage of net sales increased slightly in fiscal 1998 as compared to fiscal 1997. This increase was primarily theresult of a $12.9 million charge included within the third quarter restructuring charge for obsolescence on certain vascular inventories. Withoutthe $12.9 million obsolescence charge, cost of products sold as a percentage of net sales would have been 25.2%. The decrease in cost of prod-ucts sold as a percentage of net sales from fiscal 1996 to fiscal 1997 resulted from the impact of favorable product and geographic mixes com-bined with increased volumes, and the favorable impact of foreign exchange rate fluctuations between the time products were shipped and sold.Improvements were partially offset by pricing pressures on certain products and costs related to new product introductions. Future gross marginswill continue to be impacted by competitive pricing pressures, new product introductions, the mix of products both within and among businessesand geographies, and the effects of foreign currency fluctuations.

The company remains committed to spending aggressively on research and development (R&D) to develop technological enhancements andnew indications for existing products, as well as to develop less invasive and new technologies to address unmet patient needs and to help reduceprocedural costs and length of hospital stay. R&D expense was $297.2 million in fiscal 1998 compared to $280.2 million in fiscal 1997.

Selling, general, and administrative expense (SG&A) as a percent of sales decreased in both fiscal 1998 and 1997. The decrease in fiscal 1998 is primarily attributable to contin-ued emphasis on achieving overall cost efficiencies in response to the weaker than anticipated revenue trends for certain products. The fiscal 1998 and 1997 decreases were alsoimpacted by gains recognized from the sale of certain available-for-sale equity securities and increased royalty income offset in part by increased legal costs, additional invest-ments in information technology, and marketing initiatives. In addition, the decrease in fiscal 1998 was impacted by an increase in the dollar amount of gains recognized fromhedging activities as compared to the prior year.

As discussed in Note 3 to the consolidated financial statements, the company recorded pre-tax charges totaling $205.3 million during the third quarter of fiscal 1998. These chargesincluded $156.4 million for management initiatives to restructure the vascular organization and reduce global infrastructure, $12.9 million for obsolescence on certain vascularinventories (included in cost of products sold in the above table) and a $36.0 million commitment to the Medtronic Foundation. Management believes these initiatives will even-tually result in annualized pre-tax cost savings in excess of $50.0 million.

Income TaxesThe company’s effective income tax rate in fiscal 1998 was 34.8% compared to an effective rate of 34.5% in fiscal 1997 and 35.0% in fiscal 1996, after restatement for the acqui-sitions of AneuRx and InStent. Excluding the effect of the non-recurring charges discussed in Note 3 to the consolidated financial statements, the effective income tax rate in fis-cal 1998 would have been 34.5%. Despite tax legislation that reduces U.S. tax benefits derived from the company’s operations in Puerto Rico, management believes that other taxplanning initiatives should contribute to a reduction of up to one percentage point in the effective tax rate for fiscal 1999.

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R&D EXPENSE

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30

60

90

120

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180

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270

96 97 98


DIVIDENDS TOSHAREHOLDERS

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45

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105

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96 97 98

Management’s Discussion and Analysis

Liquidity and Capital Resources

SummaryThe company continued to strengthen its financial position during fiscal 1998. At April 30, 1998, working capital, the excess of current assets over current liabilities, totaled $979.6million compared to $719.2 million at April 30, 1997. The current ratio at April 30, 1998, was 2.7:1 compared with 2.4:1 and 2.6:1 at April 30, 1997 and 1996, respectively. Thecompany’s net cash position, defined as the sum of cash, cash equivalents, and short-term investments less short-term borrowings and long-term debt was $316.3 million at April30, 1998, compared to $130.2 million at April 30, 1997, and $430.8 million at April 30, 1996. The decrease in the company’s current ratio and net cash position between fiscal1996 and fiscal 1997 was primarily due to the repurchase of $476.6 million of stock during fiscal 1997.

Cash FlowCash provided by operating activities was $590.1 million in fiscal 1998 compared to $463.6 million in fiscal 1997 and $500.9 million in fiscal 1996. Fiscal 1998 operating cashflows were more than sufficient to fund the company’s stock repurchases, capital expenditures, and dividends paid to shareholders. Repurchases of common stock totaled $168.2million in fiscal 1998, compared to $476.6 million and $33.6 million in fiscal 1997 and fiscal 1996, respectively. The significant stock repurchases during fiscal 1997 were sup-ported by the company’s existing strong cash position. Additions to property, plant and equipment totaled $148.2 million in fiscal 1998, compared to $171.3 million and $165.1million in fiscal 1997, and 1996, respectively. The company expects future growth in capital spending to support increased manufacturing capacity and operational requirements.This spending will be financed primarily by funds from operations. Dividends paid to shareholders totaled $102.9 million, $90.7 million, and $60.4 million for fiscal 1998, 1997,and 1996, respectively. Consistent with the company’s financial objectives, the company expects to continue paying dividends at a rate of approximately 20% of the previous year’snet earnings.

In addition, significant items affecting cash flows during fiscal 1997 included net sales and maturities of marketable securities of $367.3 million and other investing activities of$99.1 million. Significant items affecting cash flows during fiscal 1996 included the cash purchase price paid for the acquisition of Synectics of approximately $56.0 million andnet purchases of marketable securities totaling $190.3 million.

Debt and CapitalAt April 30, 1998, the total number of shares of common stock authorized by the Board of Directors for repurchase was approximately 21.9 million shares. During fiscal 1998, approx-imately 3.5 million shares were repurchased at an average price of $47.90. During fiscal 1997, approximately 14.8 million shares were repurchased at an average price of $32.18. Thecompany repurchased shares in fiscal 1998 and 1997 to offset dilution resulting from shares issued in conjunction with purchased acquisitions in fiscal 1996 and fiscal 1997, theissuance of stock under employee stock purchase and award plans and to take advantage of market conditions. Future repurchases of common stock will depend upon the company’ssystematic stock repurchase plan, market conditions, restrictions related to pooling transactions, and other factors.

The company’s capital structure consists of equity and interest-bearing debt. Interest-bearing debt as a percent of total capital was 5.1% at April 30, 1998, compared with 6.4% and4.0% at April 30, 1997, and 1996, respectively.

One of the company’s key financial objectives is achieving an annual return on equity (ROE) of at least 20%. ROE compares net earnings to average shareholders’ equity and isa key measure of management’s ability to utilize the shareholders’ investment in the company effectively. In fiscal 1998, ROE was 24.1% as compared to 29.6% in fiscal 1997.Excluding the effects of the $205.3 million pre-tax charges taken in the third quarter, fiscal 1998 ROE would have been 30.3%. In fiscal 1996, ROE was 27.0% and in each of thepreceding eight years, ROE exceeded 20%.

Market RiskDue to the global nature of its operations, the company is subject to the exposures that arise from foreign exchange rate fluctuations. Such exposures arise from transactionsdenominated in foreign currencies, primarily from translation of results of operations from outside the United States, intercompany loans, and intercompany purchases of inven-tory. The company is also exposed to interest rate changes.

The company’s objective in managing its exposure to foreign currency fluctuations is to minimize earnings and cash flow volatility associated with foreign exchange rate changes.The company utilizes a variety of simple derivative financial instruments, including foreign currency forward and option contracts, as hedges to meet these objectives. Theprincipal currencies hedged are the Japanese yen and the German mark. The gains and losses on these contracts offset changes in the value of the related exposures. It is thecompany’s policy to enter into foreign currency hedging transactions only to the extent true exposures exist. The company does not enter into foreign currency transactions forspeculative purposes. The company’s risk management activities for fiscal 1998 were successful in reducing the net earnings impact of currency fluctuations to an immateriallevel despite adverse market conditions.

The fair value of all foreign currency derivative contracts outstanding at April 30, 1998 was $6.8 million, which does not represent the company’s annual exposure. An analysis wasprepared to estimate the sensitivity of the fair value of all derivative foreign exchange contracts to hypothetical 10% favorable and unfavorable changes in spot exchange rates atApril 30, 1998. Premiums paid for purchased options are included in the fair value. The results of this estimation, which may vary from actual results, are as follows (in millions):

Fair Value of Derivatives

10% adverse rate movement $(1.0)At April 30, 1998 rates 6.810% favorable rate movement 17.7

Any gains and losses on the fair value of derivative contracts would be largely offset by losses and gains on the underlying transactions or anticipated transactions. These offset-ting gains and losses are not reflected in the above analysis. An analysis of the impact on the company’s interest rate sensitive financial instruments of a hypothetical 10% changein short-term interest rates compared to interest rates at April 30, 1998 shows no significant impact on expected fiscal 1999 earnings.

Government Regulation and Other MattersGovernment and private sector initiatives to limit the growth of health care costs, including price regulation and competitive pricing, are continuing in many countries where thecompany does business, including the United States. These changes are causing the marketplace to put increased emphasis on the delivery of more cost-effective medical thera-pies. Although the company believes it is well positioned to respond to changes resulting from this worldwide trend toward cost containment, the uncertainty as to the outcome ofany proposed legislation or changes in the marketplace precludes the company from predicting the impact these changes may have on future operating results.

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In keeping with the increased emphasis on cost effectiveness in health care delivery, the current trend among hospitals and other customers of medical device manufacturers isto consolidate into larger purchasing groups to enhance purchasing power. The medical device industry has also been consolidating rapidly, partly in order to offer a broader rangeof products to large purchasers. As a result, transactions with customers are more significant, more complex and tend to involve more long-term contracts than in the past. Thisenhanced purchasing power may also increase the pressure on product pricing, although management is unable to estimate the potential impact at this time.

In the United States, the Food and Drug Administration (FDA), among other governmental agencies, is responsible for regulating the introduction of new medical devices, includ-ing laboratory and manufacturing practices, labeling and record keeping for medical devices, and review of manufacturers’ required reports of adverse experience to identify poten-tial problems with marketed medical devices. The FDA can ban certain medical devices, detain or seize adulterated or misbranded medical devices, order repair, replacement, orrefund of such devices, and require notification of health professionals and others with regard to medical devices that present unreasonable risks of substantial harm to the pub-lic health. The FDA may also enjoin and restrain certain violations of the Food, Drug and Cosmetic Act and the Safe Medical Devices Act pertaining to medical devices, or initiateaction for criminal prosecution of such violations. Moreover, the FDA administers certain controls over the export of such devices from the United States. Many of the devices thatMedtronic develops and markets are in a category for which the FDA has implemented stringent clinical investigation and pre-market clearance requirements. Any delay or accel-eration experienced by the company in obtaining regulatory approvals to conduct clinical trials or in obtaining required market clearances (especially with respect to significantproducts in the regulatory process that have been discussed in the company’s announcements) may affect the company’s operations or the market’s expectations for the timing ofsuch events and, consequently, the market price for the company’s common stock.

Medical device laws are also in effect in many of the countries in which Medtronic does business outside the United States. These range from comprehensive device approvalrequirements for some or all of Medtronic’s medical device products to requests for product data or certifications. The number and scope of these requirements are increasing.

In the early 1990s, the review time by the FDA to clear medical devices for commercial release lengthened and the number of clearances, both of 510(k) submissions and pre-market approval applications (PMAs), decreased. In response to public and congressional concern, the FDA Modernization Act of 1997 was adopted with the intent of bringing bet-ter definition to the clearance process. Although it is expected that the 1997 Act will result in improved cycle times for product clearance, there can be no assurance that the FDAreview process will not involve delays or that clearances will be granted on a timely basis.

Medtronic is also subject to various environmental laws and regulations both within and outside the United States. The operations of the company, like those of other medical devicecompanies, involve the use of substances regulated under environmental laws, primarily in manufacturing and sterilization processes. While it is difficult to quantify the potentialimpact of compliance with environmental protection laws, management believes that such compliance will not have a material impact on the company’s financial position, resultsof operations or liquidity.

The company operates in an industry susceptible to significant product liability claims. In recent years, there has been increased public interest in product liability claims forimplanted medical devices, including pacemakers and leads. These claims may be brought by individuals seeking relief for themselves or, increasingly, by groups seeking to rep-resent a class, and the company has experienced an increase in such claims. During the past several years, United States District Courts in California, Florida, Kentucky, and Ohiohave refused to certify class actions in cases brought against the company. This is consistent with the trend in class action law as it applies to the medical device industry gener-ally. In addition, product liability claims may be asserted against the company in the future related to events not known to management at the present time. Management believesthat the company’s risk management practices, including insurance coverage, are reasonably adequate to protect against potential product liability losses.

In 1994, governmental authorities in Germany began an investigation into certain business and accounting practices by heart valve manufacturers. As part of this investigation,documents were seized from the company and certain other manufacturers. Subsequently, the United States Securities and Exchange Commission (SEC) also began an inquiry intothis matter. In August 1996, the SEC issued a formal, non-public order of investigation to the company, as it did to at least one other manufacturer. Based upon currently availableinformation, the company does not expect these investigations to have a materially adverse impact on the company’s financial position, results of operations, or liquidity.

The company has completed a review of its computer systems with regard to year 2000 compliance and will either replace or correct through programming modifications thosecomputer systems that have been found to have date-related deficiencies. In addition, the company is assessing the readiness of third parties (e.g., vendors and customers) thatinteract with the company’s systems. Also being assessed are facility and telecommunication systems, as well as systems used to support manufacturing processes, to ensure thatthese will be year 2000 ready. The company’s products have been assessed and found to be year 2000 compliant with the exception of a few requiring minor corrective actions.

External and internal costs specifically associated with modifying internal use software for year 2000 compliance are expensed as incurred. To date, those costs have not beenmaterial. Based upon currently available information, the company does not expect the costs of addressing potential year 2000 problems to have a material adverse impact on thecompany’s financial position, results of operations or liquidity in future periods. The company plans to devote the necessary resources to resolve all significant year 2000 issues ina timely manner.

Cautionary Factors That May Affect Future ResultsCertain statements contained in this Annual Report and other written and oral statements made from time to time by the company do not relate strictly to historical or currentfacts. As such, they are considered “forward-looking statements” which provide current expectations or forecasts of future events. Such statements can be identified by the use ofterminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “possible,” “plan,” “project,” “will,” “forecast” and similar words or expressions.The company’s forward-looking statements generally relate to its growth strategies, financial results, product development and regulatory approval programs, and sales efforts.One must carefully consider forward-looking statements and understand that such statements involve a variety of risks and uncertainties, known and unknown, and may be affect-ed by inaccurate assumptions, including, among others, those discussed in the previous section titled, “Government Regulation and Other Matters.” Consequently, no forward-looking statement can be guaranteed and actual results may vary materially.

The company undertakes no obligation to update any forward-looking statement, but investors are advised to consult any further disclosures by the company on this subject in itsfilings with the Securities and Exchange Commission, especially on Forms 10-K, 10-Q, and 8-K (if any), in which the company discusses in more detail various important factors thatcould cause actual results to differ from expected or historic results. The company notes these factors as permitted by the Private Securities Litigation Reform Act of 1995. It is notpossible to foresee or identify all such factors. As such, investors should not consider any list of such factors to be an exhaustive statement of all risks, uncertainties or potentiallyinaccurate assumptions.

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5

Report of Management

The management of Medtronic, Inc., is responsible for the integrity of the financialinformation presented in the Annual Report. The consolidated financial statementshave been prepared in accordance with generally accepted accounting principles.Where necessary, they reflect estimates based on management’s judgment.

Management relies upon established accounting procedures and related systems ofinternal control for meeting its responsibilities to maintain reliable financialrecords. These systems are designed to provide reasonable assurance that assets aresafeguarded and that transactions are properly recorded and executed in accordancewith management’s intentions. Internal auditors periodically review the accountingand control systems, and these systems are revised if and when weaknesses or defi-ciencies are found.

The Audit Committee of the Board of Directors, composed of directors from outsidethe company, meets regularly with management, the company’s internal auditors,and its independent accountants to discuss audit scope and results, internal controlevaluations, and other accounting, reporting, and financial matters. The indepen-dent accountants and internal auditors have access to the Audit Committee withoutmanagement’s presence.

William W. GeorgeChairman and Chief Executive Officer


Robert L. RyanSenior Vice President and Chief Financial Officer

Report of Independent Accountants

To the Shareholders andBoard of Directors of Medtronic, Inc.

In our opinion, the accompanying consolidated balance sheet and the related state-ments of consolidated earnings, shareholders’ equity and cash flows present fairly, inall material respects, the financial position of Medtronic, Inc., and its subsidiaries atApril 30, 1998 and 1997, and the results of their operations and their cash flows foreach of the three years in the period ended April 30, 1998, in conformity with gener-ally accepted accounting principles. These financial statements are the responsibili-ty of the company’s management; our responsibility is to express an opinion on thesefinancial statements based on our audits. We conducted our audits of these state-ments in accordance with generally accepted auditing standards which require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includes examining,on a test basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimates madeby management, and evaluating the overall financial statement presentation. Webelieve that our audits provide a reasonable basis for the opinion expressed above.

Price Waterhouse LLPMinneapolis, MinnesotaMay 26, 1998

Statement of Consolidated Earnings

(in thousands of dollars, except per share data) Medtronic, Inc.


Net sales $ 2,604,819 $ 2,438,224 $ 2,172,100Costs and expenses:

Cost of products sold 670,360 610,190 591,433Research and development expense 297,177 280,214 243,829Selling, general, and administrative expense 757,647 763,347 700,876Non-recurring charges 156,400 — —Foundation commitment 36,000 — —Interest expense 8,161 9,375 8,089Interest income (22,927) (34,045) (31,124)

Total costs and expenses 1,902,818 1,629,081 1,513,103

Earnings before income taxes 702,001 809,143 658,997Provision for income taxes 244,619 279,155 230,691

Net earnings $ 457,382 $ 529,988 $ 428,306

Weighted average shares outstanding 468,936 477,386 474,872Basic earnings per share $ 0.98 $ 1.11 $ 0.90

Earnings per share assuming dilution $ 0.96 $ 1.09 $ 0.89

Weighted average shares outstandingassuming dilution 475,584 485,536 483,792

See accompanying notes to consolidated financial statements.

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Consolidated Balance Sheet

(in thousands of dollars) Medtronic, Inc.

April 30, 1998 1997

AssetsCurrent Assets:

Cash and cash equivalents $ 382,734 $ 197,388Short-term investments 43,148 53,181Accounts receivable, less allowance

for doubtful accounts of $14,469 and $13,673 566,056 516,984Inventories:

Finished goods 147,689 123,282Work in process 73,350 68,034Raw materials 110,094 91,235

Total Inventories 331,133 282,551Deferred tax assets 146,429 121,087Prepaid expenses and other current assets 82,110 66,718

Total Current Assets 1,551,610 1,237,909Property, Plant, and Equipment:

Land and land improvements 26,540 25,449Buildings and leasehold improvements 239,011 223,398Equipment 687,943 655,719Construction in progress 69,909 60,436

1,023,403 965,002Accumulated depreciation (514,616) (477,786)

Net Property, Plant, and Equipment 508,787 487,216Goodwill, net of accumulated amortization of $93,197 and $71,700 368,768 394,238Other Intangible Assets, net of

accumulated amortization of $54,505 and $53,325 97,791 96,730Long-Term Investments 137,706 125,847Other Assets 110,065 67,270

Total Assets $ 2,774,727 $ 2,409,210

Liabilities and Shareholders’ EquityCurrent Liabilities:

Short-term borrowings $ 93,346 $ 106,375Accounts payable 89,149 110,337Accrued compensation 173,141 124,603Accrued income taxes 72,471 68,814Other accrued expenses 143,935 108,562

Total Current Liabilities 572,042 518,691Long-Term Debt 16,227 13,980Deferred Tax Liabilities 13,409 2,163Other Long-Term Liabilities 128,859 128,155

Total Liabilities 730,537 662,989Commitments and ContingenciesShareholders’ Equity:

Preferred stock—par value $1.00; 2,500,000 shares authorized, none outstandingCommon stock—par value $.10; 800,000,000 shares authorized,

469,045,244 and 467,627,010 shares issued and outstanding 46,905 46,762Retained earnings 2,092,296 1,784,319Cumulative translation adjustments and other (67,111) (56,960)

2,072,090 1,774,121Receivable from Employee Stock Ownership Plan (27,900) (27,900)

Total Shareholders’ Equity 2,044,190 1,746,221

Total Liabilities and Shareholders’ Equity $ 2,774,727 $ 2,409,210


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Statement of Consolidated Shareholders’ Equity


CumulativeTranslation Receivable

Common Retained Adjustments fromStock Earnings and Other ESOP

Balance, April 30, 1995 $ 11,551 $ 1,325,837 $ 23,848 $ (29,980)Net earnings 428,306Dividends paid (60,427)Two-for-one stock split 11,560 (11,560)Issuance of common stock under employee benefit

and incentive plans 126 24,720Issuance of common stock in acquisition

of subsidiaries 261 80,666Repurchases of common stock (66) (33,508)Change in unrealized gain (loss) on investments, net of tax 27,187Income tax benefit from restricted stock and nonstatutory

stock options 6,501Translation adjustments (26,523)Repayment from ESOP 1,308Adjustment for pooling of interests 499 55,985

Balance, April 30, 1996 $ 23,931 $ 1,843,707 $ (2,675) $ (28,672)Net earnings 529,988Dividends paid (90,716)Issuance of common stock under employee benefit

and incentive plans 190 44,048Repurchases of common stock (740) (475,825)Change in unrealized gain (loss) on investments, net of tax (57,864)Income tax benefit from restricted stock and nonstatutory

stock options 14,362Translation adjustments (54,285)Repayment from ESOP 772

Balance, April 30, 1997 $ 23,381 $ 1,807,700 $ (56,960) $ (27,900)Net earnings 457,382Dividends paid (102,939)Two-for-one stock split 23,451 (23,451)Issuance of common stock under employee benefit

and incentive plans 424 53,830Repurchases of common stock (351) (167,872)Change in unrealized gain (loss) on investments, net of tax 21,848Income tax benefit from restricted stock and nonstatutory

stock options 45,798Translation adjustments (8,961)Minimum pension liability (1,190)

Balance, April 30, 1998 $ 46,905 $ 2,092,296 $ (67,111) $ (27,900)


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Statement of Consolidated Cash Flows



Operating ActivitiesNet earnings $ 457,382 $ 529,988 $ 428,306Adjustments to reconcile net earnings to net cash

provided by operating activities:Depreciation and amortization 137,558 116,893 112,003Non-recurring charges, net 88,771 — —Deferred income taxes 21,546 2,043 (33,106)Changes in operating assets and liabilities:

Increase in accounts receivable (53,173) (52,176) (46,873)Increase in inventories (59,750) (16,904) (30,439)(Increase) decrease in prepaid expenses

and other assets (57,718) (30,626) 18,922(Decrease) increase in accounts payable and

accrued liabilities 52,4462 (42,996) 34,809(Decrease) increase in accrued income taxes 3,629 (41,791) (5,174)(Decrease) increase in deferred income 79 (1,621) 1,230(Decrease) increase in postretirement benefit accrual (467) 1,337 2,272(Decrease) increase in other long-term liabilities i(236) (530) 18,909

Net cash provided by operating activities 590,067 463,617 500,859Investing Activities

Additions to property, plant, and equipment (148,152) (171,329) (165,066)Acquisitions, net of cash acquired — (18,873) (55,958)Sales and maturities of marketable securities 103,131 866,911 465,215Purchases of marketable securities (86,400) (499,640) (655,510)Other investing activities (42,371) (99,069) (19,896)

Net cash provided by (used in) investing activities (173,792) 78,000 (431,215)

Financing Activities(Decrease) increase in short-term borrowings (14,153) 33,404 14,330Payments on long-term debt (7,082) (3,064) (4,062)Issuance of long-term debt 9,529 1,601 681Proceeds from stock offering of acquired subsidiary — — 41,538Dividends to shareholders (102,939) (90,716) (60,427)Repurchases of common stock (168,223) (476,565) (33,574)Issuance of common stock 54,254 44,238 24,846

Net cash used in financing activities (228,614) (491,102) (16,668)Effect of exchange rate changes on cash and cash equivalents (2,315) (4,177) (218)

Net Change in Cash and Cash Equivalents 185,346 46,338 52,758Cash and cash equivalents at beginning of year 197,388 151,050 98,292

Cash and Cash Equivalents at End of Year $ 382,734 $ 197,388 $ 151,050

Supplemental Cash Flow InformationCash paid during the year for:

Income taxes $ 218,635 $ 309,659 $ 258,795Interest 8,085 9,263 8,134

Supplemental Noncash Investing and Financing ActivitiesIssuance of common stock for acquisition of

subsidiary, net of cash acquired $ — $ — $ 73,951


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Note 1—Summary of Significant Accounting PoliciesNature of OperationsMedtronic operates in a single industry segment as the world’s leading medical tech-nology company specializing in implantable and interventional therapies. Medtroniccreates innovative solutions for the health care needs of medical professionals andtheir patients and does business in more than 120 countries. The company is head-quartered in Minneapolis, Minnesota, with worldwide operations that providetherapeutic, diagnostic, and monitoring products for the cardiac rhythm manage-ment, other cardiovascular, and neurological markets. The company generally mar-kets its products through a direct sales force in the United States and a combinationof direct sales representatives and independent distributors in international markets.The main markets for products are the United States, Western Europe, and Japan.

Principles of ConsolidationThe consolidated financial statements include the accounts of Medtronic, Inc., andall of its subsidiaries. All significant intercompany transactions and accounts havebeen eliminated.

Use of EstimatesThe preparation of the financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the amounts reported in the financial statements and accompanyingnotes. Actual results could differ from those estimates.

Cash EquivalentsThe company considers highly liquid investments with maturities of three months orless from the date of purchase to be cash equivalents. These investments are valuedat cost, which approximates fair value.

Revenue RecognitionThe company recognizes revenue from product sales when the goods are shipped toits customers. For certain products, the company maintains consigned inventory atcustomer locations. For these products, revenue is recognized at the time the com-pany is notified that the device has been used by the customer.

InventoriesInventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis.

Property, Plant, and EquipmentProperty, plant, and equipment is stated at cost. Additions and improvements extend-ing asset lives are capitalized while expenditures for repairs and maintenance areexpensed as incurred. Depreciation is provided using the straight-line method overthe estimated useful lives of the various assets.

Goodwill, Other Intangible Assets, and Long Lived AssetsGoodwill represents the excess of cost over net assets of businesses acquired, whileother intangible assets consist primarily of purchased technology and patents.Goodwill and other intangible assets are being amortized using the straight-linemethod over their estimated useful lives, of which periods up to 28 and 16 yearsremain, respectively. The company periodically reviews its goodwill and other long-lived assets for indicators of impairment in accordance with SFAS No. 121.

Research and DevelopmentResearch and development costs are expensed when incurred.

Stock-Based CompensationIn fiscal 1997, the company adopted the disclosure-only provisions of Statement ofFinancial Accounting Standard (SFAS) No. 123, “Accounting for Stock-BasedCompensation”, which disclosures are presented in Note 8 “Stock Purchase andAward Plans.” Accordingly, the company continues to account for stock-based com-pensation using the intrinsic value method as prescribed under AccountingPrinciples Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees”and related Interpretations.

Foreign Currency TranslationEssentially all assets and liabilities are translated to U.S. dollars at year-endexchange rates, while elements of the income statement are translated at averageexchange rates in effect during the year. Foreign currency transaction gains and loss-es are included in the statement of consolidated earnings as selling, general, andadministrative expense. Adjustments arising from the translation of most net assetslocated outside the United States (gains and losses) are recorded as a component ofshareholders’ equity.

Risk Management ContractsIn the normal course of business, the company utilizes a variety of derivative finan-cial instruments, including foreign currency forward and option contracts, to man-age its exposure to fluctuations in foreign currency exchange rates. The companydesignates and assigns the financial instruments as hedges for specific assets, liabil-ities or anticipated transactions. When hedged assets or liabilities are sold or extin-guished or the anticipated transactions being hedged are no longer expected tooccur, the company recognizes the gain or loss on the designated hedging financialinstruments. The company classifies its derivative financial instruments as held orissued for purposes other than trading. Prepaid option premiums and unrealizedlosses on forward contracts are recorded in the balance sheet as other assets.Unrealized gains on forward contracts are included in other accrued liabilities. Gainsand losses from hedges of firm commitments are classified in the income statementconsistent with the accounting treatment of the items being hedged.

Royalty IncomeIncome earned from royalty and license agreements is recorded as a reduction ofselling, general, and administrative expense.

Earnings Per ShareIn February 1997, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standard (SFAS) No. 128, “Earnings per Share.” SFAS No. 128requires dual presentation of basic earnings per share and diluted earnings per share.Basic earnings per share is computed based on the weighted average number of com-mon shares outstanding, while diluted earnings per share is computed based on theweighted average number of common shares outstanding adjusted by the number ofadditional shares that would have been outstanding had the potential dilutive com-mon shares been issued. Potential dilutive shares of common stock include stockoptions and other stock-based awards granted under stock-based compensation plansand shares committed to be purchased under the employee stock purchase plan.

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


Net earnings $ 457,382 $ 529,988 $ 428,306

Weighted average sharesoutstanding for basicearnings per share 468,936 477,386 474,872

Dilutive effect ofpotential shares 6,648 8,150 8,920

Adjusted weighted-average sharesoutstanding for dilutedearnings per share 475,584 485,536 483,792

Basic earningsper share $ 0.98 $ 1.11 $ 0.90

Earnings per shareassuming dilution $ 0.96 $ 1.09 $ 0.89

Notes To Consolidated Financial Statements


New Accounting StandardsIn June 1997, the Financial Accounting Standards Board issued Statement of FinancialAccounting Standard No. 130 “Reporting Comprehensive Income.” SFAS No. 130 mustbe adopted by the company in the first quarter of fiscal 1999. Under this statement, thecompany will report in its statement of consolidated shareholders’ equity, in addition tonet earnings, comprehensive income and its components including, as applicable, unre-alized gains and losses on available-for-sale securities, foreign currency translationadjustments, and minimum pension liability. Implementation of this disclosure stan-dard will not affect the company’s results of operations, cash flows or financial position.

In June 1997, the Financial Accounting Standards Board issued Statement of FinancialAccounting Standard No. 131 “Disclosure about Segments of an Enterprise and RelatedInformation.” This statement, which must be adopted by the company for the fiscalyear ending April 30, 1999, establishes new standards for reporting information aboutoperating segments in annual and interim financial statements. Under SFAS No. 131,operating segments are determined consistent with the way management organizesand evaluates financial information internally for making decisions and assessing per-formance. SFAS No. 131 also requires related disclosures about products, geographicareas, and major customers. Implementation of this disclosure standard will not affectthe company’s results of operations, cash flows or financial position.

Note 2—AcquisitionsIn August 1996, the company acquired substantially all of the assets and liabilities ofAvalon Laboratories, Inc. (Avalon) for approximately $19.0 million in cash. Avalondevelops, manufactures, and sells cannulae and other surgical products.

In June 1996, the company issued approximately 7,704,000 shares of its commonstock for all of the outstanding capital stock of InStent Inc. (InStent). InStent devel-ops, manufactures, and markets a variety of self-expanding and balloon-expandablestents used in a broad range of medical indications.

In May 1996, the company issued approximately 2,308,000 shares of its common stockfor all of the outstanding capital stock of AneuRx, Inc. (AneuRx), which provides aminimally invasive endovascular stented graft and delivery system used to repair life-threatening abdominal aortic aneurysms.

In April 1996, the company acquired the remaining outstanding stock of SynecticsMedical AB (Synectics) at a cost of approximately $59.3 million in cash. The companyhad previously purchased approximately 8% of the outstanding stock of Synectics.Synectics, of Stockholm, Sweden, is a world leader in the development and marketing ofcomputer-supported systems used to diagnose disorders of the urological and digestivesystems and sleep apnea.

In November 1995, the company acquired all of the outstanding capital stock ofPudenz-Schulte Medical Corporation (PS Medical) for approximately 2,524,000 sharesof the company’s common stock. In March 1996, upon the achievement of a specifiedmilestone, the company made an additional payment of approximately 192,000 sharesof the company’s common stock. In addition, the company may pay additional futurepayments of the company’s common stock contingent upon achieving specified mile-stones. These contingent payments, if any, will be reflected as acquisition costs when thecontingencies are resolved. PS Medical manufactures and distributes cerebrospinalfluid shunts and neurosurgical implants such as catheters, reservoirs, and fluiddrainage systems.

In November 1995, the company issued approximately 2,492,000 shares of the com-pany’s common stock for all of the outstanding common stock of Micro InterventionalSystems, Inc. (MIS), a developer of products for the minimally invasive treatment ofstroke and other diseases. During fiscal 1998, the company announced plans to closeMIS as a result of identifying evidence of improper submissions to the U.S. Food andDrug Administration (FDA) for product clearances prior to Medtronic’s acquisition ofMIS in 1995. The company has begun legal action on this matter and costs related toclosing MIS were included in the $205.3 million of non-recurring charges taken dur-ing the third quarter of fiscal 1998 (See Note 3).

The acquisitions of AneuRx, InStent and MIS have been accounted for as poolings-of-interests, and, accordingly, the company’s consolidated financial statements for fiscalyear 1996 have been restated to include the results of AneuRx, InStent, and MIS.

Activity for years prior to fiscal year 1996 has not been restated as the impact of theseacquisitions in such years is not considered material, and restatement is therefore notrequired. Net sales and net results for the individual entities are not presented as theactivity is not deemed to be material.

The acquisitions of Avalon, PS Medical, and Synectics were accounted for as purchas-es. Accordingly, the results of operations of the acquired entities have been included inthe company’s consolidated financial statements since the respective dates of acquisi-tion. Acquired goodwill, patents, trademarks, and other intangible assets associatedwith these acquisitions are being amortized using the straight-line method over peri-ods ranging from 8 to 30 years.

Note 3—Non-Recurring Charges and Foundation CommitmentThe company recorded pre-tax charges totaling $205.3 million during the third quarterof fiscal 1998. $156.4 million of this pre-tax charge pertained to management initiativesto restructure the vascular organization and reduce global infrastructure by streamlin-ing certain manufacturing and administrative operations within the United States,Europe, and Japan. These actions include the closing of several manufacturing facilitiesand will result in the elimination of approximately 1,000 positions and a net reductionof about 600 in the company’s worldwide workforce. Since the inception of this restruc-turing program, approximately 400 positions have been eliminated. The company is inthe process of implementing the major strategic actions associated with this restructur-ing program, which are expected to be completed by the end of fiscal 1999.

In connection with this initiative, included in the $205.3 million pre-tax charge was a$12.9 million obsolescence charge to cost of products sold as a result of identified obso-lescence on certain vascular inventories.

Also included in the $205.3 million pre-tax charge was a commitment made by the com-pany during the third quarter to contribute $36.0 million to the Medtronic Foundation(See Note 12). This commitment is included within the “Other” category below.

Cash and non-cash applications against the initial charges are as follows:

NoncancelableContractual

Facility Severance and Asset ObligationsReductions Related Costs Write-downs and Other Total

Initial charges $7,659 $58,364 $81,700 $57,577 $205,300Utilization:

Cash (3,621) (13,608) — (7,100) (24,329)

Noncash — — (81,700) (10,500) (92,200)

Balance atApril 30, 1998 $4,038 $44,756 $ — $39,977 $ 88,771

The April 30, 1998 reserve balance consisted of $44,756 included in accruedcompensation and $44,015 included in other accrued expenses.

Note 4—Financial InstrumentsThe fair value of cash and cash equivalents, receivables, and short-term debt approximatetheir carrying value due to their short maturities. The carrying amounts and estimatedfair values of the company’s other significant financial instruments were as follows:

April 30, 1998 1997Carrying Fair Carrying FairAmount Value Amount Value

AssetsShort-term investments $43,148 $43,148 $53,181 $53,181Long-term investments 137,706 137,706 125,847 125,847Net purchased currency options 779 779 4,698 4,698Forward exchange contracts 6,053 6,053 5,721 5,721LiabilitiesShort-term debt 93,346 93,346 106,375 106,375Long-term debt 16,227 17,053 13,980 15,588

11



The fair value of certain short-term and long-term investments are based on quotedmarket prices for those or similar investments. For long-term investments which haveno quoted market prices and are accounted for on a cost basis, a reasonable estimateof fair value was made using available market and financial information. The fairvalue of long-term debt is based on the current rates offered to the company for debtof similar maturities. The estimates presented on long-term financial instruments arenot necessarily indicative of the amounts that would be realized in a current marketexchange. The fair value of foreign currency instruments was estimated based onquoted market prices at April 30, 1998 and 1997.

Investments in debt and equity securities that have readily determinable fair values areclassified and accounted for in one of two categories: held-to-maturity, or available-for-sale. Held-to-maturity securities are recorded at amortized cost in short-term and long-term investments. Available-for-sale securities are recorded at fair value in short-termor long-term investments with the change in fair value during the period excludedfrom earnings and recorded net of tax as a component of shareholders’ equity.Management determines the appropriate classification of its investments in debt andequity securities at the time of purchase and reevaluates such determinations at eachbalance sheet date.

At April 30, 1998 and 1997, available-for-sale investments included only equity securi-ties. The cost, gross unrealized holding gains, gross unrealized holding losses and fairvalue for available-for-sale securities at April 30, 1998 and 1997 were as follows:

Gross GrossUnrealized Unrealized

Holding HoldingCost Gains Losses Fair Value

April 30, 1998 $66,932 $32,666 $ (2,030) $97,568April 30, 1997 61,314 15,058 (18,035) 58,337

At April 30, 1998 and 1997, the net unrealized gain (loss) associated with available-for-sale securities of $19,913 and $(1,935) respectively, net of tax expense (benefit) of$10,723 and $(1,042), was included in retained earnings. Proceeds from the sale ofavailable-for-sale securities during fiscal 1998 and 1997 were $37,193 and $45,965,respectively. Net gains included in income in fiscal 1998 and 1997 were $25,466 and$32,275, respectively. In addition, during fiscal 1998 and 1997 the company donatedequity securities with fair values of $10,500 and $13,400, respectively, to fund commit-ments to the Medtronic Foundation (See Note 12).

Held-to-maturity investments at April 30, 1998 consisted primarily of U.S. governmentand corporate debt securities, all of which mature within three years. Debt securities areclassified as held-to-maturity when the company has the positive intent and ability tohold the securities to maturity. These securities were carried at amortized cost of$413,217 and have a fair value of $413,217. During the fourth quarter of fiscal 1997,the company sold previously categorized held-to-maturity investments with an amor-tized cost of $316,075 to fund repurchases of company common stock, resulting in aloss that was not material. Election of this funding option does not affect the classifi-cation of the April 30, 1998 balance of the securities in the held-to-maturity portfolioas the company retains the intent and ability to hold those securities until they mature.

Foreign Exchange Risk ManagementDue to the global nature of its operations, the company is subject to the exposures thatarise from foreign exchange rate fluctuations. The company’s objective in managingits exposure to foreign currency fluctuations is to minimize net earnings and cash flowvolatility associated with foreign exchange rate changes. In order to reduce the uncer-tainty of foreign exchange rate movements, the company enters into derivativefinancial instruments in the form of forward exchange and option contracts withmajor international financial institutions. These forward and option contracts, whichtypically expire within one year, are designed to hedge anticipated foreign currencytransactions. Such transactions, primarily export intercompany sales, occur through-out the year and are probable but not firmly committed. The principal currencieshedged are the Japanese yen and the German mark.

The company had contracts, all of which expire within one year, to exchange foreigncurrencies for U.S. dollars in the following notional amounts:

April 30, 1998 1997

Forward exchange contracts $146,574 $ 150,635

Put options 779 4,841Call options — (143)

Net purchased currency options $ 779 $ 4,698

The company had aggregate foreign currency transaction gains (losses), primarilyrelated to purchased currency options and forward contracts, of $17,462, $1,926, and$(20,789), in fiscal 1998, 1997, and 1996, respectively. Realized gains (losses) onthese contracts were offset by the (losses) gains on assets, liabilities, and transactionsbeing hedged. Forward contracts and net premium on option contracts in existence atthe balance sheet date are recorded at their fair value. Gains and losses on forward andoption contracts are recorded in selling, general, and administrative expense.

Concentrations of Credit RiskFinancial instruments, which potentially subject the company to significant concen-trations of credit risk, consist principally of interest-bearing investments, foreigncurrency exchange contracts, and trade accounts receivable.

The company maintains cash and cash equivalents, investments, and certain otherfinancial instruments with various major financial institutions. The companyperforms periodic evaluations of the relative credit standing of these financial institu-tions and limits the amount of credit exposure with any one institution.

Concentrations of credit risk with respect to trade accounts receivable are limited dueto the large number of customers and their dispersion across many geographic areas.The company monitors the creditworthiness of its customers to which it grants creditterms in the normal course of business. However, a significant amount of trade receiv-ables are with national health care systems in many countries. Although the compa-ny does not currently foresee a credit risk associated with these receivables, repaymentis dependent upon the financial stability of those countries’ national economies.

Note 5—Debt

Debt consisted of the following at April 30:

AverageShort-Term Debt Interest Rate 1998 1997

Bank borrowings 2.2% $ 90,846 $ 99,716Current portion of

long-term debt 6.3% 2,500 6,659

Total Short-Term Debt $ 93,346 $106,375

Average MaturityLong-Term Debt Interest Rate Date 1998 1997

Various notes 2.1% 1999-2007 $13,568 $ 10,387Capitalized lease

obligations 9.8% 1999-2008 2,659 3,593

Total Long-Term Debt $16,227 $ 13,980

Short-term borrowings consisted primarily of borrowings from non-U.S. banks at favor-able interest rates and where natural hedges can be gained for foreign exchange pur-poses. The company has existing committed lines of credit of $229 million with variousbanks, of which $138 million was unused at April 30, 1998. Maturities of long-term debtfor the next five fiscal years are as follows: 1999, $2,500; 2000, $3,248; 2001, $1,786;2002, $1,730; 2003, $7,091, thereafter, $2,372.

Note 6—Shareholders’ EquityAt April 30, 1998, Board of Directors’ authorization existed to repurchase approxi-mately 21.9 million shares of the company’s common stock.

12



On July 10, 1997, the Board of Directors approved a two-for-one common stock split,effected September 12, 1997 in the form of a 100 percent stock dividend to sharehold-ers of record at the close of business on August 29, 1997. The stock split resulted in theissuance of 234.5 million additional shares and the reclass of $23,451 from retainedearnings to common stock, representing the par value of the shares issued.

On August 30, 1995, the Board of Directors approved a two-for-one common stocksplit, effected September 29, 1995 in the form of a 100 percent stock dividend to share-holders of record at the close of business on September 14, 1995. The stock split result-ed in the issuance of 115.6 million additional shares and the reclass of $11,560 fromretained earnings to common stock, representing the par value of the shares issued. Allreferences in the consolidated financial statements and notes to consolidated financialstatements to per share information, number of shares, except shares authorized, andrelated share prices have been restated to reflect these stock splits.

A shareholder rights plan exists which provides for a dividend distribution of one rightto be attached to each share of common stock. The rights are currently not exercisableor transferable apart from the common stock. The basic right entitles the holder topurchase one sixteen-hundredth of a share of a new series of participating preferredstock, which is substantially equivalent to one share of common stock, at an exerciseprice of $37.50 per share. These rights would become exercisable if a person or groupacquires 15% or more of the company’s common stock or announces a tender offerwhich would increase the person’s or group’s beneficial ownership to 15% or more ofthe company’s common stock, subject to certain exceptions. After the rights becomeexercisable, each right entitles the holder (other than the 15% holder), instead, to pur-chase common stock having a market price of two times the exercise price. If the com-pany is acquired in a merger or other business combination transaction, each exer-cisable right entitles the holder to purchase common stock of the acquiring companyor an affiliate having a market price of two times the exercise price of the right. In cer-tain events the Board of Directors may exchange rights for common stock or equiva-lent securities having a market price equal to the exercise price of the rights. Eachright is redeemable at $.000625 any time before a person or group triggers the 15%ownership threshold. The rights expire on July 10, 2001.

Note 7—Employee Stock Ownership PlanThe company has an Employee Stock Ownership Plan (ESOP) for eligible U.S.employees. In December 1989, the ESOP borrowed $40,000 from the company andused the proceeds to purchase 9,466,464 shares of the company’s common stock. Thecompany makes contributions to the plan which are used, in part, by the ESOP tomake loan and interest payments. Expenses related to the ESOP are based on debt ser-vice requirements less any dividends received by the ESOP on the company’s commonstock. This amount is further adjusted by any additional company contribution nec-essary to meet an annual targeted benefit level. Compensation and interest expenserecognized were as follows:


Interest expense $2,511 $2,580 $2,698Dividends paid 1,957 1,798 1,310

Net interest expense 554 782 1,388Compensation expense 1 779 1,316

Total expense $ 555 $1,561 $2,704

Shares of common stock acquired by the plan are allocated to each employee inamounts based on company performance and the employee’s annual compensation.Allocations of 2.5%, 3.0%, and 4.0% of qualified compensation were made to plan par-ticipants’ accounts in fiscal 1998, 1997, and 1996, respectively. At April 30, 1998 and1997, cumulative allocated shares remaining in the trust were 3,870,704 and3,663,724, respectively, and unallocated shares were 5,396,014 and 5,788,440, respec-tively, of which, 228,297 and 392,426, respectively, were committed-to-be allocated.Unallocated shares are released based on the ratio of current debt service to totalremaining principal and interest. The loan from the company to the ESOP isrepayable over 20 years, ending on April 30, 2010. Interest is payable annually at a rateof 9.0%. The receivable from the ESOP is recorded as a reduction of the company’sshareholders’ equity and allocated and unallocated shares of the ESOP are treated asoutstanding common stock in the computation of earnings per share.

Note 8—Stock Purchase and Award Plans1994 Stock Award PlanThe 1994 stock award plan provides for the grant of nonqualified and incentive stockoptions, stock appreciation rights, performance shares, and other stock-based awards.There were 13,403,965 shares available under this plan for future grants at April 30, 1998.

Under the provisions of the 1994 stock award plan, nonqualified stock options andother stock awards are granted to officers and key employees at prices not less than fairmarket value at the date of grant. In addition, awards granted under the previous non-qualified stock option and stock award plans as well as stock options assumed as aresult of acquisition transactions remain outstanding though no additional awardswill be made under these plans.

In fiscal 1998, the company adopted a new stock compensation plan for outside direc-tors which replaces the provisions in the 1994 stock award plan relating to awards tooutside directors. The table below includes awards granted under the new plan, whichat April 30, 1998 had 1,402,806 shares available for future grants.

A summary of nonqualified option transactions is as follows:

Option Price Range Per Number of Expiration

Share Shares Date

Outstanding at April 30, 1996 $ 2.44 - 29.63 13,060,740 1997 - 2006

Granted 24.88 - 34.57 1,583,550 2002 - 2007Exercised 2.44 - 29.63 2,390,146 1997 - 2007Canceled 3.77 - 34.25 177,044 2002 - 2007

Outstanding atApril 30, 1997 $ 2.44 - 34.57 12,077,100 1998 - 2007

Granted 27.06 - 53.31 2,564,633 2003 - 2008Exercised 2.44 - 48.44 3,612,002 1998 - 2008Canceled 9.39 - 53.31 190,666 2003 - 2008

Outstanding atApril 30, 1998 $ 2.55 - 53.31 10,839,065 1999 - 2008

Exercisable atApril 30, 1997 $ 2.44 - 34.19 8,221,452 1998 - 2007April 30, 1998 2.55 - 53.31 6,721,822 1999 - 2008

In addition, stock options outstanding at April 30, 1998 assumed as part of certain fiscal1997 and 1996 acquisitions were 198,863 and 14,453, respectively. Stock options exer-cisable under these plans were 172,164 and 1,032 at April 30, 1998. These options havea price range per share of $0.28 - $28.58 at April 30, 1998 and expire 1999-2007. Noadditional awards will be made under these plans.

A summary of stock options as of April 30, 1998, including options assumed as a resultof acquisitions, is as follows:

Options Outstanding Options Exercisable

Weighted Average Weighted WeightedRange of Remaining Years Average AverageExercise of Contractual Exercise ExercisePrices Outstanding Life Price Exercisable Price

$ 0.28 - 15.00 6,000,928 3.9 $ 8.62 5,656,540 $ 8.2615.01 - 30.00 1,664,084 7.3 25.06 1,104,641 24.3730.01 - 45.00 2,182,655 8.6 38.73 33,839 43.1345.01 - 53.31 1,204,714 9.2 47.45 99,998 51.49

11,052,381 5.9 $21.27 6,895,018 $11.83

13



Nonqualified options are normally exercisable beginning one year from the date of grantin cumulative yearly amounts of 25 percent of the shares under option and generallyhave a contractual option term of 10 years. However, certain nonqualified options grant-ed are exercisable immediately.

Restricted stock and performance share awards are dependent upon continued employ-ment and, in the case of performance shares, achievement of certain performanceobjectives. In fiscal 1998, 399,640 restricted shares were issued and 193,088 shares ofcommon stock were issued pursuant to previous performance share grants. At April 30,1998, total restricted shares outstanding under both the 1994 stock award plan and theprevious restricted stock and performance share award plans were 1,677,501.Performance share awards for up to 407,365 shares, assuming maximum performancepayout, were outstanding under the two plans at April 30, 1998. The actual number ofperformance shares awarded may vary depending on the degree to which the perfor-mance objectives are met. The cost of the restricted stock is generally expensed over fiveyears from the date of issuance ($5,815, $4,761, and $4,375 in fiscal 1998, 1997, and1996, respectively). The estimated cost of the performance shares is expensed over threeyears from the date of grant ($9,793, $7,582, and $10,313 in fiscal 1998, 1997, and1996, respectively).

In fiscal 1997, the company adopted Statement of Financial Accounting Standard(SFAS) No. 123 “Accounting for Stock-Based Compensation” which encourages, butdoes not require companies to recognize compensation cost for stock-based compensa-tion plans over the vesting period based upon the fair value of awards on the date ofgrant. However, the statement allows the alternative of the continued use of the intrin-sic value method as prescribed in Accounting Principles Board Opinion (APB) No. 25,“Accounting for Stock Issued to Employees.” Therefore, as permitted, the companycontinues to apply APB No. 25, and related Interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation expense has been recognizedby the company for its nonqualified stock options and its stock purchase plan.

Had compensation expense for the company’s stock-based compensation plans beendetermined based on the fair value at the grant dates consistent with the method ofSFAS No. 123, the company’s net earnings and basic earnings per share would havebeen reduced to the pro forma amounts indicated below:

1998 1997

Net Earnings As reported $457,382 $529,988Pro forma 436,529 517,470

Basic EarningsPer Share As reported $ 0.98 $ 1.11

Pro forma 0.93 1.08

Pro forma net earnings reflects only options and other stock-based awards granted infiscal 1998, 1997, and 1996. Therefore, the full impact of calculating compensationcost for stock options under SFAS No. 123 is not reflected in the pro forma net earn-ings amounts presented because compensation cost is reflected over the options’ vest-ing period, which is normally four years, and compensation cost for options grantedprior to fiscal year 1996 is not considered.

The weighted-average fair value per option at the date of grant for options granted infiscal 1998 and 1997 was $17.75 and $13.06, respectively. The fair value was estimat-ed using the Black-Scholes option pricing model with the following weighted-averageassumptions for fiscal 1998 and 1997:

1998 1997

Risk-free interest rate 6.04% 6.26%Expected dividend yield 0.49% 0.61%Expected volatility factor 25.7% 28.9%Expected option term 7 years 7 years

Stock Purchase PlanThe stock purchase plan enables employees to contribute up to 10% of their wagestoward purchase of the company’s common stock at 85% of the market value.Employees purchased 939,971 shares at $27.20 per share in fiscal 1998. As of April 30,1998, plan participants have had approximately $15,427 withheld to purchase sharesat a price of $36.98 per share, or 85% of the market value of the company’s commonstock at October 31, 1998, whichever is less.

Note 9—Income TaxesThe company provides for income taxes in accordance with Statement of FinancialAccounting Standard (SFAS) No. 109, “Accounting for Income Taxes.” SFAS No. 109 isan asset and liability approach that requires the recognition of deferred tax assets andliabilities for the expected future tax consequences of temporary differences betweenthe carrying amounts and the tax bases of other assets and liabilities.

The provision for income taxes is based on earnings before income taxes reported forfinancial statement purposes. The components of earnings before income taxes were:


United States $672,041 $773,287 $532,297Non-U.S. 29,960 35,856 126,700

Earnings before income taxes $702,001 $809,143 $658,997

The provision for income taxes consisted of:Year ended April 30, 1998 1997 1996

Taxes currently payable:U.S. federal $154,960 $186,599 $154,941U.S. state and other 35,049 55,638 35,696Non-U.S. 32,596 28,443 62,750

Total currently payable 222,605 270,680 253,387Deferred tax (benefit) expense:

U.S. federal (29,093) (4,581) (34,232)U.S. state and other 1,837 (8,047) (2,526)Non-U.S. 2,024 962 3,495

Net deferred tax benefit (25,232) (11,666) (33,263)Tax expense credited directly to

shareholders’ equity 47,246 20,141 10,567

Total provision $244,619 $279,155 $230,691

Deferred tax assets (liabilities) were comprised of the following:

Year ended April 30, 1998 1997

Deferred tax assets:Inventory (intercompany profit in inventory

and excess of tax over book valuation) $ 75,370 $ 98,333Accrued liabilities 99,297 42,167Other 24,375 17,881

Total deferred tax assets 199,042 158,381

Deferred tax liabilities:Intangible assets (5,568) (6,458)Undistributed earnings of subsidiaries (1,625) (7,048)Accumulated depreciation (14,641) (12,340)Unrealized (gain) loss on investments (10,723) 1,042Other (33,465) (14,653)

Total deferred tax liabilities (66,022) (39,457)

Net deferred tax assets $133,020 $118,924

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The company’s effective income tax rate varied from the U.S. federal statutory tax rateas follows:


U.S. federal statutory tax rate 35.0% 35.0% 35.0%Increase (decrease) in tax rate

resulting from:U.S. state taxes, net of federal

tax benefit 1.9 2.3 2.3Tax benefits from operations in

Puerto Rico (2.5) (2.3) (3.4)Non-U.S. taxes 2.7 0.6 1.6Other, net (2.3) (1.1) (0.5)

Effective tax rate 34.8% 34.5% 35.0%

Taxes are not provided on undistributed earnings of non-U.S. subsidiaries becausesuch earnings are either permanently reinvested or do not exceed available foreign taxcredits. Current U.S. tax regulations provide that earnings of the company’s manufac-turing subsidiaries in Puerto Rico may be repatriated tax free; however, theCommonwealth of Puerto Rico will assess a tax of up to 10% in the event of repatria-tion of earnings prior to liquidation. The company has provided for the anticipated taxattributable to earnings intended for dividend repatriation. At April 30, 1998, earningspermanently reinvested in subsidiaries outside the United States were $114,620.

At April 30, 1998, approximately $9,016 of non-U.S. tax losses were available for car-ryforward. These carryforwards are subject to valuation allowances and generallyexpire within a period of one to five years.

Note 10—Retirement Benefit PlansIn February 1998, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standard (SFAS) No. 132, “Employers’ Disclosures aboutPensions and Other Postretirement Benefits.” SFAS No. 132 does not change the mea-surement or recognition of those plans, but revises disclosures about pensions and otherpostretirement benefit plans. The company adopted SFAS No. 132 in fiscal 1998.Restatement of disclosures for the prior year has been made for comparative purposes.

The company has various retirement benefit plans covering substantially all U.S.employees and many employees outside the United States. The cost of these plans was$36,999 in fiscal 1998, $36,525 in fiscal 1997, and $36,598 in fiscal 1996.

In the United States, the company maintains a qualified pension plan designed toprovide guaranteed minimum retirement benefits to substantially all U.S. employees.Pension coverage for non-U.S. employees of the company is provided, to theextent deemed appropriate, through separate plans. In addition, U.S. and non-U.S.employees of the company are also eligible to receive specified company paid healthcare and life insurance benefits.

Pension Benefits Other Benefits1998 1997 1998 1997

Change in benefit obligationBenefit obligation at beginning of $143,279 $137,538 $32,714 $30,529

fiscal year Service cost 14,475 13,097 2,421 1,982Interest cost 10,899 9,758 2,470 2,209Actuarial (gain) loss 9,843 (14,931) 373 (1,656)Benefits paid (3,332) (2,183) (565) (350)

Benefit obligation at April 30 $175,164 $143,279 $37,413 $32,714Change in plan assetsFair value of plan assets at

beginning of year $152,364 $127,521 $12,080 $ 5,926Actual return on plan assets 30,841 17,399 3,014 858Employer contributions 12,312 9,392 3,447 5,646Benefits paid (3,098) (1,948) (565) (350)

Fair value of plan assets atApril 30 $192,419 $152,364 $17,976 $12,080

Pension Benefits Other Benefits1998 1997 1998 1997

Funded status $17,255 $ 9,085 $ (19,437) $(20,634)Unrecognized net actuarial (loss)

gain (832) 4,544 324 1,803Unrecognized prior service cost (356) (416) — —

Prepaid (accrued) benefit cost $16,067 $13,213 $(19,113) $(18,831)

Net periodic benefit cost of plans included the following components:

Pension Benefits Other Benefits

Year ended April 30, 1998 1997 1998 1997

Service cost $14,475 $13,097 $2,421 $1,982Interest cost 10,899 9,758 2,470 2,209Expected return on plan assets (12,681) (10,525) (1,164) (632)Amortization of prior service cost 593 573 — 40

Net periodic benefit cost $13,286 $12,903 $3,727 $3,599

Plan assets for the U.S. plan consist of a diversified portfolio of fixed-incomeinvestments, debt and equity securities, and cash equivalents. Plan assets includeinvestments in the company’s common stock of $33,920 and $22,160 at April 30, 1998and 1997, respectively.

Outside the U.S., the funding of pension plans is not a common practice in certaincountries as funding provides no economic benefit. Consequently, the company hascertain non-U.S. plans that are unfunded. It is the company’s policy to fund retirementcosts within the limits of allowable tax deductions.

The actuarial assumptions were as follows:

Pension Benefits Other Benefits

Year ended April 30, 1998 1997 1998 1997

Discount rate 3.5% - 7.3% 4.0% - 8.5% 7.25% 7.75%

Expected return on plan assets 7.0% - 9.0% 8.5% - 9.0% 9.0% 9.0%

Rate of compensation increase 3.0% - 5.0% 3.0% - 6.0% N/A N/A

Health care cost trend rate N/A N/A 8.0% 8.0%

In addition to the benefits provided under the qualified pension plan, retirement benefitsassociated with wages in excess of the IRS allowable wages are provided to certainemployees under non-qualified plans. The net periodic cost of non-qualified pensionplans was $2,633 and $1,770 in fiscal 1998 and 1997, respectively. The unfunded accruedpension cost related to these non-qualified plans totaled $11,840 at April 30, 1998.

The health care cost trend rate is assumed to decrease gradually to 6% by fiscal 2002.Assumed health care cost trend rates have a significant effect on the amounts report-ed for the health care plans. A one-percentage-point change in assumed health carecost trend rates would have the following effects:

One-Percentage-Point One-Percentage-Point Increase Decrease

Effect on postretirement benefit cost $ 611 $ (507)

Effect on postretirement benefitobligation 3,776 (3,134)

15



Defined Contribution PlansThe company has defined contribution savings plans that cover substantially all U.S.employees and certain non-U.S. employees. The general purpose of these plans is toprovide additional financial security during retirement by providing employees withan incentive to make regular savings. Company contributions to the plans are basedon employee contributions and company performance. Fiscal expense under theseplans was $15,658 in 1998, $16,402 in 1997, and $17,786 in 1996.

Note 11—LeasesThe company leases offices, manufacturing and research facilities, and warehouses, aswell as transportation, data processing, and other equipment, under capital and oper-ating leases. A substantial number of these leases contain options that allow the com-pany to renew at the then fair rental value.

Future minimum payments under capitalized leases and noncancelable operatingleases at April 30, 1998, were:

Capitalized OperatingLeases Leases

1999 $ 823 $ 20,035 2000 668 14,5142001 490 10,8422002 415 8,9052003 415 7,4672004 and thereafter 1,891 3,905

Total minimum lease payments 4,702 $ 65,668Less amounts representing interest (1,275)

Present value of net minimum leasepayments $ 3,427

Rent expense for all operating leases was $32,573, $32,832, and $27,406 in fiscal 1998,1997, and 1996, respectively.

Note 12—Commitments and ContingenciesThe company is involved in litigation and disputes which are normal to its business.Management believes losses that might eventually be sustained from such litigationand disputes would not be material to future years. Further, product liability claimsmay be asserted in the future relative to events not known to management at the pre-sent time. Management believes that the company’s risk management practices,including insurance coverage, are reasonably adequate to protect against potentialproduct liability losses.

The Medtronic Foundation (Foundation), funded entirely by the company, was estab-lished to maintain good corporate citizenship in its communities. During fiscal 1997,the company donated equity securities with a fair value of $13,400 to fund commit-ments to the Foundation. In fiscal 1998, the company made a commitment to con-tribute $36,000. This commitment is expected to fund the Foundation through the endof fiscal 2001. In April 1998, the company funded the initial portion of this commit-ment through the donation of equity securities with a fair value of $10,500.Commitments to the Foundation are expensed when authorized and approved by thecompany’s Board of Directors.

Note 13—Quarterly Financial Data (unaudited, in millions ofdollars, except per share data)

First Second Third Fourth FiscalQuarter Quarter Quarter Quarter Year

Net Sales1998 $646.3 $642.1 $631.4 $685.1 $2,604.81997 600.9 598.2 598.7 640.5 2,438.2

Gross Profit1998 486.1 483.2 460.6 504.5 1,934.51997 445.3 447.1 446.4 489.2 1,828.0

Net Earnings1998 146.5 143.5 7.3 160.1 457.41997 127.4 128.3 128.7 145.5 530.0

Basic Earnings per Share:1998 .31 .31 .02 .34 .981997 .27 .27 .27 .31 1.11

Earnings per ShareAssuming Dilution:1998 .31 .30 .02 .34 .961997 .26 .26 .26 .30 1.09

Quarterly and annual earnings per share are calculated independently based on theweighted-average number of shares outstanding during the period. As discussed inNote 3, the company recorded pre-tax non-recurring charges totaling $205.3 millionduring the third quarter of fiscal 1998.

16



Note 14—Segment ReportingThe company operates in a single industry segment -- providing medical products andservices. For management purposes, the company is segmented into three geographicareas -- the Americas, Europe/Middle East/Africa (Europe), and Asia/Pacific markets.The geographic areas are, to a significant degree, interdependent with respect toresearch, product supply, and business expertise. Sales between geographic areas aremade at prices which would approximate transfers to unaffiliated distributors. In thepresentation below, the profit derived from such transfers is attributed to the area inwhich the sale to the unaffiliated customer is eventually made. Because of the interde-pendence of the geographic areas, the operating profit as presented may not be repre-sentative of the geographic distribution which would occur if the areas were not inter-dependent. In addition, comparison of operating results between geographic areas andbetween years may be significantly impacted by foreign currency fluctuations.

Geographic Area Information

United Asia Other Elimi- Consoli-States Europe Pacific Americas nations dated

1998Sales to unaffiliated

customers $1,598,516 $653,517 $272,898 $79,888 $ — $2,604,819Intergeographic

sales 296,366 131,872 10 10,858 (439,106) —

Total sales 1,894,882 785,389 272,908 90,746 (439,106) 2,604,819

Operating profit 460,752 83,953 89,452 15,672 — 649,829Nonoperating

income 52,172

Earnings beforeincome s 702,001

Identifiable assets 1,640,271 523,284 134,307 53,115 (145,845) 2,205,132 Corporate assets 569,595

Total assets $2,774,727



sales 216,773 68,936 20 4,182 (289,911) —

Total sales 1,619,935 770,191 268,380 69,629 (289,911) 2,438,224


income 34,041

Earnings beforeincome taxes 809,143

Identifiable assets 1,548,821 449,991 185,498 43,489 (160,224) 2,067,575Corporate assets 341,635


United Asia Other Elimi- Consoli-States Europe Pacific Americas nations dated



sales 148,515 87,187 — 5,061 (240,763) —

Total sales 1,389,490 704,741 257,018 61,614 (240,763) 2,172,100


expense (22,721)

Earnings beforeincome taxes 658,997

Identifiable assets 1,371,170 424,415 179,595 35,785 (161,047) 1,849,918Corporate assets 704,782


Fiscal 1998 operating profit includes the impact of the $205.3 million non-recurringcharges (See Note 3). Nonoperating income and expenses consist principally of non-allocable corporate activities. Intergeographic sales and the intergeographic profitremaining in ending inventories are the principal items reflected as eliminations.

Note 15—Subsequent EventOn June 29, 1998, Medtronic, Inc. and Physio-Control International Corporationannounced the signing of a definitive merger agreement. The agreement calls for eachPhysio-Control shareholder to receive $27.50 in the form of Medtronic common stockfor each share of Physio-Control they now hold. Physio-Control has approximately 21 million shares outstanding on a diluted basis. It is anticipated that the transactionwill close in the second quarter of fiscal 1999 and be accounted for as a pooling ofinterests. In order to be eligible for pooling of interests, Medtronic intends to issueapproximately 12 million shares of common stock to the public prior to the closing ofthe transaction. Physio-Control designs, manufactures, markets, and services an inte-grated line of noninvasive emergency cardiac defibrillator and vital sign assessmentdevices, disposable electrodes, and data management software.

Unaudited pro forma information related to this merger is not included as the impactof the merger is not deemed to be material.

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Selected Financial Data

(in millions of dollars, except per share data) Medtronic, Inc.

1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988

Operating Results for the Year:Net sales $2,604.8 $2,438.2 $2,172.1 $1,742.4 $1,390.9 $1,328.2 $1,176.9 $1,021.4 $865.9 $765.8 $669.9Cost of products sold 670.4 610.2 591.4 540.1 431.7 420.1 381.8 331.7 281.7 248.5 217.4Research and development

expense 297.2 280.2 243.8 191.4 156.3 133.0 109.2 89.5 81.5 67.7 55.1Selling, general, and administrative

expense 950.0* 763.3 700.9 574.6 456.3* 460.0* 439.9 399.9* 331.3* 291.9* 267.2Interest expense 8.2 9.4 8.1 9.0 8.2 10.4 13.4 13.8 10.1 8.4 5.9Interest income (22.9) (34.0) (31.1) (14.8) (8.4) (8.8) (10.3) (9.7) (6.2) (5.6) (7.1)

Earnings from continuing operationsbefore income taxes 702.0 809.1 659.0 442.1 346.8 313.5 242.9 196.2 167.5 155.0 131.4

Provision for income taxes 244.6 279.2 230.7 148.1 114.4 101.9 81.4 62.9 54.6 54.7 44.8

Earnings from continuingoperations 457.4 530.0 428.3 294.0 232.4 211.6 161.5 133.4 112.9 100.3 86.6

Cumulative effect ofaccounting changes (net) — — — — — (14.4) — — — — —

Net earnings $457.4 $530.0 $428.3 $294.0 $232.4 $197.2 $161.5 $133.4 $112.9 $100.3 $86.6

Net earnings as a percent ofnet sales 17.6% 21.7% 19.7% 16.9% 16.7% 14.8% 13.7% 13.1% 13.0% 13.1% 12.9%

Net earnings as a percent of averageshareholders’ equity 24.1% 29.6% 27.0% 24.6% 24.5% 24.1% 21.8% 21.4% 21.3% 22.2% 21.2%

Per share of common stock:Earnings from continuing operations

before cumulative effects ofaccounting changes $0.98 $1.11 $0.90 $0.64 $0.51 $0.45 $0.34 $0.28 $0.24 $0.22 $0.18

Basic earnings per share 0.98 1.11 0.90 0.64 0.51 0.41 0.34 0.28 0.24 0.22 0.18Earnings per share assuming dilution 0.96 1.09 0.89 0.63 0.50 0.41 0.33 0.27 0.23 0.22 0.18Cash dividends declared 0.220 0.190 0.130 0.103 0.085 0.070 0.060 0.053 0.045 0.035 .030

Gross margin percentage 74.3% 75.0% 72.8% 69.0% 69.0% 68.4% 67.6% 67.5% 67.5% 67.6% 67.5%

Financial Position at April 30:Working capital $979.6 $719.2 $862.1 $647.8 $406.4 $426.6 $387.3 $320.1 $240.4 $206.1 $244.6Current ratio 2.7:1 2.4:1 2.6:1 2.4:1 1.9:1 2.2:1 2.3:1 2.1:1 1.9:1 1.9:1 2.3:1Property, plant, and

equipment, net 508.8 487.2 416.9 331.1 301.8 282.8 256.8 217.2 183.6 157.2 134.6Total assets 2,774.7 2,409.2 2,554.7 1,946.7 1,623.3 1,292.5 1,163.5 1,024.1 885.3 783.0 661.3Long-term debt 16.2 14.0 15.3 14.2 20.2 10.9 8.6 7.9 8.0 8.2 11.1Long-term debt as a percent of

shareholders’ equity 0.8% 0.8% 0.8% 1.1% 1.9% 1.3% 1.1% 1.2% 1.4% 1.7% 2.7%Shareholders’ equity 2,044.2 1,746.2 1,836.3 1,335.0 1,053.5 841.5 796.5 683.2 565.2 492.7 412.0Shareholders’ equity

per common share 4.36 3.74 3.84 2.89 2.27 1.82 1.68 1.44 1.20 1.06 0.86

Additional Information:Additions to property, plant,

and equipment $148.2 $171.3 $165.1 $96.9 $60.8 $77.1 $77.2 $65.8 $56.1 $52.0 $35.4Full-time employees at year-end 12,466 11,722 10,666 8,896 8,709 8,334 8,314 7,560 7,030 6,529 5,939Full-time equivalent employees

at year-end 13,954 13,719 12,499 10,313 9,856 9,247 9,392 8,470 7,717 7,152 6,471

*Certain costs and income separately disclosed on the statement of consolidated earnings are included in selling, general, and administrative expense. Note: Fiscal 1998 results include the impact of $205.3 million pre-tax non-recurring charges taken in the third quarter (See Note 3).

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World HeadquartersMedtronic, Inc.7000 Central Avenue NEMinneapolis, MN 55432-3576USAInternet:www.medtronic.comTelephone: (612) 514-4000FAX: (612) 514-4879

Europe Medtronic Europe S.A.Route du MolliauCH-1131 TolochenazSwitzerlandTelephone: (41 21) 802 7000FAX: (41 21) 802 7900

Asia/PacificMedtronic Asia/PacificShuwa Kioi-cho Park Bldg., 5Fl.3-6 Kioi-cho, Chiyoda-kuTokyo 102JapanTelephone: (81-3) 3230-2919FAX: (81-3) 3230-2625

UC9800665EN© Medtronic, Inc.All Rights ReservedPrinted in USA

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