<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

                  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
                           THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended June 30, 1998                    Commission File Number 0-8672


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


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

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


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


                                 Not Applicable
              ----------------------------------------------------
              (Former name, former address and former fiscal year,
                          if changed since last report)

Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.

YES _X_   NO ___

The number of shares of common stock, par value $.10 per share, outstanding at
August 3, 1998 was 84,165,410.

This Form 10-Q consists of 15 pages consecutively numbered.

The Exhibit Index to this Form 10-Q is set forth on page 15.

                                    1 of 15
<PAGE>
 
PART I FINANCIAL INFORMATION

                             ST. JUDE MEDICAL, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                (Dollars in thousands, except per share amounts)

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information, and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six months ended June 30,
1998 are not necessarily indicative of the results that may be expected for the
full year ended December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.

NOTE 2 - CONTINGENCIES

The Company is involved in various products liability lawsuits, claims and
proceedings of a nature considered normal to its business. Subject to
self-insured retentions, the Company has products liability insurance and
reserves sufficient to cover such claims and suits. In connection with two
pacemaker lead models, the Company may be subject to future uninsured claims.
Management believes losses that might be sustained from such actions would not
have a material adverse effect on the Company's liquidity or financial
condition, but could potentially be material to the net income of a particular
future period if resolved unfavorably. The Company's product liability insurance
policies exclude coverage for two discontinued Pacesetter leads, models 1016 and
1026. Some of these two models were the subject of class action product
liability suits that have been settled. 

NOTE 3 - COMPREHENSIVE INCOME

Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" requires the Company to include in Other Comprehensive Income unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments, net of taxes. Other Comprehensive Income
(Loss) for the second quarter 1998 and 1997 was $(27,170) and $3,411,
respectively. Other Comprehensive (Loss) for the first six months of 1998 and
1997 was $(11,166) and $(11,933), respectively. Total Comprehensive Income
combines reported Net Income and Other Comprehensive Income. Total Comprehensive
Income for the second quarter ended June 30, 1998 and 1997 was $12,864 and
$12,176 respectively. Total Comprehensive Income for the six months ended June
30, 1998 and 1997 was $58,043 and $19,709, respectively.

                                    2 of 15
<PAGE>
 
PART I FINANCIAL INFORMATION (continued)


NOTE 4 - SPECIAL CHARGE UPDATE

The Company recorded special charge accruals of $52,926 and $58,669 in 1996 and
1997, respectively. These special charges have decreased by $47,359 and $32,721
respectively, since the date recorded.

NOTE 5 - STOCK REPURCHASE

On March 20, 1998, the Company repurchased 8,000,000 shares of its common stock
at $38 per share and correspondingly increased bank debt by $304,000. The
Company established a $500,000 revolving credit line due in 2003. As of June 30,
1998, the Company had $67,000 available under this credit line.

NOTE 6 - EARNINGS PER SHARE

The table below sets forth the computation of basic and diluted earnings per
share. There were no adjustments to the numerator.

<TABLE>
<CAPTION>
                                                       1998                       1997
                                          ----------------------------  ----------------------------
                                          Three Months    Six Months    Three Months    Six Months
                                          Ended June 30  Ended June 30  Ended June 30  Ended June 30
<S>                                            <C>           <C>           <C>           <C>    
Numerator:
     Net income                                $40,034       $69,209       $ 8,765       $31,642
Denominator:
     Basic-weighted shares outstanding          83,975        87,276        91,419        91,402
     Effect of dilutive securities:
          Employee stock options                   796           741         1,102         1,185
          Restricted shares                         48            48            72            72
                                               -------       -------       -------       -------
     Diluted-weighted shares outstanding        84,819        88,065        92,593        92,659
                                               =======       =======       =======       =======
Basic earnings per share                       $  0.48       $  0.79       $  0.10       $  0.35
                                               =======       =======       =======       =======
Diluted earnings per share                     $  0.47       $  0.79       $  0.09       $  0.34
                                               =======       =======       =======       =======

</TABLE>

                                    3 of 15
<PAGE>
 
PART I FINANCIAL INFORMATION (continued)


NOTE 7 - STATEMENT OF ACCOUNTING STANDARDS NO. 133 ACCOUNTING FOR DERIVATIVE
         INSTRUMENTS AND HEDGING ACTIVITIES

In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is required
to be adopted in years beginning after June 15, 1999. The Statement will require
the Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings.

The Company has not yet determined what the effect of Statement No. 133 will be
on the earnings and financial position of the Company.

                                    4 of 15
<PAGE>
 
PART I FINANCIAL INFORMATION (continued)

                             ST. JUDE MEDICAL, INC.
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                (Amounts in thousands, except per share amounts)
                                   (Unaudited)



                                       THREE MONTHS           SIX MONTHS
                                       ENDED JUNE 30         ENDED JUNE 30
                                    -------------------   -------------------
                                      1998       1997       1998       1997
                                    --------   --------   --------   --------

Net sales                           $261,232   $261,456   $518,720   $511,846
Cost of sales                         96,025     91,632    194,251    183,348
                                    --------   --------   --------   --------
Gross profit                         165,207    169,824    324,469    328,498
Selling, general & administrative     88,763    100,025    180,827    194,413
Research & development                27,068     27,595     49,281     57,885
Special charges                         --       30,645       --       30,645
                                    --------   --------   --------   --------
Operating profit                      49,376     11,559     94,361     45,555
Other income, net                      5,322      2,366      5,221      3,313
                                    --------   --------   --------   --------
Income before taxes                   54,698     13,925     99,582     48,868
Income tax provision                  14,664      5,160     30,373     17,226
                                    --------   --------   --------   --------
Net income                          $ 40,034   $  8,765   $ 69,209   $ 31,642
                                    ========   ========   ========   ========

Earnings per common share:
        Basic                       $   0.48   $   0.10   $   0.79   $   0.35
                                    ========   ========   ========   ========
        Diluted                     $   0.47   $   0.09   $   0.79   $   0.34
                                    ========   ========   ========   ========
Average shares outstanding:
        Basic                         83,975     91,419     87,276     91,402
        Diluted                       84,819     92,593     88,065     92,659


See notes to condensed consolidated financial statements.

                                    5 of 15
<PAGE>
 
PART I FINANCIAL INFORMATION (continued)

                             ST. JUDE MEDICAL, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                (Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>

                                                             JUNE 30       DECEMBER 31
                                                              1998            1997
                                                           (Unaudited)     (See Note)
                                                           -----------    -----------
<S>                                                        <C>            <C>        
ASSETS
Current assets:
    Cash and cash equivalents                              $    27,232    $    28,530
    Marketable securities                                       98,097        156,006
    Accounts receivable, less allowance
        (1998 $12,004; 1997 - $12,712)                         286,701        243,311
    Inventories
        Finished goods                                         131,611        137,651
        Work in process                                         32,230         39,079
        Raw materials                                           67,198         64,309
                                                           -----------    -----------
    Total inventories                                          231,039        241,039
    Other current assets                                        76,121         74,396
                                                           -----------    -----------
Total current assets                                           719,190        743,282
Property, plant and equipment                                  515,465        456,688
    Less accumulated depreciation                             (172,007)      (149,043)
                                                           -----------    -----------
Net property, plant and equipment                              343,485        307,645
Other assets                                                   395,745        407,689
                                                           -----------    -----------
TOTAL ASSETS                                               $ 1,458,393    $ 1,458,616
                                                           ===========    ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses                      $   220,686    $   251,594
Long-term debt                                                 490,500        220,000
Contingencies
Shareholders' equity:
    Preferred stock, par value $1.00 per share -
        25,000,000 shares authorized; no shares issued
    Common stock, par value $.10 per share -
        25,000,000 shares authorized; issued and
        outstanding 1998 - 84,153,890 shares;
        1997 - 91,911,496 shares                                 8,415          9,191
    Additional paid-in capital                                   5,332        244,347
    Retained earnings                                          757,173        746,032
    Accumulated other comprehensive income:
        Cumulative translation adjustment                      (28,371)       (24,150)
        Unrealized gain on available-for-sale securities         4,658         11,602
                                                           -----------    -----------
Total shareholders' equity                                     747,207        987,022
                                                           -----------    -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY                   $ 1,458,393    $ 1,458,616
                                                           ===========    ===========

</TABLE>

NOTE: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date. See notes to condensed consolidated financial
statements.

                                    6 of 15
<PAGE>
 
PART I FINANCIAL INFORMATION (continued)

                             ST. JUDE MEDICAL, INC.
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                    SIX MONTHS ENDED
                                                                         JUNE 30
                                                                ----------------------
                                                                  1998         1997
                                                                ---------    ---------
<S>                                                             <C>          <C>      
Operating Activities:
     Net income                                                 $  69,209    $  31,642
     Depreciation and amortization                                 35,976       34,529
     Special Charges                                                   --       19,104
     Net investment gain                                           (8,514)        --
     Working capital change                                       (83,581)    (158,495)
                                                                ---------    ---------

     Net cash provided by (used in) operating activities           13,090      (73,220)
                                                                ---------    ---------

Investing Activities:
     Purchases of property, plant and equipment                   (46,978)     (38,261)
     Sales of available-for-sale securities, net                   59,602       71,591
     Other investing activities                                     1,120        1,153
                                                                ---------    ---------

     Net cash provided by investing activities                     13,744       34,483
                                                                ---------    ---------

Financing Activities:
     Proceeds from exercise of stock options and stock issued       6,635        6,966
     Purchase and retirement of common stock                     (304,887)        --
     Net borrowings under lines of credit                         270,500       12,000
                                                                ---------    ---------

     Net cash provided by (used in) financing activities          (27,752)      18,966
                                                                ---------    ---------

Effect of currency exchange rate changes on cash                     (380)      (1,287)
                                                                ---------    ---------

Decrease in cash and cash equivalents                              (1,298)     (21,058)
Cash and cash equivalents at beginning of year                     28,530       49,388
                                                                ---------    ---------

Cash and cash equivalents at end of period                      $  27,232    $  28,330
                                                                =========    =========

</TABLE>

See notes to condensed consolidated financial statements.

                                    7 of 15
<PAGE>
 
                       MANAGEMENT DISCUSSION AND ANALYSIS
                OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
                (Dollars in thousands, except per share amounts)

RESULTS OF OPERATIONS:

NET SALES. Net sales for the second quarter 1998 totaled $261,232 a $224
decrease from the 1997 second quarter net sales. Excluding the non-pacing net
sales from a Far East distribution company that was sold in the third quarter of
1997, of approximately $8,000, second quarter net sales were approximately 3.2%
higher than the prior year comparable period. For the first six months, net
sales totaled $518,720, a $6,874 or 1.3% increase, over the net sales recorded
in the first six months of 1997. Excluding non-pacing sales from the Far East
distribution company, of approximately $17,000, the first six months 1998 net
sales increased about 4.9% over the first six months of 1997. Unfavorable
foreign currency effects due to the stronger U.S. dollar reduced 1998 net sales
as compared to 1997 by approximately $2,600 and $8,000 for the second quarter 
and first six months, respectively.

Second quarter and the first six months net sales, exclusive of the non-pacing
sales from the Far East distribution company, increased primarily due to higher
tissue heart valve, implantable cardioverter defibrillator, and
electrophysiology catheter unit sales that were partially offset by lower
average selling prices and fewer bradycardia pulse generator unit sales. Average
selling prices decreased because of pricing pressures, unfavorable foreign
currency effects of a stronger U.S. dollar and more units being sold into lower
priced developing markets. The decrease in bradycardia unit sales resulted
mainly from the turnover of certain domestic sales representatives.

GROSS PROFIT. Second quarter 1998 gross profit totaled $165,207 or 63.2% of net
sales, as compared to $169,824 or 65.0% of net sales during the comparable 1997
period. For the first six months of 1998 and 1997, gross profit was $324,469 or
62.6% of net sales, and $328,498, or 64.2% of net sales, respectively. The lower
gross profit margin for both the quarter and the first six months resulted from
the foreign exchange impact on net sales, average selling price decreases due to
geographical sales mix and pricing pressures in the cardiac rhythm management
business.

SELLING, GENERAL & ADMINISTRATIVE. Selling, general and administrative (SG&A)
expenses in the second quarter 1998 of $88,763 decreased $11,262 or 11.3% from
the second quarter of 1997. As a percentage of sales, 1998 SG&A decreased to
34.0% from 38.3% in 1997. On a year-to-date basis, 1998 SG&A expenses totaled
$180,827, a $13,586 decrease from 1997. The decreases for both the quarter and
first six months resulted mainly from the fourth quarter 1997 restructuring of
the cardiac rhythm management business.

RESEARCH AND DEVELOPMENT. Research and development (R&D) expenses in the second
quarter of 1998 totaled $27,068, a $527 decrease from the second quarter of
1997. The first six months R&D expenditures totaled $49,281, an $8,604 decrease
from the 1997 comparable period. The decrease for both the quarter and the first
six months was primarily attributable to the consolidation of Telectronics R&D
into the cardiac rhythm management business.

                                    8 of 15
<PAGE>
 
PART I MANAGEMENT DISCUSSION & ANALYSIS (continued)

SPECIAL CHARGES. In the second quarter 1997, the Company recorded $30,645 of
special charges related to the Ventritex merger which consisted of transaction
charges of $8,227, U.S. distribution reorganization charges of $9,433,
repositioning charges of $6,939 related to its tachycardia business and
integration charges of $6,046.

OTHER INCOME. Other income in the second quarter of 1998 totaled $5,322 compared
to $2,366 in the second quarter of 1997. In the second quarter of 1998, a
$16,362 gain was realized on the sale of an investment security that was
partially offset by the recognition of a $3,263 reduction in the carrying value
of an investment security. Interest expense in the second quarter 1998 totaled
$7,299, or a $3,499 increase over the comparable 1997 period. The higher
interest expense resulted from the higher debt level associated with the first
quarter 1998 repurchase of eight million shares of common stock for $304,000.

For the first six months of 1998 other income totaled $5,221 versus $3,313 in
the comparable period of 1997. The increase over 1997 was principally
attributable to the gain on investments that was partially offset by the
increased interest expense associated with the stock repurchase.

INCOME TAX PROVISION. The Company's 1998 year-to-date effective income tax rate
was 30.50% compared to 35.25% in 1997. The reduction in the 1998 worldwide
effective tax rate is primarily due to a greater proportion of income derived
from lower tax rate countries and elimination of the non-deductible Ventritex
related transaction costs that occurred in 1997 but not 1998. Taxes are not
provided on undistributed earnings of non-U.S. subsidiaries because such
earnings are either permanently reinvested or do not exceed available foreign
tax credits.

OUTLOOK. The Company expects that market demands, government regulation and
societal pressures will continue to change the healthcare industry worldwide
resulting in further business consolidations and alliances. To meet customer
needs, the Company intends to continue to broaden its product offerings through
internal development or external diversification opportunities. The Company will
participate with industry groups to promote the introduction and use of advanced
medical device technology within a cost conscious environment. Finally, customer
service in the form of cost-effective clinical outcomes will continue to be a
primary focus for the Company.

                                    9 of 15
<PAGE>
 
PART I MANAGEMENT DISCUSSION & ANALYSIS (continued)


As provided for in the Private Securities Litigation Reform Act of 1995, the
Company cautions investors that a number of factors could cause actual future
results of operations to vary from those anticipated in any forward-looking
statements made in this document and elsewhere by or on behalf of the Company.
Net sales could be materially affected by legislative or administrative reforms
to the U.S. Medicare and Medicaid systems in a manner that would significantly
reduce reimbursement for procedures using the Company's medical devices, the
acquisition of key patents by competitors that would have the effect of
excluding the Company from new market segments, healthcare industry
consolidation resulting in customer demands for price concessions, products
introduced by competitors with advanced technology and better features and
benefits or lower prices, fewer procedures performed in a cost conscious
environment, and the lengthy approval time by the FDA to clear implantable
medical devices for commercial release. Cost of sales could be materially
affected by unfavorable developments in the area of products liability and price
increases from the Company's suppliers of critical components, a number of which
are sole sourced. Operations could be affected by the Company's ability to
execute its diversification strategy or to integrate acquired companies, a
serious earthquake affecting the Company's facilities in California, adverse
developments in the litigation arising from the acquisitions of Telectronics and
Ventritex, including litigation related to the Ventritex Cadence model V-110 ICD
device, unanticipated product failures and attempts by competitors to gain
market share through aggressive marketing programs.

FINANCIAL CONDITION

The Company's financial condition at June 30, 1998, continues to remain strong.
Long-term debt of $490,500 was $270,500 higher than the prior year-end balance.
The increase was mainly attributable to the repurchase of eight million shares
of common stock for $304,000. The ratio of current assets to current liabilities
was 3.3 to 1 at June 30, 1998.

Total assets decreased $223 during the first six months of 1998. Accounts
receivable increased $43,390 due mainly to a higher sales level in emerging
markets that have extended credit terms and delayed payments by certain domestic
customers. Inventories decreased $10,000 principally because bradycardia
programmers were placed into service and converted to a fixed asset. Cash and
marketable securities decreased $59,207 primarily due to the reduction in
carrying value of certain marketable securities.

                                    10 of 15
<PAGE>
 
PART I MANAGEMENT DISCUSSION & ANALYSIS (continued)


Shareholders' equity decreased $239,815 during the first six months of 1998. Net
income of $69,209 and the exercise of stock options of $6,826 were offset by a
net unrealized loss on investments of $6,945 and the repurchase of stock of
$304,684 and a foreign currency translation loss adjustment of $4,221.

                                    11 of 15
<PAGE>
 
PART II OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

         GUIDANT LITIGATION

         On November 26, 1996, Guidant Corporation ("Guidant"), a competitor of
Pacesetter and Ventritex, CPI (a wholly owned subsidiary of Guidant), Guidant
Sales Corporation (a wholly owned subsidiary of CPI) ("GSC"), and Eli Lilly and
Company (the former owner of CPI) ("Lilly") (collectively, the "Guidant
Parties"), filed a lawsuit against St. Jude Medical, Inc., Pacesetter Inc.
("Pacesetter"), Ventritex Inc. ("Ventritex") and certain members of the
Telectronics Group in State Superior Court in Marion County, Indiana (the
"Telectronics Action"). The lawsuit alleges, among other things, that, pursuant
to an agreement entered into in 1993, CPI and Lilly granted Ventritex certain
intellectual property licenses relating to cardiac stimulation devices, and that
such licenses would terminate upon the consummation of the merger of Ventritex
into Pacesetter (the "Merger"). The lawsuit further alleges that, pursuant to an
agreement entered into in 1994 (the "Telectronics Agreement"), CPI and Lilly
granted the Telectronics Group certain intellectual property licenses relating
to cardiac stimulation devices (the "CPI/Telectronics License"). The lawsuit
seeks declaratory and injunctive relief, among other things, to prevent and
invalidate the transfer of the Telectronics Agreement to Pacesetter in
connection with Pacesetter's acquisition of Telectronic's assets (the
"Telectronics Acquisition") and the application of license rights granted under
the Telectronics Agreement to the manufacture and sale by Pacesetter of
Ventritex's products following the consummation of the Merger.

         On December 17, 1996, St. Jude Medical, Pacesetter, Ventritex and the
Telectronics Group removed the lawsuit to the United States District Court for
the Southern District of Indiana, and filed a motion to dismiss the complaint
or, in the alternative, to stay proceedings pending arbitration of the dispute
pursuant to the arbitration provisions of the Telectronics Agreement. On January
16, 1997, the Guidant Parties filed a motion to remand the lawsuit to Indiana
state court which was granted in May 1997. St. Jude Medical, Pacesetter and
Ventritex then filed a motion in Indiana state court to dismiss the complaint
or, in the alternative, to stay the proceedings pending arbitration. This motion
was denied by the Indiana state court on July 21, 1997.

         CPI, GSC and Lilly (collectively the "Federal Court Guidant Parties")
also filed suit against St. Jude Medical, Pacesetter and Ventritex on November
26, 1996 in the United States District Court for the Southern District of
Indiana seeking (i) a declaratory judgment that Pacesetter's manufacture, use or
sale of cardiac stimulation devices of the type or similar to the type which
Ventritex manufactured and sold at the time the Federal Court Guidant Parties
filed their complaint would upon consummation of the Merger, be unlicensed and
constitute an infringement of patent rights owned by CPI and Lilly, (ii) to
enjoin the manufacture, use or sale by St. Jude Medical, Pacesetter or Ventritex
of cardiac stimulation devices of the type which Ventritex manufactured at the
time the Federal Court Guidant Parties filed their complaint and (iii) certain
damages and costs. On December 19, 1996, St. Jude Medical, Pacesetter and
Ventritex filed a motion to dismiss the complaint or, in the alternative, to
stay proceedings pending resolution of the Telectronics Action or arbitration.
The court denied this motion.

                                    12 of 15
<PAGE>
 
PART II OTHER INFORMATION (continued)

         St. Jude Medical and Pacesetter believe that the foregoing state and
federal court complaints contain a number of significant factual inaccuracies
concerning the Telectronics Acquisition and the terms and effects of the various
intellectual property license agreements referred to in such complaints. For
these reasons and others, St. Jude Medical and Pacesetter believe that the
allegations set forth in the complaints are without merit, and, are vigorously
defending their interests.

         On December 24, 1996, the Telectronics Group and Pacesetter filed a
lawsuit and a motion against the Guidant Parties in the United States District
Court for the District of Minnesota seeking (i) a declaratory judgment that the
Guidant Parties' claims, as reflected in the Telectronics Action, are subject to
arbitration pursuant to the arbitration provisions of the Telectronics
Agreement, (ii) an order that the Defendants arbitrate their claims against the
Telectronics Group and Pacesetter in accordance with the arbitration provisions
of the Telectronics Agreement, (iii) to enjoin the Defendants preliminarily and
permanently from litigating their dispute with the Telectronics Group and
Pacesetter in any other forum and (iv) certain costs. On February 27, 1997, the
court entered an order denying the motion brought by the Telectronics Group and
Pacesetter and dismissing their complaint. On March 27, 1997, the Telectronics
Group and Pacesetter filed a Notice of Appeal from the court's February 27, 1997
order. The Eighth Circuit Court of Appeals heard oral argument in this appeal on
February 12, 1998.

         In response to the appeal by the Telectronics Group and Pacesetter, the
Court of Appeals issued a decision on May 4, 1998 reversing the district court
and vacating the district court's dismissal of the Minnesota federal district
court lawsuit which the Telectronics Group and Pacesetter brought against the
Guidant Parties. As part of this decision, the Court of Appeals remanded the
case to the district court in Minnesota and instructed the district court to
permit the arbitration requested by the Telectronics Group and Pacesetter to
proceed. The Court of Appeals also asked the district court in Minnesota to
reconsider the motion for an injunction previously brought by the Telectronics
Group and Pacesetter which sought to preliminarily and permanently enjoin the
Guidant Parties from litigating their dispute with the Telectronics Group and
Pacesetter in any forum outside the arbitration proceeding.

         The Guidant Parties filed a request for re-hearing of the Eighth
Circuit Court of Appeals' May 4, 1998 decision and a suggestion that the matter
be considered by the court EN BANC. The Court of Appeals denied Guidant's
requests in this regard by order dated June 9, 1998.

         As a result of Eighth Circuit Court of Appeals' decision in favor of
Pacesetter and the Telectronics Group, the United States District Court for the
Southern District of Indiana issued an order on June 8, 1998 staying the case
which the Federal Court Guidant Parties had brought against St. Jude Medical and
Pacesetter. In addition, the State Superior Court in Marion County, Indiana also
issued an order on June 18, 1998 staying the Telectronics Action. Finally, the
United States District Court for the District of Minnesota issued an order on
July 8, 1998 directing the arbitration requested by the Telctronics Group and
Pacesetter to proceed. That court's order also requires Guidant to provide the
Telectronics Group and Pacesetter with advance notice if it seeks to lift either
of the stays that have been granted in the above cases.

                                    13 of 15
<PAGE>
 
PART II OTHER INFORMAITON (continued)

         The parties have initiated steps to select an arbitrator for the
arbitration proceeding. St. Jude Medical and Pacesetter will continue to
vigorously defend their interests against the claims asserted by Guidant and
associated entities in the arbitration.

         IRS LITIGATION
         The Internal Revenue Service ("IRS") completed an audit examination of
the Company's 1990-1991 corporate income tax returns and issued deficiency
notices in early 1997 for taxes of $16.4 million. In addition, the IRS completed
an audit examination of the Company's 1992-1994 income tax returns in early 1998
and has proposed an adjustment of $41.8 million in taxes. Both adjustments
relate primarily to the Company's Puerto Rican operations. The deficiency
amounts do not include interest, state taxes, or offsetting Puerto Rico tax
refunds, the net effect of which is not material. It is likely that a similar
additional adjustment will be proposed for 1995. The Company is vigorously
contesting this adjustment. The Company is refuting the IRS deficiency for
1990-1991 and asserting the Company is in fact owed a refund in a petition filed
in Tax Court on June 24, 1997. The trial is expected to begin in 1999. The
Company expects that the ultimate resolution will not have material adverse
effect on its financial position or liquidity, but could potentially be material
to the net income of a particular future period if resolved unfavorably.


Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

The Company held its annual meeting of shareholders on May 15, 1998. In
conjunction therewith, proxies were solicited in accordance with Regulation 14A.
The following actions were taken:

     (1)  Fred B. Parks and Gail R. Wilensky were elected to the Board of
          Directors for terms ending in 2001. Shareholders approved management's
          nominees to the Board of Directors by votes as follows: 64,611,258 and
          64,595,826 in favor, 1,359,436 and 1,374,868 withheld for Drs. Parks
          and Wilensky, respectively. Seven other directors are serving
          unexpired terms as follows: Thomas H. Garrett III, Roger G. Stoll and
          Paul J. Chiapparone - through 1999; and Ronald A. Matricaria, Walter
          L. Sembrowich, Daniel J. Starks and Walter F. Mondale - through 2000.

     (2)  The shareholders ratified the reappointment of Ernst & Young LLP as
          the Company's independent auditor for the current fiscal year by a
          vote of 65,665,234 in favor, 118,427 opposed and 176,953 abstained
          from voting.

                                    14 of 15
<PAGE>
 
PART II OTHER INFORMATION (continued)

Item 6. EXHIBITS and REPORTS ON FORM 8-K

        (a)  Exhibits

                Exhibit
                Number        Exhibit
                ------        -------

                2             Not applicable
                4             Rights Agreement dated as of July 16, 1997 between
                              the Company and American Stock Transfer and Trust
                              Company, as Rights Agent including the Certificate
                              of Designation, Preferences and Rights of Series B
                              Junior Preferred Stock is incorporated by
                              reference to Exhibit 1 of the Registrant's Form 8A
                              dated as of August 6, 1997.
                10            Not applicable
                22            Not applicable
                23            Not applicable
                24            Not applicable
                27      Financial Data Schedule

        (b)  Reports on Form 8-k
                None



                                    SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.


                                            ST. JUDE MEDICAL, INC.


 August 14, 1998                            /s/JOHN C. HEINMILLER
-----------------                           ------------------------------------
DATE                                        JOHN C. HEINMILLER
                                            Vice President Corporate Development
                                            and Chief Financial Officer
                                            (Principal Financial and
                                             Accounting Officer)

                                    15 of 15
[{"type": "10-Q", "sequence": "1", "description": "FORM 10-Q", "secsgml_size_bytes": 39558}]
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SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

                  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
                           THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended June 30, 1998                    Commission File Number 0-8672

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

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

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

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

                                 Not Applicable
              ----------------------------------------------------
              (Former name, former address and former fiscal year,
                          if changed since last report)

Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.

YES _X_   NO ___

The number of shares of common stock, par value $.10 per share, outstanding at
August 3, 1998 was 84,165,410.

This Form 10-Q consists of 15 pages consecutively numbered.

The Exhibit Index to this Form 10-Q is set forth on page 15.

                                    1 of 15
PART I FINANCIAL INFORMATION

                             ST. JUDE MEDICAL, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                (Dollars in thousands, except per share amounts)

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information, and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six months ended June 30,
1998 are not necessarily indicative of the results that may be expected for the
full year ended December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.

NOTE 2 - CONTINGENCIES

The Company is involved in various products liability lawsuits, claims and
proceedings of a nature considered normal to its business. Subject to
self-insured retentions, the Company has products liability insurance and
reserves sufficient to cover such claims and suits. In connection with two
pacemaker lead models, the Company may be subject to future uninsured claims.
Management believes losses that might be sustained from such actions would not
have a material adverse effect on the Company's liquidity or financial
condition, but could potentially be material to the net income of a particular
future period if resolved unfavorably. The Company's product liability insurance
policies exclude coverage for two discontinued Pacesetter leads, models 1016 and
1026. Some of these two models were the subject of class action product
liability suits that have been settled. 

NOTE 3 - COMPREHENSIVE INCOME

Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" requires the Company to include in Other Comprehensive Income unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments, net of taxes. Other Comprehensive Income
(Loss) for the second quarter 1998 and 1997 was $(27,170) and $3,411,
respectively. Other Comprehensive (Loss) for the first six months of 1998 and
1997 was $(11,166) and $(11,933), respectively. Total Comprehensive Income
combines reported Net Income and Other Comprehensive Income. Total Comprehensive
Income for the second quarter ended June 30, 1998 and 1997 was $12,864 and
$12,176 respectively. Total Comprehensive Income for the six months ended June
30, 1998 and 1997 was $58,043 and $19,709, respectively.

                                    2 of 15
PART I FINANCIAL INFORMATION (continued)

NOTE 4 - SPECIAL CHARGE UPDATE

The Company recorded special charge accruals of $52,926 and $58,669 in 1996 and
1997, respectively. These special charges have decreased by $47,359 and $32,721
respectively, since the date recorded.

NOTE 5 - STOCK REPURCHASE

On March 20, 1998, the Company repurchased 8,000,000 shares of its common stock
at $38 per share and correspondingly increased bank debt by $304,000. The
Company established a $500,000 revolving credit line due in 2003. As of June 30,
1998, the Company had $67,000 available under this credit line.

NOTE 6 - EARNINGS PER SHARE

The table below sets forth the computation of basic and diluted earnings per
share. There were no adjustments to the numerator.
1998                       1997
                                          ----------------------------  ----------------------------
                                          Three Months    Six Months    Three Months    Six Months
                                          Ended June 30  Ended June 30  Ended June 30  Ended June 30
Numerator:
     Net income                                $40,034       $69,209       $ 8,765       $31,642
Denominator:
     Basic-weighted shares outstanding          83,975        87,276        91,419        91,402
     Effect of dilutive securities:
          Employee stock options                   796           741         1,102         1,185
          Restricted shares                         48            48            72            72
                                               -------       -------       -------       -------
     Diluted-weighted shares outstanding        84,819        88,065        92,593        92,659
                                               =======       =======       =======       =======
Basic earnings per share                       $  0.48       $  0.79       $  0.10       $  0.35
                                               =======       =======       =======       =======
Diluted earnings per share                     $  0.47       $  0.79       $  0.09       $  0.34
                                               =======       =======       =======       =======
3 of 15
PART I FINANCIAL INFORMATION (continued)

NOTE 7 - STATEMENT OF ACCOUNTING STANDARDS NO. 133 ACCOUNTING FOR DERIVATIVE
         INSTRUMENTS AND HEDGING ACTIVITIES

In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is required
to be adopted in years beginning after June 15, 1999. The Statement will require
the Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings.

The Company has not yet determined what the effect of Statement No. 133 will be
on the earnings and financial position of the Company.

                                    4 of 15
PART I FINANCIAL INFORMATION (continued)

                             ST. JUDE MEDICAL, INC.
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                (Amounts in thousands, except per share amounts)
                                   (Unaudited)

                                       THREE MONTHS           SIX MONTHS
                                       ENDED JUNE 30         ENDED JUNE 30
                                    -------------------   -------------------
                                      1998       1997       1998       1997
                                    --------   --------   --------   --------

Net sales                           $261,232   $261,456   $518,720   $511,846
Cost of sales                         96,025     91,632    194,251    183,348
                                    --------   --------   --------   --------
Gross profit                         165,207    169,824    324,469    328,498
Selling, general & administrative     88,763    100,025    180,827    194,413
Research & development                27,068     27,595     49,281     57,885
Special charges                         --       30,645       --       30,645
                                    --------   --------   --------   --------
Operating profit                      49,376     11,559     94,361     45,555
Other income, net                      5,322      2,366      5,221      3,313
                                    --------   --------   --------   --------
Income before taxes                   54,698     13,925     99,582     48,868
Income tax provision                  14,664      5,160     30,373     17,226
                                    --------   --------   --------   --------
Net income                          $ 40,034   $  8,765   $ 69,209   $ 31,642
                                    ========   ========   ========   ========

Earnings per common share:
        Basic                       $   0.48   $   0.10   $   0.79   $   0.35
                                    ========   ========   ========   ========
        Diluted                     $   0.47   $   0.09   $   0.79   $   0.34
                                    ========   ========   ========   ========
Average shares outstanding:
        Basic                         83,975     91,419     87,276     91,402
        Diluted                       84,819     92,593     88,065     92,659

See notes to condensed consolidated financial statements.

                                    5 of 15
PART I FINANCIAL INFORMATION (continued)

                             ST. JUDE MEDICAL, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                (Dollars in thousands, except per share amounts)
JUNE 30       DECEMBER 31
                                                              1998            1997
                                                           (Unaudited)     (See Note)
                                                           -----------    -----------
ASSETS
Current assets:
    Cash and cash equivalents                              $    27,232    $    28,530
    Marketable securities                                       98,097        156,006
    Accounts receivable, less allowance
        (1998 $12,004; 1997 - $12,712)                         286,701        243,311
    Inventories
        Finished goods                                         131,611        137,651
        Work in process                                         32,230         39,079
        Raw materials                                           67,198         64,309
                                                           -----------    -----------
    Total inventories                                          231,039        241,039
    Other current assets                                        76,121         74,396
                                                           -----------    -----------
Total current assets                                           719,190        743,282
Property, plant and equipment                                  515,465        456,688
    Less accumulated depreciation                             (172,007)      (149,043)
                                                           -----------    -----------
Net property, plant and equipment                              343,485        307,645
Other assets                                                   395,745        407,689
                                                           -----------    -----------
TOTAL ASSETS                                               $ 1,458,393    $ 1,458,616
                                                           ===========    ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses                      $   220,686    $   251,594
Long-term debt                                                 490,500        220,000
Contingencies
Shareholders' equity:
    Preferred stock, par value $1.00 per share -
        25,000,000 shares authorized; no shares issued
    Common stock, par value $.10 per share -
        25,000,000 shares authorized; issued and
        outstanding 1998 - 84,153,890 shares;
        1997 - 91,911,496 shares                                 8,415          9,191
    Additional paid-in capital                                   5,332        244,347
    Retained earnings                                          757,173        746,032
    Accumulated other comprehensive income:
        Cumulative translation adjustment                      (28,371)       (24,150)
        Unrealized gain on available-for-sale securities         4,658         11,602
                                                           -----------    -----------
Total shareholders' equity                                     747,207        987,022
                                                           -----------    -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY                   $ 1,458,393    $ 1,458,616
                                                           ===========    ===========
NOTE: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date. See notes to condensed consolidated financial
statements.

                                    6 of 15
PART I FINANCIAL INFORMATION (continued)

                             ST. JUDE MEDICAL, INC.
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)
                                   (Unaudited)
SIX MONTHS ENDED
                                                                         JUNE 30
                                                                ----------------------
                                                                  1998         1997
                                                                ---------    ---------
Operating Activities:
     Net income                                                 $  69,209    $  31,642
     Depreciation and amortization                                 35,976       34,529
     Special Charges                                                   --       19,104
     Net investment gain                                           (8,514)        --
     Working capital change                                       (83,581)    (158,495)
                                                                ---------    ---------

     Net cash provided by (used in) operating activities           13,090      (73,220)
                                                                ---------    ---------

Investing Activities:
     Purchases of property, plant and equipment                   (46,978)     (38,261)
     Sales of available-for-sale securities, net                   59,602       71,591
     Other investing activities                                     1,120        1,153
                                                                ---------    ---------

     Net cash provided by investing activities                     13,744       34,483
                                                                ---------    ---------

Financing Activities:
     Proceeds from exercise of stock options and stock issued       6,635        6,966
     Purchase and retirement of common stock                     (304,887)        --
     Net borrowings under lines of credit                         270,500       12,000
                                                                ---------    ---------

     Net cash provided by (used in) financing activities          (27,752)      18,966
                                                                ---------    ---------

Effect of currency exchange rate changes on cash                     (380)      (1,287)
                                                                ---------    ---------

Decrease in cash and cash equivalents                              (1,298)     (21,058)
Cash and cash equivalents at beginning of year                     28,530       49,388
                                                                ---------    ---------

Cash and cash equivalents at end of period                      $  27,232    $  28,330
                                                                =========    =========
See notes to condensed consolidated financial statements.

                                    7 of 15
MANAGEMENT DISCUSSION AND ANALYSIS
                OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
                (Dollars in thousands, except per share amounts)

RESULTS OF OPERATIONS:

NET SALES. Net sales for the second quarter 1998 totaled $261,232 a $224
decrease from the 1997 second quarter net sales. Excluding the non-pacing net
sales from a Far East distribution company that was sold in the third quarter of
1997, of approximately $8,000, second quarter net sales were approximately 3.2%
higher than the prior year comparable period. For the first six months, net
sales totaled $518,720, a $6,874 or 1.3% increase, over the net sales recorded
in the first six months of 1997. Excluding non-pacing sales from the Far East
distribution company, of approximately $17,000, the first six months 1998 net
sales increased about 4.9% over the first six months of 1997. Unfavorable
foreign currency effects due to the stronger U.S. dollar reduced 1998 net sales
as compared to 1997 by approximately $2,600 and $8,000 for the second quarter 
and first six months, respectively.

Second quarter and the first six months net sales, exclusive of the non-pacing
sales from the Far East distribution company, increased primarily due to higher
tissue heart valve, implantable cardioverter defibrillator, and
electrophysiology catheter unit sales that were partially offset by lower
average selling prices and fewer bradycardia pulse generator unit sales. Average
selling prices decreased because of pricing pressures, unfavorable foreign
currency effects of a stronger U.S. dollar and more units being sold into lower
priced developing markets. The decrease in bradycardia unit sales resulted
mainly from the turnover of certain domestic sales representatives.

GROSS PROFIT. Second quarter 1998 gross profit totaled $165,207 or 63.2% of net
sales, as compared to $169,824 or 65.0% of net sales during the comparable 1997
period. For the first six months of 1998 and 1997, gross profit was $324,469 or
62.6% of net sales, and $328,498, or 64.2% of net sales, respectively. The lower
gross profit margin for both the quarter and the first six months resulted from
the foreign exchange impact on net sales, average selling price decreases due to
geographical sales mix and pricing pressures in the cardiac rhythm management
business.

SELLING, GENERAL & ADMINISTRATIVE. Selling, general and administrative (SG&A)
expenses in the second quarter 1998 of $88,763 decreased $11,262 or 11.3% from
the second quarter of 1997. As a percentage of sales, 1998 SG&A decreased to
34.0% from 38.3% in 1997. On a year-to-date basis, 1998 SG&A expenses totaled
$180,827, a $13,586 decrease from 1997. The decreases for both the quarter and
first six months resulted mainly from the fourth quarter 1997 restructuring of
the cardiac rhythm management business.

RESEARCH AND DEVELOPMENT. Research and development (R&D) expenses in the second
quarter of 1998 totaled $27,068, a $527 decrease from the second quarter of
1997. The first six months R&D expenditures totaled $49,281, an $8,604 decrease
from the 1997 comparable period. The decrease for both the quarter and the first
six months was primarily attributable to the consolidation of Telectronics R&D
into the cardiac rhythm management business.

                                    8 of 15
PART I MANAGEMENT DISCUSSION & ANALYSIS (continued)

SPECIAL CHARGES. In the second quarter 1997, the Company recorded $30,645 of
special charges related to the Ventritex merger which consisted of transaction
charges of $8,227, U.S. distribution reorganization charges of $9,433,
repositioning charges of $6,939 related to its tachycardia business and
integration charges of $6,046.

OTHER INCOME. Other income in the second quarter of 1998 totaled $5,322 compared
to $2,366 in the second quarter of 1997. In the second quarter of 1998, a
$16,362 gain was realized on the sale of an investment security that was
partially offset by the recognition of a $3,263 reduction in the carrying value
of an investment security. Interest expense in the second quarter 1998 totaled
$7,299, or a $3,499 increase over the comparable 1997 period. The higher
interest expense resulted from the higher debt level associated with the first
quarter 1998 repurchase of eight million shares of common stock for $304,000.

For the first six months of 1998 other income totaled $5,221 versus $3,313 in
the comparable period of 1997. The increase over 1997 was principally
attributable to the gain on investments that was partially offset by the
increased interest expense associated with the stock repurchase.

INCOME TAX PROVISION. The Company's 1998 year-to-date effective income tax rate
was 30.50% compared to 35.25% in 1997. The reduction in the 1998 worldwide
effective tax rate is primarily due to a greater proportion of income derived
from lower tax rate countries and elimination of the non-deductible Ventritex
related transaction costs that occurred in 1997 but not 1998. Taxes are not
provided on undistributed earnings of non-U.S. subsidiaries because such
earnings are either permanently reinvested or do not exceed available foreign
tax credits.

OUTLOOK. The Company expects that market demands, government regulation and
societal pressures will continue to change the healthcare industry worldwide
resulting in further business consolidations and alliances. To meet customer
needs, the Company intends to continue to broaden its product offerings through
internal development or external diversification opportunities. The Company will
participate with industry groups to promote the introduction and use of advanced
medical device technology within a cost conscious environment. Finally, customer
service in the form of cost-effective clinical outcomes will continue to be a
primary focus for the Company.

                                    9 of 15
PART I MANAGEMENT DISCUSSION & ANALYSIS (continued)

As provided for in the Private Securities Litigation Reform Act of 1995, the
Company cautions investors that a number of factors could cause actual future
results of operations to vary from those anticipated in any forward-looking
statements made in this document and elsewhere by or on behalf of the Company.
Net sales could be materially affected by legislative or administrative reforms
to the U.S. Medicare and Medicaid systems in a manner that would significantly
reduce reimbursement for procedures using the Company's medical devices, the
acquisition of key patents by competitors that would have the effect of
excluding the Company from new market segments, healthcare industry
consolidation resulting in customer demands for price concessions, products
introduced by competitors with advanced technology and better features and
benefits or lower prices, fewer procedures performed in a cost conscious
environment, and the lengthy approval time by the FDA to clear implantable
medical devices for commercial release. Cost of sales could be materially
affected by unfavorable developments in the area of products liability and price
increases from the Company's suppliers of critical components, a number of which
are sole sourced. Operations could be affected by the Company's ability to
execute its diversification strategy or to integrate acquired companies, a
serious earthquake affecting the Company's facilities in California, adverse
developments in the litigation arising from the acquisitions of Telectronics and
Ventritex, including litigation related to the Ventritex Cadence model V-110 ICD
device, unanticipated product failures and attempts by competitors to gain
market share through aggressive marketing programs.

FINANCIAL CONDITION

The Company's financial condition at June 30, 1998, continues to remain strong.
Long-term debt of $490,500 was $270,500 higher than the prior year-end balance.
The increase was mainly attributable to the repurchase of eight million shares
of common stock for $304,000. The ratio of current assets to current liabilities
was 3.3 to 1 at June 30, 1998.

Total assets decreased $223 during the first six months of 1998. Accounts
receivable increased $43,390 due mainly to a higher sales level in emerging
markets that have extended credit terms and delayed payments by certain domestic
customers. Inventories decreased $10,000 principally because bradycardia
programmers were placed into service and converted to a fixed asset. Cash and
marketable securities decreased $59,207 primarily due to the reduction in
carrying value of certain marketable securities.

                                    10 of 15
PART I MANAGEMENT DISCUSSION & ANALYSIS (continued)

Shareholders' equity decreased $239,815 during the first six months of 1998. Net
income of $69,209 and the exercise of stock options of $6,826 were offset by a
net unrealized loss on investments of $6,945 and the repurchase of stock of
$304,684 and a foreign currency translation loss adjustment of $4,221.

                                    11 of 15
PART II OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

         GUIDANT LITIGATION

         On November 26, 1996, Guidant Corporation ("Guidant"), a competitor of
Pacesetter and Ventritex, CPI (a wholly owned subsidiary of Guidant), Guidant
Sales Corporation (a wholly owned subsidiary of CPI) ("GSC"), and Eli Lilly and
Company (the former owner of CPI) ("Lilly") (collectively, the "Guidant
Parties"), filed a lawsuit against St. Jude Medical, Inc., Pacesetter Inc.
("Pacesetter"), Ventritex Inc. ("Ventritex") and certain members of the
Telectronics Group in State Superior Court in Marion County, Indiana (the
"Telectronics Action"). The lawsuit alleges, among other things, that, pursuant
to an agreement entered into in 1993, CPI and Lilly granted Ventritex certain
intellectual property licenses relating to cardiac stimulation devices, and that
such licenses would terminate upon the consummation of the merger of Ventritex
into Pacesetter (the "Merger"). The lawsuit further alleges that, pursuant to an
agreement entered into in 1994 (the "Telectronics Agreement"), CPI and Lilly
granted the Telectronics Group certain intellectual property licenses relating
to cardiac stimulation devices (the "CPI/Telectronics License"). The lawsuit
seeks declaratory and injunctive relief, among other things, to prevent and
invalidate the transfer of the Telectronics Agreement to Pacesetter in
connection with Pacesetter's acquisition of Telectronic's assets (the
"Telectronics Acquisition") and the application of license rights granted under
the Telectronics Agreement to the manufacture and sale by Pacesetter of
Ventritex's products following the consummation of the Merger.

         On December 17, 1996, St. Jude Medical, Pacesetter, Ventritex and the
Telectronics Group removed the lawsuit to the United States District Court for
the Southern District of Indiana, and filed a motion to dismiss the complaint
or, in the alternative, to stay proceedings pending arbitration of the dispute
pursuant to the arbitration provisions of the Telectronics Agreement. On January
16, 1997, the Guidant Parties filed a motion to remand the lawsuit to Indiana
state court which was granted in May 1997. St. Jude Medical, Pacesetter and
Ventritex then filed a motion in Indiana state court to dismiss the complaint
or, in the alternative, to stay the proceedings pending arbitration. This motion
was denied by the Indiana state court on July 21, 1997.

         CPI, GSC and Lilly (collectively the "Federal Court Guidant Parties")
also filed suit against St. Jude Medical, Pacesetter and Ventritex on November
26, 1996 in the United States District Court for the Southern District of
Indiana seeking (i) a declaratory judgment that Pacesetter's manufacture, use or
sale of cardiac stimulation devices of the type or similar to the type which
Ventritex manufactured and sold at the time the Federal Court Guidant Parties
filed their complaint would upon consummation of the Merger, be unlicensed and
constitute an infringement of patent rights owned by CPI and Lilly, (ii) to
enjoin the manufacture, use or sale by St. Jude Medical, Pacesetter or Ventritex
of cardiac stimulation devices of the type which Ventritex manufactured at the
time the Federal Court Guidant Parties filed their complaint and (iii) certain
damages and costs. On December 19, 1996, St. Jude Medical, Pacesetter and
Ventritex filed a motion to dismiss the complaint or, in the alternative, to
stay proceedings pending resolution of the Telectronics Action or arbitration.
The court denied this motion.

                                    12 of 15
PART II OTHER INFORMATION (continued)

         St. Jude Medical and Pacesetter believe that the foregoing state and
federal court complaints contain a number of significant factual inaccuracies
concerning the Telectronics Acquisition and the terms and effects of the various
intellectual property license agreements referred to in such complaints. For
these reasons and others, St. Jude Medical and Pacesetter believe that the
allegations set forth in the complaints are without merit, and, are vigorously
defending their interests.

         On December 24, 1996, the Telectronics Group and Pacesetter filed a
lawsuit and a motion against the Guidant Parties in the United States District
Court for the District of Minnesota seeking (i) a declaratory judgment that the
Guidant Parties' claims, as reflected in the Telectronics Action, are subject to
arbitration pursuant to the arbitration provisions of the Telectronics
Agreement, (ii) an order that the Defendants arbitrate their claims against the
Telectronics Group and Pacesetter in accordance with the arbitration provisions
of the Telectronics Agreement, (iii) to enjoin the Defendants preliminarily and
permanently from litigating their dispute with the Telectronics Group and
Pacesetter in any other forum and (iv) certain costs. On February 27, 1997, the
court entered an order denying the motion brought by the Telectronics Group and
Pacesetter and dismissing their complaint. On March 27, 1997, the Telectronics
Group and Pacesetter filed a Notice of Appeal from the court's February 27, 1997
order. The Eighth Circuit Court of Appeals heard oral argument in this appeal on
February 12, 1998.

         In response to the appeal by the Telectronics Group and Pacesetter, the
Court of Appeals issued a decision on May 4, 1998 reversing the district court
and vacating the district court's dismissal of the Minnesota federal district
court lawsuit which the Telectronics Group and Pacesetter brought against the
Guidant Parties. As part of this decision, the Court of Appeals remanded the
case to the district court in Minnesota and instructed the district court to
permit the arbitration requested by the Telectronics Group and Pacesetter to
proceed. The Court of Appeals also asked the district court in Minnesota to
reconsider the motion for an injunction previously brought by the Telectronics
Group and Pacesetter which sought to preliminarily and permanently enjoin the
Guidant Parties from litigating their dispute with the Telectronics Group and
Pacesetter in any forum outside the arbitration proceeding.

         The Guidant Parties filed a request for re-hearing of the Eighth
Circuit Court of Appeals' May 4, 1998 decision and a suggestion that the matter
be considered by the court EN BANC. The Court of Appeals denied Guidant's
requests in this regard by order dated June 9, 1998.

         As a result of Eighth Circuit Court of Appeals' decision in favor of
Pacesetter and the Telectronics Group, the United States District Court for the
Southern District of Indiana issued an order on June 8, 1998 staying the case
which the Federal Court Guidant Parties had brought against St. Jude Medical and
Pacesetter. In addition, the State Superior Court in Marion County, Indiana also
issued an order on June 18, 1998 staying the Telectronics Action. Finally, the
United States District Court for the District of Minnesota issued an order on
July 8, 1998 directing the arbitration requested by the Telctronics Group and
Pacesetter to proceed. That court's order also requires Guidant to provide the
Telectronics Group and Pacesetter with advance notice if it seeks to lift either
of the stays that have been granted in the above cases.

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PART II OTHER INFORMAITON (continued)

         The parties have initiated steps to select an arbitrator for the
arbitration proceeding. St. Jude Medical and Pacesetter will continue to
vigorously defend their interests against the claims asserted by Guidant and
associated entities in the arbitration.

         IRS LITIGATION
         The Internal Revenue Service ("IRS") completed an audit examination of
the Company's 1990-1991 corporate income tax returns and issued deficiency
notices in early 1997 for taxes of $16.4 million. In addition, the IRS completed
an audit examination of the Company's 1992-1994 income tax returns in early 1998
and has proposed an adjustment of $41.8 million in taxes. Both adjustments
relate primarily to the Company's Puerto Rican operations. The deficiency
amounts do not include interest, state taxes, or offsetting Puerto Rico tax
refunds, the net effect of which is not material. It is likely that a similar
additional adjustment will be proposed for 1995. The Company is vigorously
contesting this adjustment. The Company is refuting the IRS deficiency for
1990-1991 and asserting the Company is in fact owed a refund in a petition filed
in Tax Court on June 24, 1997. The trial is expected to begin in 1999. The
Company expects that the ultimate resolution will not have material adverse
effect on its financial position or liquidity, but could potentially be material
to the net income of a particular future period if resolved unfavorably.

Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

The Company held its annual meeting of shareholders on May 15, 1998. In
conjunction therewith, proxies were solicited in accordance with Regulation 14A.
The following actions were taken:

     (1)  Fred B. Parks and Gail R. Wilensky were elected to the Board of
          Directors for terms ending in 2001. Shareholders approved management's
          nominees to the Board of Directors by votes as follows: 64,611,258 and
          64,595,826 in favor, 1,359,436 and 1,374,868 withheld for Drs. Parks
          and Wilensky, respectively. Seven other directors are serving
          unexpired terms as follows: Thomas H. Garrett III, Roger G. Stoll and
          Paul J. Chiapparone - through 1999; and Ronald A. Matricaria, Walter
          L. Sembrowich, Daniel J. Starks and Walter F. Mondale - through 2000.

     (2)  The shareholders ratified the reappointment of Ernst & Young LLP as
          the Company's independent auditor for the current fiscal year by a
          vote of 65,665,234 in favor, 118,427 opposed and 176,953 abstained
          from voting.

                                    14 of 15
PART II OTHER INFORMATION (continued)

Item 6. EXHIBITS and REPORTS ON FORM 8-K

        (a)  Exhibits

                Exhibit
                Number        Exhibit
                ------        -------

                2             Not applicable
                4             Rights Agreement dated as of July 16, 1997 between
                              the Company and American Stock Transfer and Trust
                              Company, as Rights Agent including the Certificate
                              of Designation, Preferences and Rights of Series B
                              Junior Preferred Stock is incorporated by
                              reference to Exhibit 1 of the Registrant's Form 8A
                              dated as of August 6, 1997.
                10            Not applicable
                22            Not applicable
                23            Not applicable
                24            Not applicable
                27      Financial Data Schedule

        (b)  Reports on Form 8-k
                None

                                    SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.

                                            ST. JUDE MEDICAL, INC.

 August 14, 1998                            /s/JOHN C. HEINMILLER
-----------------                           ------------------------------------
DATE                                        JOHN C. HEINMILLER
                                            Vice President Corporate Development
                                            and Chief Financial Officer
                                            (Principal Financial and
                                             Accounting Officer)

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