GSI understands its target markets, and continues to develop and implement solutions based on clinicans' and other customers' feedback. In fiscal 1998, we invested 41% of revenues into R&D with a focus on complete procedural solutions, highlighted by our successful launch of the ENDOSAPH™ vein harvest system and our SEPS kit for chronic venous insufficiency surgery. Additional surgical procedure kits are expected to be introduced in fiscal 1999 and 2000.

We have focused our organizational resources into two groups in order to leverage our SPACEMAKER® balloon dissection platform technology. Technology Alliance Group (TAG) supports hernia repair, stress urinary incontinence surgery, and aesthetic and reconstructive breast surgery products. Cardiovascular Group (CVG) supports minimally invasive vein harvest and subfascial endoscopic perforator surgery (SEPS) products.

FOCUSED ON GENERATING REVENUES
During fiscal year 1998, we restructured our distribution agreement with Ethicon Endo-Surgery, Inc. to allow us to sell through additional distribution and direct sales channels to the hernia repair and stress urinary incontinence markets. Revenues of $6.8 million in fiscal 1998 reflect more products sold directly by our sales force than ever before. For example, in 1998 24% of total revenues, or $1.6 million were payments guaranteed in our original agreement with Ethicon Endo-Surgery, Inc., versus 54%, or $4.9 million in fiscal year 1997. GSI intends to significantly increase its sales force in fiscal year 1999, focusing our efforts on sales to leading clinical groups in key markets. We also expect to see results from 21 important new distribution agreements, all of which were executed in fiscal 1998. GSI's distribution agreements now provide coverage of 48 states in the US and 18 countries in the European Union, as well as Japan and part of South America. We expect this coverage to grow in fiscal 1999.

We have devoted significant resources to enforcing and defending our intellectual property position and increasing our patent portfolio. At this writing, GSI has received a favorable judgment in the patent infringement action in which it was a defendant (GSI's adversary has appealed). GSI is the plaintiff in all remaining actions against one defendant, and is confidently moving forward.

Our balance sheet continues to be healthy with virtually no long-term debt and approximately $37.5 million in cash, cash equivalents, and available-for-sale securities at the end of the fiscal year.

FOCUSED ON CONTROLLING OUR DESTINY
Through the implementation of new organizational programs, the Company is committed to achieving a higher level of performance in areas such as hiring and training the best-qualified personnel, listening to the needs of our customers, developing high quality solutions for patients and clinicians, and increasing product sales. Innovative and dedicated GSI associates and distributors, as well as leaders in the medical profession, are dedicated to making the benefits of minimally invasive surgery available to patients and clinicians. They have helped establish the SPACEMAKER® platform as enabling technology for the more predictable, less invasive treatment options provided by leading medical institutions and practitioners.

I recognize that for GSI to move forward, leadership is paramount. I value the confidence placed in me, and will honor that faith by focusing on execution of our strategies. Thank you for your support. We are excited about the growth opportunities awaiting us in 1999.

Sincerely,

Gregory D. Casciaro

President and Chief Executive Officer
September 15, 1998