UNITED STATESSECURITIES AND EXCHANGE COMMISSION 
Washington, DC 20549

FORM 10-Q

|  |                                                                                                                                  
|- | ---------------------------------------------------------------------------------------------------------------------------------
|x | QUARTERLY
 REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
 For the quarterly period ended July 30, 2010

Commission File Number 1-7707

(MEDTRONIC LOGO)

MEDTRONIC, INC. 
(Exact name of registrant as specified in its charter)

|                          |  |                     
|------------------------- |  | --------------------
|Minnesota                 |  | 41-0793183          
|(State
 of incorporation) |  | (I.R.S.
 Employer   
|                          |  | Identification
 No.)

710 Medtronic Parkway 
Minneapolis, Minnesota 55432(Address of principal
executive offices) (Zip Code)

(763) 514-4000(Registrants
telephone number, including area code)

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 (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90
days.     Yes   x      No   o

Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes x   No o

Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act.

| |                            |                              | 
| | -------------------------- | ---------------------------- | 
| | Large
 accelerated filer x | Accelerated
 filer o         | 
| | Non-accelerated
 filer o   | Smaller
 Reporting Company o | 

Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
Yes o   No x

Shares of common stock, $.10
par value, outstanding on September 3,
2010: 1,079,885,995







TABLE OF CONTENTS

|     |  |                                                                                        |  |     
|---- |  | -------------------------------------------------------------------------------------- |  | ----
|Item |  | Description                                                                            |  | Page
|     |  |                                                                                        |  |     
|     |  | PART I                                                                                 |  |     
|1.   |  | Financial
 Statements                                                                  |  | 1   
|2.   |  | Managements
 Discussion and Analysis of Financial Condition and Results of Operations |  | 29  
|3.   |  | Quantitative
 and Qualitative Disclosures About Market Risk                            |  | 45  
|4.   |  | Controls
 and Procedures                                                               |  | 45  
|     |  | PART II                                                                                |  |     
|1.   |  | Legal
 Proceedings                                                                     |  | 46  
|2.   |  | Unregistered
 Sales of Equity Securities and Use of Proceeds                           |  | 46  
|6.   |  | Exhibits                                                                               |  | 47  

---



PART I  FINANCIAL INFORMATION

Item 1. Financial Statements

MEDTRONIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS 
(Unaudited)

|                                                                                              |  |                                       |         |                 |   |         | 
|--------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | --------------- | - | ------- | 
|                                                                                              |  | Three
 months ended                   |        
|                                                                                              |  | July
 30,
 2010                       |         | July
 31,
 2009 |  
|                                                                                              |  | (in
 millions, except per share data) |        
|Net sales                                                                                     |  | $                                     | 3,773   |                 | $ | 3,933   | 
|                                                                                              |  |                                       |         |                 |   |         | 
|Costs and expenses:                                                                           |  |                                       |         |                 |   |         | 
|Cost of products sold                                                                         |  |                                       | 893     |                 |   | 966     | 
|Research and development expense                                                              |  |                                       | 370     |                 |   | 370     | 
|Selling, general, and administrative
 expense                                                 |  |                                       | 1,334   |                 |   | 1,368   | 
|Restructuring charges                                                                         |  |                                       |        |                 |   | 62      | 
|Certain litigation charges, net                                                               |  |                                       |        |                 |   | 444     | 
|Purchased in-process research and
 development (IPR&D) and certain acquisition-related
 costs |  |                                       | 15      |                 |   |        | 
|Other expense, net                                                                            |  |                                       | 47      |                 |   | 96      | 
|Interest expense, net                                                                         |  |                                       | 74      |                 |   | 66      | 
|Total costs and expenses                                                                      |  |                                       | 2,733   |                 |   | 3,372   | 
|                                                                                              |  |                                       |         |                 |   |         | 
|Earnings before income taxes                                                                  |  |                                       | 1,040   |                 |   | 561     | 
|                                                                                              |  |                                       |         |                 |   |         | 
|Provision for income taxes                                                                    |  |                                       | 210     |                 |   | 116     | 
|                                                                                              |  |                                       |         |                 |   |         | 
|Net earnings                                                                                  |  | $                                     | 830     |                 | $ | 445     | 
|                                                                                              |  |                                       |         |                 |   |         | 
|Basic earnings per share                                                                      |  | $                                     | 0.76    |                 | $ | 0.40    | 
|Diluted earnings per share                                                                    |  | $                                     | 0.76    |                 | $ | 0.40    | 
|                                                                                              |  |                                       |         |                 |   |         | 
|Basic weighted average shares outstanding                                                     |  |                                       | 1,086.1 |                 |   | 1,112.6 | 
|Diluted weighted average shares outstanding                                                   |  |                                       | 1,089.7 |                 |   | 1,114.6 | 
|                                                                                              |  |                                       |         |                 |   |         | 
|Cash dividends declared per common share                                                      |  | $                                     | 0.225   |                 | $ | 0.205   | 

The accompanying notes are an integral part
of these condensed consolidated financial statements.

1

---



MEDTRONIC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS 
(Unaudited)

|                                                                   |  |                                       |        |                  |   |        |  
|------------------------------------------------------------------ |  | ------------------------------------- | ------ | ---------------- | - | ------ | -
|                                                                   |  | July
 30,
 2010                       |        | April
 30,
 2010 |  
|                                                                   |  | (in
 millions, except per share data) |       
|ASSETS                                                             |  |                                       |        |                  |   |        |  
|                                                                  
|Current assets:                                                    |  |                                       |        |                  |   |        |  
|Cash and cash equivalents                                          |  | $                                     | 1,364  |                  | $ | 1,400  |  
|Short-term investments                                             |  |                                       | 2,553  |                  |   | 2,375  |  
|Accounts receivable, less allowances of $65
 and $67, respectively |  |                                       | 3,230  |                  |   | 3,335  |  
|Inventories                                                        |  |                                       | 1,577  |                  |   | 1,481  |  
|Deferred tax assets, net                                           |  |                                       | 558    |                  |   | 544    |  
|Prepaid expenses and other current assets                          |  |                                       | 715    |                  |   | 704    |  
|                                                                   |  |                                       |        |                  |   |        |  
|Total current assets                                               |  |                                       | 9,997  |                  |   | 9,839  |  
|                                                                   |  |                                       |        |                  |   |        |  
|Property,
 plant, and equipment                                    |  |                                       | 5,429  |                  |   | 5,358  |  
|Accumulated
 depreciation                                          |  |                                       | (3,009 | )                |   | (2,937 | )
|Property, plant, and equipment, net                                |  |                                       | 2,420  |                  |   | 2,421  |  
|                                                                   |  |                                       |        |                  |   |        |  
|Goodwill                                                           |  |                                       | 8,395  |                  |   | 8,391  |  
|Other
intangible assets, net                                       |  |                                       | 2,510  |                  |   | 2,559  |  
|Long-term investments                                              |  |                                       | 5,057  |                  |   | 4,632  |  
|Other assets                                                       |  |                                       | 281    |                  |   | 248    |  
|                                                                   |  |                                       |        |                  |   |        |  
|Total assets                                                       |  | $                                     | 28,660 |                  | $ | 28,090 |  
|                                                                   |  |                                       |        |                  |   |        |  
|LIABILITIES AND SHAREHOLDERS EQUITY                               |  |                                       |        |                  |   |        |  
|                                                                   |  |                                       |        |                  |   |        |  
|Current liabilities:                                               |  |                                       |        |                  |   |        |  
|Short-term borrowings                                              |  | $                                     | 3,428  |                  | $ | 2,575  |  
|Accounts payable                                                   |  |                                       | 410    |                  |   | 420    |  
|Accrued compensation                                               |  |                                       | 680    |                  |   | 1,001  |  
|Accrued income taxes                                               |  |                                       | 197    |                  |   | 235    |  
|Other accrued expenses                                             |  |                                       | 896    |                  |   | 890    |  
|                                                                   |  |                                       |        |                  |   |        |  
|Total current liabilities                                          |  |                                       | 5,611  |                  |   | 5,121  |  
|                                                                  
|Long-term debt                                                     |  |                                       | 7,080  |                  |   | 6,944  |  
|Long-term accrued compensation and retirement benefits             |  |                                       | 481    |                  |   | 516    |  
|Long-term accrued income taxes                                     |  |                                       | 634    |                  |   | 595    |  
|Long-term deferred tax liabilities, net                            |  |                                       | 42     |                  |   | 89     |  
|Other long-term liabilities                                        |  |                                       | 211    |                  |   | 196    |  
|                                                                   |  |                                       |        |                  |   |        |  
|Total liabilities                                                  |  |                                       | 14,059 |                  |   | 13,461 |  
|                                                                   |  |                                       |        |                  |   |        |  
|Commitments and contingencies (Notes 3 and 19)                     |  |                                       |       |                  |   |       |  
|                                                                   |  |                                       |        |                  |   |        |  
|Shareholders equity:                                              |  |                                       |        |                  |   |        |  
|Preferred stock par value $1.00                                   |  |                                       |       |                  |   |       |  
|Common stock par value $0.10                                      |  |                                       | 108    |                  |   | 110    |  
|Retained earnings                                                  |  |                                       | 14,846 |                  |   | 14,826 |  
|Accumulated other comprehensive loss                               |  |                                       | (353   | )                |   | (307   | )
|                                                                   |  |                                       |        |                  |   |        |  
|Total shareholders equity                                         |  |                                       | 14,601 |                  |   | 14,629 |  
|                                                                   |  |                                       |        |                  |   |        |  
|Total liabilities and shareholders equity                         |  | $                                     | 28,660 |                  | $ | 28,090 |  

The accompanying notes are an integral part
of these condensed consolidated financial statements.

2

---



MEDTRONIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
(Unaudited)

|                                                                                     |  |                     |        |                 |   |        |  
|------------------------------------------------------------------------------------ |  | ------------------- | ------ | --------------- | - | ------ | -
|                                                                                     |  | Three
 months ended |       
|                                                                                     |  | July
 30,
 2010     |        | July
 31,
 2009 |  
|                                                                                     |  | (in
 millions)      |       
|Operating Activities:                                                                |  |                     |        |                 |   |        |  
|Net earnings                                                                         |  | $                   | 830    |                 | $ | 445    |  
|Adjustments to reconcile net earnings to
 net cash provided by operating activities: |  |                     |        |                 |   |        |  
|Depreciation and amortization                                                        |  |                     | 187    |                 |   | 188    |  
|Amortization of discount on senior
 convertible notes                                |  |                     | 43     |                 |   | 43     |  
|IPR&D charges                                                                        |  |                     | 15     |                 |   |       |  
|Deferred income taxes                                                                |  |                     | (22    | )               |   | 68     |  
|Stock-based compensation                                                             |  |                     | 49     |                 |   | 62     |  
|Change in operating assets and liabilities,
 net of effect of acquisitions:          |  |                     |        |                 |   |        |  
|Accounts receivable, net                                                             |  |                     | 68     |                 |   | 37     |  
|Inventories                                                                          |  |                     | (73    | )               |   | (35    | )
|Accounts payable and accrued liabilities                                             |  |                     | (322   | )               |   | (136   | )
|Other operating assets and liabilities                                               |  |                     | 30     |                 |   | (1     | )
|Certain litigation charges, net                                                      |  |                     |       |                 |   | 444    |  
|Certain litigation payments                                                          |  |                     |       |                 |   | (494   | )
|                                                                                     |  |                     |        |                 |   |        |  
|Net cash provided by operating activities                                            |  |                     | 805    |                 |   | 621    |  
|                                                                                     |  |                     |        |                 |   |        |  
|Investing Activities:                                                                |  |                     |        |                 |   |        |  
|Acquisitions, net of cash acquired                                                   |  |                     | (62    | )               |   |       |  
|Additions to property, plant, and equipment                                          |  |                     | (108   | )               |   | (150   | )
|Purchases of marketable securities                                                   |  |                     | (1,747 | )               |   | (1,156 | )
|Sales and maturities of marketable
 securities                                       |  |                     | 1,183  |                 |   | 860    |  
|Other investing activities, net                                                      |  |                     | (55    | )               |   | (83    | )
|                                                                                     |  |                     |        |                 |   |        |  
|Net cash used in investing activities                                                |  |                     | (789   | )               |   | (529   | )
|                                                                                     |  |                     |        |                 |   |        |  
|Financing Activities:                                                                |  |                     |        |                 |   |        |  
|Change in short-term borrowings, net                                                 |  |                     | 816    |                 |   | 148    |  
|Payments on long-term debt                                                           |  |                     | (2     | )               |   | (6     | )
|Dividends to shareholders                                                            |  |                     | (245   | )               |   | (228   | )
|Issuance of common stock                                                             |  |                     | 25     |                 |   | 36     |  
|Repurchase of common stock                                                           |  |                     | (640   | )               |   | (344   | )
|                                                                                     |  |                     |        |                 |   |        |  
|Net cash used in financing activities                                                |  |                     | (46    | )               |   | (394   | )
|                                                                                     |  |                     |        |                 |   |        |  
|Effect of
 exchange rate changes on cash and cash equivalents                        |  |                     | (6     | )               |   | 53     |  
|                                                                                     |  |                     |        |                 |   |        |  
|Net change in cash and cash equivalents                                              |  |                     | (36    | )               |   | (249   | )
|                                                                                     |  |                     |        |                 |   |        |  
|Cash and
 cash equivalents at beginning of period                                    |  |                     | 1,400  |                 |   | 1,271  |  
|                                                                                     |  |                     |        |                 |   |        |  
|Cash and cash equivalents at end of period                                           |  | $                   | 1,364  |                 | $ | 1,022  |  
|                                                                                     |  |                     |        |                 |   |        |  
|Supplemental Cash Flow Information                                                   |  |                     |        |                 |   |        |  
|Income taxes paid                                                                    |  | $                   | 261    |                 | $ | 68     |  
|Interest paid                                                                        |  |                     | 60     |                 |   | 58     |  

The accompanying notes are an integral part
of these condensed consolidated financial statements.

3

---



MEDTRONIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
(Unaudited)

Note 1  Basis of Presentation

The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America (U.S.) (U.S. GAAP) for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information necessary for a fair
presentation of results of operations, financial condition, and cash flows in
conformity with U.S. GAAP. In the opinion of management, the condensed
consolidated financial statements reflect all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of the
results of Medtronic, Inc. and its subsidiaries (Medtronic or the Company) for
the periods presented. Operating results for interim periods are not
necessarily indicative of results that may be expected for the fiscal year as a
whole. The preparation of the financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues, expenses, and the related disclosures
at the date of the financial statements and during the reporting period. Actual
results could materially differ from these estimates. For further information,
refer to the consolidated financial statements and notes thereto included in
the Companys Annual Report on Form 10-K for the year ended April 30, 2010.

In December
2009, the Company consolidated its businesses into two operating groups: one
combining its Cardiac Rhythm Disease Management (CRDM), CardioVascular, and
Physio-Control businesses; the other combining its Spinal, Neuromodulation,
Diabetes, and Surgical Technologies businesses.
This structure further advances the Companys goal of operating as One Medtronic because it enables
the Company to capitalize on existing synergies related to customers and technologies across each business.
The creation of these two operating
groups did not immediately change how the Company internally managed and
reported the results of these businesses in fiscal year 2010. Starting in the
first quarter of fiscal year 2011, due to changes in how the Company internally
manages and reports the results of these businesses, the Company now operates
under two reportable segments and two operating segments. During the first
quarter of fiscal year 2011, the two operating groups were formally named the
Cardiac and Vascular Group (composed of the CRDM, CardioVascular, and
Physio-Control businesses) and the Restorative Therapies Group (composed of the
Spinal, Neuromodulation, Diabetes, and Surgical Technologies businesses),
respectively. See Note 20 for further information regarding the Companys segment
reporting.

The Companys
fiscal years 2011, 2010, and 2009 will end or ended on April 29, 2011, April
30, 2010, and April 24, 2009, respectively. The three months ended July 30, 2010
contained thirteen weeks, one fewer week than the first quarter of the prior
fiscal year.

Note 2  New Accounting Pronouncements

In October
2009, the Financial Accounting Standards Board (FASB) updated the revenue
recognition accounting guidance relating to the accounting for revenue
arrangements that involve more than one deliverable or unit of accounting. The
updated guidance requires companies to allocate arrangement considerations in
multiple deliverable arrangements in a manner that better reflects the
economics of the transaction by revising certain thresholds for separation, and
providing criteria for allocation of revenue among deliverables. The updated
guidance is effective for the Company beginning in fiscal year 2012. The
Company may elect to adopt the provisions prospectively to new or materially
modified arrangements beginning on the effective date or retrospectively for
all periods presented. The Company is currently evaluating the impact of
adoption of this accounting guidance on its consolidated financial statements.

In January
2010, the FASB updated the disclosure requirements for fair value measurements.
The updated guidance requires companies to disclose separately the investments
that transfer in and out of Levels 1 and 2 and the reasons for those transfers.
Additionally, in the reconciliation for fair value measurements using
significant unobservable inputs (Level 3), companies should present separately
information about purchases, sales, issuances, and settlements. The updated
guidance was effective for the Company beginning in the fourth quarter of fiscal
year 2010, except for the disclosures about purchases, sales, issuances, and
settlements in the Level 3 reconciliation, which are effective for the Company
beginning in the first quarter of fiscal year 2012. As this guidance only
requires additional disclosures, the adoption of this guidance is not expected
to have a material impact to the Companys consolidated financial statements.
Refer to Note 7 of the Companys Annual Report on Form 10-K for the year ended
April 30, 2010 for additional information on Levels 1, 2, and 3.

Note 3  Acquisitions and IPR&D Charges

Pending Acquisition

On August 16,
2010, the Company signed a definitive agreement to acquire Osteotech, Inc.
(Osteotech). Osteotech develops innovative biologic products for regenerative
medicine. Under the terms of the agreement, the Company will pay $6.50 per
share in cash for each share of Osteotech common stock. The total value of the
transaction is expected to be approximately $123 million.

4

---



Subsequent Acquisition

On August 12,
2010, the Company acquired ATS Medical, Inc. (ATS Medical). ATS Medical is a
leading developer, manufacturer, and marketer of products and services focused
on cardiac surgery, including heart valves and surgical cryoablation
technology. Under the terms of the agreement, ATS Medical shareholders received
$4.00 per share in cash for each share of ATS Medical common stock they owned.

See Note 21
for additional information.

Acquisitions

On June 2,
2010, the Company acquired substantially all of the assets of Axon Surgical
(Axon), a privately held company. Prior to the acquisition, the Company
distributed a large portion of Axons product. The agreement will allow the
Company to bring to market the next generation of surgeon-directed and
professionally supported spinal neuromonitoring technology and expand the
availability of this technology. Total consideration for the transaction, net
of cash acquired, was $62 million, which includes the settlement of existing
Axon debt. In connection with the acquisition of Axon, the Company acquired $41
million of technology-based intangible assets that had an estimated useful life
of 10 years at the time of acquisition, $5 million of tangible assets, and $16
million of goodwill. Goodwill is deductible for tax purposes. The pro forma
impact of the acquisition of Axon was not significant to the results of the
Company for the three months ended July 30, 2010 and July 31, 2009.

There were no
significant acquisitions during the three months ended July 31, 2009.

IPR&D Charges

During the
three months ended July 30, 2010, the Company incurred a $15 million IPR&D
charge related to a milestone payment under the existing terms of a royalty
bearing, non-exclusive patent cross-licensing agreement with NeuroPace, Inc.
Product commercialization related to this technology had not yet been achieved. As a result, in accordance with
authoritative guidance the payment was immediately expensed as IPR&D since technological feasibility had not yet been reached
and such technology has no future alternative use.

During the
three months ended July 31, 2009, the Company did not incur any IPR&D
charges.

Contingent Consideration

Certain of the
Companys business combinations or purchases of intellectual property involve
the potential for the payment of future contingent consideration upon the
achievement of certain product development milestones and/or various other
favorable operating conditions. Payment of the additional consideration is
generally contingent on the acquired company reaching certain performance
milestones, including attaining specified revenue levels, achieving product
development targets, or obtaining regulatory approvals. As a result of the
Company adopting new authoritative guidance in fiscal year 2010 related to
business combinations, contingent consideration is recorded at the acquisition
date estimated fair value of the contingent milestone payment for all
acquisitions subsequent to April 24, 2009. The fair value of the contingent
milestone consideration is remeasured at the estimated fair value at each
reporting period with the change in fair value recorded in the condensed
consolidated statements of earnings. The Company measures the initial liability
and remeasures the liability on a recurring basis using Level 3 inputs as
defined under authoritative guidance for fair value measurements. See Note 7
for further information regarding fair value measurements.

At July 30,
2010, the estimated maximum potential amount of undiscounted future contingent
consideration that the Company is expected to make associated with all
completed business combinations or purchases of intellectual property prior to
April 24, 2009 was approximately $350 million. The milestones associated with
the contingent consideration must be reached in future periods ranging from
fiscal years 2011 to 2016 in order for the consideration to be paid.

The fair value
of contingent milestone payments associated with acquisitions subsequent to
April 24, 2009 were remeasured as of July 30, 2010 at $120 million and are
reflected in other long-term liabilities
in the condensed consolidated balance sheets. The change in fair value was $2
million for the three months ended July 30, 2010 and is reflected as an expense
in the condensed consolidated statement of earnings.

Note 4  Certain Litigation Charges, Net

The Company
classifies material litigation reserves and gains recognized as certain
litigation charges, net. During the three months ended July 30, 2010, there
were no certain litigation charges, net.

5

---



During the
three months ended July 31, 2009, the Company recorded certain litigation
charges, net of $444 million related to the global resolution of all
outstanding intellectual property litigation with Abbott Laboratories (Abbott).
The terms of the agreement stipulate that neither party will sue each other in
the field of coronary stent and stent delivery systems for a period of at least
10 years, subject to certain conditions. Both parties also agreed to a
cross-license of the disputed patents within the defined field. The $444
million settlement amount included a $400 million payment made to Abbott and a
$42 million success payment made to evYsio Medical Devices, LLC (evYsio). In
addition, a $2 million payment was made to evYsio in connection with an
amendment to the parties existing agreement in order to expand the scope of
the definition of the license field from evYsio.

Note 5  Restructuring Charges

Fiscal Year 2009 Initiative

In the fourth
quarter of fiscal year 2009, as part of the Companys One Medtronic strategy,
the Company recorded a $34 million restructuring charge, which consisted of
employee termination costs of $29 million and asset write-downs of $5 million.
The One Medtronic strategy focused on streamlining the organization and
standardizing or centralizing certain functional activities which were not
unique to individual businesses. In connection with these efforts to create
One Medtronic, this initiative was designed to streamline operations, by
further consolidating manufacturing and eliminating certain non-core product
lines, and to further align resources around the Companys higher growth
opportunities. This initiative impacted most businesses and certain corporate
functions. Of the $5 million of asset write-downs, $3 million related to
inventory write-offs and production-related asset impairments and therefore was
recorded within cost of products sold
in the consolidated statement of earnings. The employee termination costs of
$29 million consisted of severance and the associated costs of continued
medical benefits and outplacement services.

As a
continuation of the fiscal year 2009 initiative, in the first quarter of fiscal
year 2010, the Company incurred $72 million of incremental restructuring
charges, which consisted of employee termination costs of $62 million and asset
write-downs of $10 million. Of the $10 million of asset write-downs, $7 million
related to inventory write-offs and production-related asset impairments and
therefore was recorded within cost of
products sold in the condensed consolidated statement of earnings.
Included in the $62 million restructuring charge was $9 million of incremental
defined benefit pension and post-retirement related expenses for those
employees who accepted early retirement packages. These costs are not included
in the table summarizing restructuring costs below because they are associated
with costs that are accounted for under the pension and post-retirement rules.
For further discussion on the incremental defined benefit pension and
post-retirement related expenses, see Note 18.

In the fourth
quarter of fiscal year 2010, the Company recorded a $12 million reversal of
excess restructuring reserves related to the fiscal year 2009 initiative. This
reversal was primarily a result of a higher than expected percentage of
employees identified for elimination finding positions elsewhere within the
Company.

During the
three months ended July 30, 2010, the Company did not incur any restructuring
charges.

In connection
with the fiscal year 2009 initiative, as of the end of the first quarter of
fiscal year 2010, the Company had identified approximately 1,500 positions for
elimination which were achieved through early retirement packages offered to
employees, voluntary separation, and involuntary separation. As of July 30,
2010, the fiscal year 2009 initiative was substantially complete.A summary of
the activity related to the fiscal year 2009 initiative is presented below:

|                             |  |                              |     |                  |   |       |   |   |     |  
|---------------------------- |  | ---------------------------- | --- | ---------------- | - | ----- | - | - | --- | -
|                             |  | Fiscal
 Year 2009 Initiative |    
|(in millions)                |  | Employee
 Termination
 Costs |     | AssetWrite-downs |   | Total |  
|Balance as of April 25, 2008 |  | $                            |    |                  | $ |      |   | $ |    |  
|Restructuring
 charges       |  |                              | 29  |                  |   | 5     |   |   | 34  |  
|Payments/write-downs         |  |                              | (1  | )                |   | (5    | ) |   | (6  | )
|Balance as of April 24, 2009 |  | $                            | 28  |                  | $ |      |   | $ | 28  |  
|Restructuring
 charges       |  |                              | 53  |                  |   | 10    |   |   | 63  |  
|Reversal of
 excess accrual  |  |                              | (12 | )                |   |      |   |   | (12 | )
|Payments                     |  |                              | (64 | )                |   | (10   | ) |   | (74 | )
|Balance as of April 30, 2010 |  | $                            | 5   |                  | $ |      |   | $ | 5   |  
|Payments/write-downs         |  |                              | (5  | )                |   |      |   |   | (5  | )
|Balance as of July 30, 2010  |  | $                            |    |                  | $ |      |   | $ |    |  

6

---



Note 6  Investments

The Company
invests in short-term and long-term investments, which consists primarily of
marketable debt and equity securities.

Information
regarding the Companys short-term
and long-term investments as of
July 30, 2010 is as follows:

|                                                  |  |      |       |                   |   |                    |  |             |     |   |   |       | 
|------------------------------------------------- |  | ---- | ----- | ----------------- | - | ------------------ |  | ----------- | --- | - | - | ----- | 
|(in millions)                                     |  | Cost |       | Unrealized
 Gains |   | Unrealized
 Losses |  | Fair
 Value |    
|Available-for-sale securities:                    |  |      |       |                   |   |                    |  |             |     |   |   |       | 
|Corporate debt securities                         |  | $    | 2,235 |                   | $ | 23                 |  | $           | (10 | ) | $ | 2,248 | 
|Auction rate securities                           |  |      | 193   |                   |   |                   |  |             | (55 | ) |   | 138   | 
|Mortgage backed securities                        |  |      | 696   |                   |   | 11                 |  |             | (14 | ) |   | 693   | 
|U.S. government and agency securities             |  |      | 3,107 |                   |   | 30                 |  |             |    |   |   | 3,137 | 
|Foreign government and agency securities          |  |      | 174   |                   |   | 2                  |  |             |    |   |   | 176   | 
|Certificates of deposit                           |  |      | 305   |                   |   |                   |  |             |    |   |   | 305   | 
|Other asset backed securities                     |  |      | 318   |                   |   | 2                  |  |             | (4  | ) |   | 316   | 
|Marketable equity securities                      |  |      | 1     |                   |   | 2                  |  |             |    |   |   | 3     | 
|Trading securities:                               |  |      |       |                   |   |                    |  |             |     |   |   |       | 
|Exchange-traded funds                             |  |      | 29    |                   |   |                   |  |             | (1  | ) |   | 28    | 
|Cost method, equity method, and other investments |  |      | 566   |                   |   |                   |  |             |    |   |   | 566   | 
|Total
 short-term and long-term investments       |  | $    | 7,624 |                   | $ | 70                 |  | $           | (84 | ) | $ | 7,610 | 

Information
regarding the Companys short-term
and long-term investments as of
April 30, 2010 is as follows:

|                                                  |  |      |       |                   |   |                    |  |             |     |   |   |       | 
|------------------------------------------------- |  | ---- | ----- | ----------------- | - | ------------------ |  | ----------- | --- | - | - | ----- | 
|(in millions)                                     |  | Cost |       | Unrealized
 Gains |   | Unrealized
 Losses |  | Fair
 Value |    
|Available-for-sale securities:                    |  |      |       |                   |   |                    |  |             |     |   |   |       | 
|Corporate debt securities                         |  | $    | 2,130 |                   | $ | 16                 |  | $           | (12 | ) | $ | 2,134 | 
|Auction rate securities                           |  |      | 194   |                   |   |                   |  |             | (52 | ) |   | 142   | 
|Mortgage backed securities                        |  |      | 724   |                   |   | 8                  |  |             | (15 | ) |   | 717   | 
|U.S. government and agency securities             |  |      | 2,745 |                   |   | 9                  |  |             | (1  | ) |   | 2,753 | 
|Foreign government and agency securities          |  |      | 118   |                   |   | 1                  |  |             |    |   |   | 119   | 
|Certificates of deposit                           |  |      | 256   |                   |   |                   |  |             |    |   |   | 256   | 
|Other asset backed securities                     |  |      | 315   |                   |   | 1                  |  |             | (3  | ) |   | 313   | 
|Marketable equity securities                      |  |      | 1     |                   |   |                   |  |             |    |   |   | 1     | 
|Trading securities:                               |  |      |       |                   |   |                    |  |             |     |   |   |       | 
|Exchange-traded funds                             |  |      | 29    |                   |   | 1                  |  |             |    |   |   | 30    | 
|Cost method, equity method, and other investments |  |      | 542   |                   |   |                   |  |             |    |   |   | 542   | 
|Total
 short-term and long-term investments       |  | $    | 7,054 |                   | $ | 36                 |  | $           | (83 | ) | $ | 7,007 | 

Information
regarding the Companys available-for-sale and trading securities as of July
30, 2010 and April 30, 2010 is as follows:

|                               |  |                |       |                 |   |            |  |           |       |  |   |       | 
|------------------------------ |  | -------------- | ----- | --------------- | - | ---------- |  | --------- | ----- |  | - | ----- | 
|                               |  | July
 30, 2010 |       | April
 30, 2010 |  
|(in millions)                  |  | Short-term     |       | Long-term       |   | Short-term |  | Long-term |      
|Available-for-sale
 securities |  | $              | 2,553 |                 | $ | 4,463      |  | $         | 2,375 |  | $ | 4,060 | 
|Trading
 securities            |  |                |      |                 |   | 28         |  |           |      |  |   | 30    | 
|Total
 investments             |  | $              | 2,553 |                 | $ | 4,491      |  | $         | 2,375 |  | $ | 4,090 | 

7

---



The following
table shows the gross unrealized losses and fair values of the Companys
available-for-sale investments in individual securities that have been in a
continuous unrealized loss position deemed to be temporary for less than 12
months and for more than 12 months, aggregated by investment category:

|                                            |  |                      |     |                      |   |            |   |                      |     |  |   |     |  
|------------------------------------------- |  | -------------------- | --- | -------------------- | - | ---------- | - | -------------------- | --- |  | - | --- | -
|                                            |  | July 30,
 2010       |    
|                                            |  | Less than
 12 months |     | More than
 12 months |  
|(in millions)                               |  | Fair Value           |     | Unrealized
 
 Losses |   | Fair Value |   | Unrealized
 
 Losses |    
|Corporate
 debt securities                  |  | $                    | 696 |                      | $ | (2         | ) | $                    | 36  |  | $ | (8  | )
|Auction rate
 securities                    |  |                      |    |                      |   |           |   |                      | 138 |  |   | (55 | )
|Mortgage
 backed securities                 |  |                      | 106 |                      |   | (1         | ) |                      | 81  |  |   | (13 | )
|Other asset
 backed securities              |  |                      | 66  |                      |   | (2         | ) |                      | 10  |  |   | (2  | )
|Total
 short-term and long-term investments |  | $                    | 868 |                      | $ | (5         | ) | $                    | 265 |  | $ | (78 | )

|                                            |  |                      |       |                      |   |            |   |                    |     |  |   |     |  
|------------------------------------------- |  | -------------------- | ----- | -------------------- | - | ---------- | - | ------------------ | --- |  | - | --- | -
|                                            |  | April 30,
 2010      |      
|                                            |  | Less than
 12 months |       | More than
 12 months |  
|(in millions)                               |  | Fair Value           |       | Unrealized
 
 Losses |   | Fair Value |   | Unrealized
 Losses |    
|Corporate
 debt securities                  |  | $                    | 890   |                      | $ | (3         | ) | $                  | 39  |  | $ | (9  | )
|Auction rate
 securities                    |  |                      |      |                      |   |           |   |                    | 142 |  |   | (52 | )
|Mortgage
 backed securities                 |  |                      | 97    |                      |   |           |   |                    | 92  |  |   | (15 | )
|U.S.
 government and agency securities      |  |                      | 853   |                      |   | (1         | ) |                    |    |  |   |    |  
|Other asset
 backed securities              |  |                      | 95    |                      |   | (1         | ) |                    | 19  |  |   | (2  | )
|Total
 short-term and long-term investments |  | $                    | 1,935 |                      | $ | (5         | ) | $                  | 292 |  | $ | (78 | )

The Companys investments in
marketable debt securities detailed above are classified and accounted for as
available-for-sale and include corporate debt securities, and mortgage backed
and other asset backed securities including auction rate securities. Market
conditions during the first quarter of fiscal year 2011 and subsequent to the
Companys quarter-end continue to indicate some uncertainty on the part of
investors on the world economic outlook. This uncertainty has created reduced
liquidity across the fixed income investment market, including certain
securities in which the Company has invested. As a result, some of the
Companys investments have experienced reduced liquidity including unsuccessful
monthly auctions for auction rate security holdings. At July 30, 2010, the
Company concluded that the unrealized losses associated with the remaining
securities were not other-than-temporary as the Company does not have the
intent to sell, nor is it more likely than not that the Company will be
required to sell, before recovery of the amortized cost.

Activity related to the
Companys short-term and long-term investment portfolio is as follows:

|                              |  |                     |       |                |   |          |   |            |     |   |   |    |  
|----------------------------- |  | ------------------- | ----- | -------------- | - | -------- | - | ---------- | --- | - | - | -- | -
|                              |  | Three
 months ended |      
|                              |  | July 30,
 2010      |       | July 31,
 2009 |  
|(in millions)                 |  | Debt (a)            |       | Equity (b)     |   | Debt (a) |   | Equity (b) |    
|Proceeds from sales           |  | $                   | 1,183 |                | $ |         |   | $          | 860 |   | $ |   |  
|Gross realized gains          |  | $                   | 7     |                | $ |         |   | $          | 14  |   | $ |   |  
|Gross realized losses         |  | $                   | (4    | )              | $ |         |   | $          | (1  | ) | $ |   |  
|Impairment losses
 recognized |  | $                   | (3    | )              | $ | (3       | ) | $          | (7  | ) | $ | (3 | )

|    |                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------
|(a) | Includes
 available-for-sale debt securities.                                                                     
|(b) | Includes marketable equity
 securities, cost method, equity method, exchange-traded funds, and other
 investments.

8

---



The total
other-than-temporary impairment losses on available-for-sale debt securities
for the three months ended July 30, 2010 and July 31, 2009 were $9 million and
$24 million, respectively, of which $6 million and $17 million, respectively,
were recognized in other comprehensive income resulting in $3 million and $7
million, respectively, of charges being recognized in earnings. These charges
relate to credit losses on certain mortgage backed securities, other corporate
securities, and auction rate securities. The amount of credit losses represents
the difference between the present value of cash flows expected to be collected
on these securities and the amortized cost. In determining this
other-than-temporary impairment loss, U.S. GAAP specifies that the Company
consider a variety of factors, including the quality and estimated value of the
underlying credit support for the Companys holdings and the financial
condition and credit quality of the underlying collateral and credit support
available to each of the remaining securities in which the Company is invested.
The Company believes it has recorded all necessary other-than-temporary
impairments as the Company does not have the intent to sell, nor is it more
likely than not that the Company will be required to sell, before recovery of
the amortized cost.

The following table shows
the credit loss portion of other-than-temporary impairments on debt securities
held by the Company as of the dates indicated and the corresponding changes in
such amounts:

|                                                                       |  |   |    |  
|---------------------------------------------------------------------- |  | - | -- | -
|(in millions)                                                          |  |   |    |  
|Balance as of April 30, 2010                                           |  | $ | 17 |  
|Additional
 credit losses recognized on securities previously impaired |  |   | 2  |  
|Credit
 losses recognized on securities previously not impaired        |  |   | 1  |  
|Reductions
 for securities sold during the period                      |  |   | (1 | )
|Balance as of July 30, 2010                                            |  | $ | 19 |  

The July 30, 2010 balance of
available-for-sale debt securities by contractual maturity is shown in the following
table at fair value. Within the table, maturities of mortgage backed securities
have been allocated based upon timing of estimated cash flows, assuming no
change in the current interest rate environment. Actual maturities may differ
from contractual maturities because the issuers of the securities may have the
right to prepay obligations without prepayment penalties.

|                                        |  |                 |       | 
|--------------------------------------- |  | --------------- | ----- | 
|(in millions)                           |  | July 30, 
 2010 |      
|Due in one year or less                 |  | $               | 2,816 | 
|Due after one year through
 five years  |  |                 | 3,909 | 
|Due after five years
 through ten years |  |                 | 149   | 
|Due after ten years                     |  |                 | 139   | 
|Total debt securities                   |  | $               | 7,013 | 

As of July 30, 2010 and
April 30, 2010, the aggregate carrying amount of equity and other securities
without a quoted market price and accounted for using the cost or equity method
was $566 million and $542 million, respectively. The total carrying value of
these investments is reviewed quarterly for changes in circumstance or the
occurrence of events that suggest the Companys investment may not be
recoverable. The fair value of cost or equity method investments is not
adjusted if there are no identified events or changes in circumstances that may
have a material adverse effect on the fair value of the investment.

Gains and losses realized on
trading securities and available-for-sale debt securities are recorded in interest expense, net in the condensed
consolidated statements of earnings. Gains and losses realized on marketable
equity securities, cost method, equity method, and other investments are
recorded in other expense, net in
the condensed consolidated statements of earnings. In addition, unrealized
gains and losses on available-for-sale debt securities are recorded in accumulated
other comprehensive loss in the condensed consolidated balance
sheets and unrealized gains and losses on trading securities are recorded in interest expense, netin the condensed consolidated statements of
earnings. Gains and losses from the sale of investments are calculated
based on the specific identification method.

Note
7  Fair Value Measurements

The Company follows the
authoritative guidance on fair value measurements and disclosures, with respect
to assets and liabilities that are measured at fair value on both a recurring
and nonrecurring basis. Under the authoritative guidance for fair value
measurements, fair value is defined as the exit price, or the amount that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants as of the measurement date. The
authoritative guidance also establishes a hierarchy for inputs used in
measuring fair value that maximizes the use of observable inputs and minimizes
the use of unobservable inputs by requiring that the most observable inputs be
used when available. Observable inputs are inputs market participants would use
in valuing the asset or liability developed based on market data obtained from
sources independent of the Company. Unobservable inputs are inputs that reflect
the Companys assumptions about the factors market participants would use in
valuing the asset or liability developed based upon the best information
available in the circumstances. The hierarchy is broken down into three levels.
The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurement) and the
lowest priority to unobservable inputs (Level 3 measurement). Descriptions of
the three levels of the fair value hierarchy are discussed in Note 7 of the
Companys Annual Report on Form 10-K for the year ended April 30, 2010.

9

---



See the section below titled
Valuation
Techniquesfor further discussion of how the Company determines fair
value for investments.

Assets and Liabilities That Are Measured at Fair
Value on a Recurring Basis

The authoritative guidance
is principally applied to financial assets and liabilities such as marketable
equity securities and debt securities that are classified and accounted for as
trading, available-for-sale, and derivative instruments. Derivatives include
cash flow hedges, freestanding derivative forward contracts, net investment
hedges, and interest rate swaps. These items are marked-to-market at each
reporting period. The information in the following paragraphs and tables
primarily addresses matters relative to these financial assets and liabilities.

The following tables provide
information by level for assets and liabilities that are measured at fair value
on a recurring basis.

|                                         |  |                                   |         |                                                      |         |       |         |   |       |  |   |     | 
|---------------------------------------- |  | --------------------------------- | ------- | ---------------------------------------------------- | ------- | ----- | ------- | - | ----- |  | - | --- | 
|                                         |  | Fair Value
 as of 
 July 30, 2010 |         | Fair Value
 Measurements
 Using Inputs Considered as |        
|(in millions)                            |  |                                   | Level 1 |                                                      | Level 2 |       | Level 3 |  
|Assets:                                  |  |                                   |         |                                                      |         |       |         |   |       |  |   |     | 
|Corporate debt securities                |  | $                                 | 2,248   |                                                      | $       | 2     |         | $ | 2,230 |  | $ | 16  | 
|Auction rate securities                  |  |                                   | 138     |                                                      |         |      |         |   |      |  |   | 138 | 
|Mortgage backed securities               |  |                                   | 693     |                                                      |         |      |         |   | 656   |  |   | 37  | 
|U.S. government and agency securities    |  |                                   | 3,137   |                                                      |         | 1,071 |         |   | 2,066 |  |   |    | 
|Foreign government and agency securities |  |                                   | 176     |                                                      |         |      |         |   | 176   |  |   |    | 
|Certificates of deposit                  |  |                                   | 305     |                                                      |         |      |         |   | 305   |  |   |    | 
|Other asset backed securities            |  |                                   | 316     |                                                      |         |      |         |   | 309   |  |   | 7   | 
|Marketable equity securities             |  |                                   | 3       |                                                      |         | 3     |         |   |      |  |   |    | 
|Exchange-traded funds                    |  |                                   | 28      |                                                      |         | 28    |         |   |      |  |   |    | 
|Derivative assets                        |  |                                   | 369     |                                                      |         | 217   |         |   | 152   |  |   |    | 
|Total assets                             |  | $                                 | 7,413   |                                                      | $       | 1,321 |         | $ | 5,894 |  | $ | 198 | 
|                                         |  |                                   |         |                                                      |         |       |         |   |       |  |   |     | 
|Liabilities:                             |  |                                   |         |                                                      |         |       |         |   |       |  |   |     | 
|Derivative liabilities                   |  | $                                 | 75      |                                                      | $       | 75    |         | $ |      |  | $ |    | 
|Total liabilities                        |  | $                                 | 75      |                                                      | $       | 75    |         | $ |      |  | $ |    | 

|                                         |  |                                     |         |                                                      |         |       |         |   |       |  |   |     | 
|---------------------------------------- |  | ----------------------------------- | ------- | ---------------------------------------------------- | ------- | ----- | ------- | - | ----- |  | - | --- | 
|                                         |  | Fair Value
 
 as of
 April 30, 2010 |         | Fair Value
 Measurements
 Using Inputs Considered as |        
|(in millions)                            |  |                                     | Level 1 |                                                      | Level 2 |       | Level 3 |  
|Assets:                                  |  |                                     |         |                                                      |         |       |         |   |       |  |   |     | 
|Corporate debt securities                |  | $                                   | 2,134   |                                                      | $       |      |         | $ | 2,118 |  | $ | 16  | 
|Auction rate securities                  |  |                                     | 142     |                                                      |         |      |         |   |      |  |   | 142 | 
|Mortgage backed securities               |  |                                     | 717     |                                                      |         |      |         |   | 678   |  |   | 39  | 
|U.S. government and agency securities    |  |                                     | 2,753   |                                                      |         | 782   |         |   | 1,971 |  |   |    | 
|Foreign government and agency securities |  |                                     | 119     |                                                      |         |      |         |   | 119   |  |   |    | 
|Certificates of deposit                  |  |                                     | 256     |                                                      |         |      |         |   | 256   |  |   |    | 
|Other asset backed securities            |  |                                     | 313     |                                                      |         |      |         |   | 297   |  |   | 16  | 
|Marketable equity securities             |  |                                     | 1       |                                                      |         | 1     |         |   |      |  |   |    | 
|Exchange-traded funds                    |  |                                     | 30      |                                                      |         | 30    |         |   |      |  |   |    | 
|Derivative assets                        |  |                                     | 296     |                                                      |         | 265   |         |   | 31    |  |   |    | 
|Total assets                             |  | $                                   | 6,761   |                                                      | $       | 1,078 |         | $ | 5,470 |  | $ | 213 | 
|                                         |  |                                     |         |                                                      |         |       |         |   |       |  |   |     | 
|Liabilities:                             |  |                                     |         |                                                      |         |       |         |   |       |  |   |     | 
|Derivative liabilities                   |  | $                                   | 47      |                                                      | $       | 47    |         | $ |      |  | $ |    | 
|Total liabilities                        |  | $                                   | 47      |                                                      | $       | 47    |         | $ |      |  | $ |    | 

10

---



Valuation Techniques

Financial assets that are
classified as Level 1 securities include highly liquid government bonds within
 U.S. government and agency securities, marketable equity securities, and
exchange-traded funds for which quoted market prices are available. In
addition, the Company has determined that foreign currency forward contracts
will be included in Level 1 as these are valued using quoted market prices in
active markets which have identical assets or liabilities.

The valuation for most fixed
maturity securities are classified as Level 2. Financial assets that are
classified as Level 2 include corporate debt securities, U.S. and foreign
government and agency securities, certificates of deposit, other asset backed
securities, and certain mortgage backed securities whose value is determined
using inputs that are observable in the market or can be derived principally
from or corroborated by observable market data such as pricing for similar
securities, recently executed transactions, cash flow models with yield curves,
and benchmark securities. In addition, the Company determined that
interest rate swaps will be included in Level 2 as the Company uses inputs
other than quoted prices that are observable for the asset. The Level 2
derivative positions are primarily valued using standard calculations and
models that use readily observable market data as their basis.

Financial assets are
considered Level 3 when their fair values are determined using pricing models,
discounted cash flow methodologies, or similar techniques, and at least one
significant model assumption or input is unobservable. Level 3 financial assets
also include certain investment securities for which there is limited market
activity such that the determination of fair value requires significant
judgment or estimation. Level 3 investment securities primarily include certain
corporate debt securities, auction rate securities, certain mortgage backed
securities, and certain other asset backed securities for which there was a
decrease in the observability of market pricing for these investments. At July
30, 2010, these securities were valued primarily using broker pricing models
that incorporate transaction details such as contractual terms, maturity,
timing, and amount of expected future cash flows, as well as assumptions about
liquidity and credit valuation adjustments of marketplace participants.

The Company reviews the fair
value hierarchy classification on a quarterly basis. Changes in the ability to
observe valuation inputs may result in a reclassification of levels for certain
securities within the fair value hierarchy. The Companys policy is to
recognize transfers into and out of levels within the fair value hierarchy at
the end of the fiscal quarter in which the actual event or change in
circumstances that caused the transfer occurs. There were no significant
transfers between Level 1 and Level 2 during the three months ended July 30,
2010 or July 31, 2009. When a determination is made to classify an asset or
liability within Level 3, the determination is based upon the significance of
the unobservable inputs to the overall fair value measurement. The following
table provides a reconciliation of the beginning and ending balances of items
measured at fair value on a recurring basis in the table above that used
significant unobservable inputs (Level 3).

|                                                                                        |  |                     |     |                |   |     |  
|--------------------------------------------------------------------------------------- |  | ------------------- | --- | -------------- | - | --- | -
|                                                                                        |  | Three
 months ended |    
|(in millions)                                                                           |  | July 30,
 2010      |     | July 31,
 2009 |  
|Beginning Balance                                                                       |  | $                   | 213 |                | $ | 205 |  
|Total
 realized losses and other-than-temporary impairment losses included in
 earnings |  |                     | (2  | )              |   | (4  | )
|Total
 unrealized gains/(losses) included in other comprehensive income                 |  |                     | (2  | )              |   | 45  |  
|Net
 purchases, issuances, and settlements                                              |  |                     | (11 | )              |   | (22 | )
|Ending Balance                                                                          |  | $                   | 198 |                | $ | 224 |  

Assets and Liabilities that are Measured at Fair Value on a
Nonrecurring Basis

Non-financial assets such as
goodwill, intangible assets, and property, plant, and equipment are measured at
fair value when there is an indicator of impairment and recorded at fair value
only when an impairment is recognized. There were no indicators of impairment
as of July 30, 2010. With the exception of the property, plant, and equipment
impairment charges recorded as part of the Companys fiscal year 2009 and
global realignment restructuring reserves of $8 million, no impairments were
recognized as of July 31, 2009.

The Company holds
investments in equity and other securities that are accounted for using the
cost or equity method, which are classified as long-term
investmentsin the condensed consolidated balance sheets. The
aggregate carrying amount of these investments approximated $566 million as of
July 30, 2010 and $542 million as of April 30, 2010. These cost or equity
method investments are measured at fair value on a nonrecurring basis. The fair
value of the Companys cost or equity method investments is not estimated if
there are no identified events or changes in circumstance that may have a
significant adverse effect on the fair value of these investments. During the
three months ended July 30, 2010 and July 31, 2009, the Company determined that
the fair values of certain cost method investments were below their carrying
values and that the carrying values of these investments were not expected to
be recoverable within a reasonable period of time. As a result, the Company
recognized $3 million in impairment charges during both the three months ended
July 30, 2010 and the three months ended July 31, 2009. The impairment charges
related to the cost method investments were recorded in other expense, net in the
condensed consolidated statement of earnings. These investments fall within
Level 3 of the fair value hierarchy due to the use of significant unobservable
inputs to determine fair value, as the investments are privately held entities
without quoted market prices. To determine the fair value of these investments,
the Company used all pertinent financial information that was available related
to the entities, including financial statements and market participant
valuations from recent and proposed financing offerings.

11

---



Financial Instruments Not Measured at Fair Value

The estimated fair value of
the Companys long-term debt, including the short-term portion, at July 30,
2010 was $10.153 billion compared to a carrying value of $9.709 billion, and at
April 30, 2010 was $10.047 billion compared to a carrying value of $9.711
billion. Fair value was estimated using quoted market prices for the same or
similar instruments. The fair values and carrying values consider the terms of
the related debt and exclude the impacts of debt discounts and
derivative/hedging activity.

Note
8  Financing Arrangements

Senior Convertible Notes

In April 2006, the Company
issued $2.200 billion of 1.500 percent Senior Convertible Notes due 2011 (2011
Senior Convertible Notes) and $2.200 billion of 1.625 percent Senior
Convertible Notes due 2013 (2013 Senior Convertible Notes) (collectively, the
Senior Convertible Notes). The Senior Convertible Notes were issued at par and
pay interest in cash semi-annually in arrears on April 15 and
October 15 of each year. The Senior Convertible Notes are unsecured
unsubordinated obligations and rank equally with all other unsecured and
unsubordinated indebtedness.

Concurrent with the issuance
of the Senior Convertible Notes, the Company purchased call options on its
common stock in private transactions. The call options allow the Company to receive
shares of the Companys common stock and/or cash from counterparties equal to
the amounts of common stock and/or cash related to the excess conversion value
that it would pay to the holders of the Senior Convertible Notes upon
conversion.

In separate transactions,
the Company sold warrants to issue shares of the Companys common stock at an
exercise price of $76.56 per share in private transactions. Pursuant to these
transactions, warrants for 41 million shares of the Companys common stock may
be settled over a specified period beginning in July 2011 and warrants for 41
million shares of the Companys common stock may be settled over a specified
period beginning in July 2013.

In June 2008, the FASB
issued authoritative guidance on determining whether an instrument (or embedded
feature) is indexed to an entitys own stock. This authoritative guidance
provides guidance for determining whether an entity-linked financial instrument
(or embedded feature) is indexed to an entitys own stock and classified in shareholders
equity or whether it should be bifurcated and classified as a separate asset or
liability and marked-to-market through earnings. The Company adopted this
authoritative guidance in the first quarter of fiscal year 2010. In applying
this guidance, the Company concluded that the purchased call options and sold
warrants were indexed to its own stock and should continue to be classified in
shareholders equity; thus consistent with prior periods, the existing guidance
for accounting for derivative financial instruments indexed to and potentially
settled in, a companys own stock would still apply.

Under this existing
guidance, the Senior Convertible Notes are accounted for as a combined
instrument because the conversion spread meets the requirements to not be
separated as a derivative.

Existing guidance provides
that contracts are initially classified as equity if (1) the contract
requires physical settlement or net-share settlement, or (2) the contract
gives the Company a choice of net-cash settlement or settlement in its own
shares (physical settlement or net-share settlement). The settlement terms of
the Companys purchased call options and sold warrant contracts provide for net
cash settlement for the particular contract or net share settlement, depending
on the method of settlement, as discussed above, which is at the option of the
Company. Based on existing guidance, the purchased call option contracts were
recorded as a reduction of equity and the warrants were recorded as an addition
to equity as of the trade date. Existing guidance states that a reporting
entity shall not consider contracts to be derivative instruments if the
contract issued or held by the reporting entity is both indexed to its own
stock and classified in shareholders equity in its statement of financial
position. The Company concluded the purchased call option contracts and the
warrant contracts should be accounted for in shareholders equity.

12

---



Authoritative guidance
requires the proceeds from the issuance of the Senior Convertible Notes to be
allocated between a liability component (issued at a discount) and an equity
component. The resulting debt discount is amortized over the period the Senior
Convertible Notes are expected to be outstanding as additional non-cash interest
expense.

The following table provides
equity and debt information for the Senior Convertible Notes under the
convertible debt guidance.

|                                                  |  |                                |       |                                |   |                 |   |                 |       |   |   |       |  
|------------------------------------------------- |  | ------------------------------ | ----- | ------------------------------ | - | --------------- | - | --------------- | ----- | - | - | ----- | -
|                                                  |  | 2011 Senior
 Convertible Notes |       | 2013 Senior
 Convertible Notes |  
|(in millions)                                     |  | July 30, 
 2010                |       | April 30,
 2010                |   | July 30, 
 2010 |   | April 30,
 2010 |      
|Carrying amount of the equity component           |  | $                              | 420   |                                | $ | 420             |   | $               | 547   |   | $ | 547   |  
|                                                  |  |                                |       |                                |   |                 |   |                 |       |   |   |       |  
|Principal amount of the Senior Convertible
 Notes |  | $                              | 2,200 |                                | $ | 2,200           |   | $               | 2,200 |   | $ | 2,200 |  
|Unamortized discount                              |  |                                | (67   | )                              |   | (90             | ) |                 | (239  | ) |   | (259  | )
|Net carrying amount                               |  | $                              | 2,133 |                                | $ | 2,110           |   | $               | 1,961 |   | $ | 1,941 |  

As of July 30, 2010, the
unamortized balance of the debt discount will be amortized over the remaining
life of the Senior Convertible Notes, which is approximately nine months for
the 2011 Senior Convertible Notes and approximately three years for the 2013
Senior Convertible Notes. The following table provides interest rate and
interest expense amounts related to the Senior Convertible Notes.

|                                                       |  |                                |      |                                |   |                 |   |                 |      |   |   |      |  
|------------------------------------------------------ |  | ------------------------------ | ---- | ------------------------------ | - | --------------- | - | --------------- | ---- | - | - | ---- | -
|                                                       |  | 2011 Senior
 Convertible Notes |      | 2013 Senior
 Convertible Notes |  
|                                                       |  | Three
 months ended            |      | Three
 months ended            |  
|(in millions, except interest rate)                    |  | July 30, 
 2010                |      | July 31, 
 2009                |   | July 30, 
 2010 |   | July 31, 
 2009 |     
|Effective
 interest rate                               |  |                                | 5.97 | %                              |   | 5.97            | % |                 | 6.03 | % |   | 6.03 | %
|Interest
 cost related to contractual interest coupon  |  | $                              | 8    |                                | $ | 9               |   | $               | 9    |   | $ | 10   |  
|Interest
 cost related to amortization of the discount |  | $                              | 23   |                                | $ | 23              |   | $               | 20   |   | $ | 21   |  

Senior Notes

In March 2010, the Company
issued three tranches of Senior Notes (collectively, the 2010 Senior Notes)
with the aggregate face value of $3.000 billion. The first tranche consisted of
$1.250 billion of 3.000 percent Senior Notes due 2015, the second tranche consisted
of $1.250 billion of 4.450 percent Senior Notes due 2020, and the third tranche
consisted of $500 million of 5.550 percent Senior Notes due 2040. All three
tranches were issued at a discount which resulted in an effective interest rate
of 3.002 percent, 4.470 percent, and 5.564 percent, respectively. Interest on
each series of the 2010 Senior Notes is payable semi-annually, on March 15 and
September 15 of each year, commencing September 15, 2010. The 2010 Senior Notes
are unsecured senior obligations of the Company and rank equally with all other
unsecured and unsubordinated indebtedness of the Company. The indentures under
which the 2010 Senior Notes were issued contain customary covenants, all of
which the Company remains in compliance with as of July 30, 2010. The Company
used the net proceeds from the sale of the 2010 Senior Notes for working
capital and general corporate uses, which may include repayment of its
indebtedness that matures in fiscal year 2011. This indebtedness includes the
$2.200 billion of 1.500 percent Senior Convertible Notes due 2011 and the $400
million of 2005 Senior Notes due 2010.

In March 2009, the Company
issued three tranches of Senior Notes (collectively, the 2009 Senior Notes)
with the aggregate face value of $1.250 billion. The first tranche consisted of
$550 million of 4.500 percent Senior Notes due 2014, the second tranche
consisted of $400 million of 5.600 percent Senior Notes due 2019, and the third
tranche consisted of $300 million of 6.500 percent Senior Notes due 2039. The
first tranche was issued at par, the second tranche was issued at a discount
which resulted in an effective interest rate of 5.609 percent, and the third
tranche was issued at a discount which resulted in an effective interest rate
of 6.519 percent. Interest on each series of the 2009 Senior Notes is payable
semi-annually, on March 15 and September 15 of each year. The 2009 Senior Notes
are unsecured senior obligations of the Company and rank equally with all other
unsecured and unsubordinated indebtedness of the Company. The indentures under
which the 2009 Senior Notes were issued contain customary covenants, all of
which the Company remains in compliance with as of July 30, 2010. The Company
used the net proceeds from the sale of the 2009 Senior Notes for repayment of a
portion of its commercial paper and for general corporate uses.

13

---



In September 2005, the
Company issued two tranches of Senior Notes (collectively, the 2005 Senior
Notes) with the aggregate face value of $1.000 billion. The first tranche
consisted of $400 million of 4.375 percent Senior Notes due 2010 and the second
tranche consisted of $600 million of 4.750 percent Senior Notes due 2015. Each
tranche was issued at a discount which resulted in an effective interest rate
of 4.433 percent and 4.760 percent for the five and ten year 2005 Senior Notes,
respectively. Interest on each series of 2005 Senior Notes is payable
semi-annually, on March 15 and September 15 of each year. The 2005 Senior Notes
are unsecured unsubordinated obligations of the Company and rank equally with
all other unsecured and unsubordinated indebtedness of the Company. The
indentures under which 2005 Senior Notes were issued contain customary
covenants, all of which the Company remains in compliance with as of July 30,
2010. The Company used the net proceeds from the sale of the Senior Notes for
repayment of a portion of its commercial paper.

As of July 30, 2010, the
Company had interest rate swap agreements designated as fair value hedges of
underlying fixed rate obligations including the Companys $1.250 billion 3.000
percent 2010 Senior Notes due 2015, the Companys $600 million 4.750 percent
2005 Senior Notes due 2015, the Companys $2.200 billion 1.625 percent Senior
Convertible Notes due 2013, and the Companys $550 million 4.500 percent 2009
Senior Notes due 2014. For additional information regarding the interest rate
swap agreements, refer to Note 9.

Contingent Convertible Debentures

As of July 30, 2010 and
April 30, 2010, the Company has $15 million remaining in aggregate principal
amount of 1.250 percent Contingent Convertible Debentures, Series B due 2021
(the Debentures) outstanding. Interest is payable semi-annually. Each Debenture
is convertible into shares of common stock at an initial conversion price of
$61.81 per share; however, the Debentures are not convertible before their
final maturity unless the closing price of our common stock reaches 110 percent
of the conversion price for 20 trading days during a consecutive 30 trading day
period. Upon conversion of the Debentures, the Company will pay holders cash
equal to the lesser of the principal amount of the Debentures or their
conversion value, and shares of the Companys common stock to the extent the
conversion value exceeds the principal amount of the Debentures. The Company
may be required to repurchase the remaining Debentures at the option of the
holders in September 2011 or 2016. For put options exercised by the holders of
the Debentures, the purchase price is equal to the principal amount of the
applicable Debenture plus any accrued and unpaid interest thereon to the
repurchase date. If the put option is exercised, the Company will pay holders
the repurchase price solely in cash. The Company can redeem the Debentures for
cash at any time.

Commercial Paper

The Company maintains a
commercial paper program that allows the Company to have a maximum of $2.250
billion in commercial paper outstanding, with maturities up to 364 days
from the date of issuance. As of July 30, 2010, outstanding commercial paper
totaled $725 million. There was no outstanding commercial paper as of April 30,
2010. During the three months ended July 30, 2010, the weighted average
original maturity of the commercial paper outstanding was approximately 33
days, and the weighted average interest rate was 0.262 percent. The issuance of
commercial paper reduces the amount of credit available under our existing
lines of credit.

Bank Borrowings

Bank borrowings consist
primarily of borrowings from non-U.S. banks at interest rates considered
favorable by management and where natural hedges can be gained for foreign
exchange purposes and borrowings from U.S. banks.

Lines of Credit

The Company has existing
unsecured lines of credit of approximately $2.870 billion with various banks at
July 30, 2010. The existing lines of credit include a five-year $1.750 billion
syndicated credit facility dated December 20, 2006 that will expire on
December 20, 2011. The credit facility provides backup funding for the
commercial paper program and may also be used for general
corporate purposes. The credit facility provides the Company with the
ability to increase its capacity by an additional $500 million at any time
during the life of the five-year term of the agreement.

On November 2, 2007, the
Company entered into a credit agreement with the Bank of Tokyo-Mitsubishi UFJ,
Ltd. The credit agreement provides for a $300 million unsecured revolving
credit facility maturing November 2, 2010. In addition to certain initial fees,
the Company is obligated to pay a commitment fee based on the total revolving
commitment.

As of July 30, 2010 and
April 30, 2010, $880 million and $65 million, respectively, were outstanding on
all lines of credit and commercial paper.

Interest rates on these
borrowings are determined by a pricing matrix, based on the Companys long-term
debt ratings, assigned by Standard and Poors Ratings Group and Moodys
Investors Service. Facility fees are payable on the credit facilities and are
determined in the same manner as the interest rates. The agreements also
contain customary covenants, all of which the Company remains in compliance
with as of July 30, 2010.



14

---



As of July 30,
2010, the Company had unused credit lines and commercial paper of approximately
$2.490 billion.

Note 9  Derivatives and Foreign Exchange Risk Management

The Company
uses operational and economic hedges, as well as forward currency exchange rate
derivative contracts and interest rate derivative instruments to manage the
impact of currency exchange and interest rate changes on earnings and cash
flows. The gross notional amount of all derivative contracts outstanding as of
July 30, 2010 and April 30, 2010 was $10.636 billion and $10.095 billion,
respectively. In order to reduce the uncertainty of currency exchange rate
movements, the Company enters into derivative instruments, primarily forward
currency exchange rate contracts, to manage its exposure related to currency
exchange rate changes. These contracts are designed to hedge anticipated
foreign currency transactions and changes in the value of specific assets,
liabilities, net investments, and probable commitments. At inception of the forward
contract, the derivative is designated as either a freestanding derivative, net
investment hedge, or cash flow hedge. Principal currencies hedged are the Euro
and the Japanese Yen. The Company does not enter into forward currency exchange
derivative contracts for speculative purposes. The gross notional amount of
these contracts outstanding as of July 30, 2010 and April 30, 2010 was $6.586
billion and $5.495 billion, respectively. The aggregate currency exchange rate
gains were $54 million and $39 million for the three months ended July 30, 2010
and July 31, 2009, respectively. These gains represent the net impact to the
condensed consolidated statements of earnings for the derivative instruments
presented below offset by remeasurement losses on foreign currency denominated
assets and liabilities.

The
information that follows explains the various types of derivatives and
financial instruments used by the Company, how and why the Company uses such
instruments, how such instruments are accounted for, and how such instruments
impact the Companys condensed consolidated balance sheets and statements of
earnings.

Freestanding Derivative Forward Contracts

Freestanding
derivative forward contracts are used to offset the Companys exposure to the
change in value of certain foreign currency denominated assets and liabilities.
These derivatives are not designated as hedges, and therefore, changes in the
value of these forward contracts are recognized currently in earnings, thereby
offsetting the current earnings effect of the related change in U.S. dollar
value of foreign currency denominated assets and liabilities. The cash flows
from these contracts are reported as operating activities in the condensed
consolidated statements of cash flows. The gross notional amount of these
contracts, not designated as hedging instruments, outstanding as of July 30,
2010 and April 30, 2010 was $2.640 billion and $1.839 billion, respectively.

The amount of
gains/(losses) and location of the gains/(losses) in the condensed consolidated
statements of earnings related to derivative instruments not designated as
hedging instruments for the three months ended July 30, 2010 and July 31, 2009
were as follows:

|                                                   |  |                    |  |        |     |  
|-------------------------------------------------- |  | ------------------ |  | ------ | --- | -
|Three
 months ended
 July 30, 2010(in millions)    |  |                    |  |        |    
|                                                   |  |                    |  |        |    
|Derivatives
 Not Designated as Hedging Instruments |  | Location           |  | Amount |    
|Foreign
 currency exchange rate contracts          |  | Other expense, net |  | $      | 21  |  
|                                                   |  |                    |  |        |     |  
|Three
 months ended
 July 31, 2009(in millions)    |  |                    |  |        |     |  
|                                                   |  |                    |  |        |     |  
|Derivatives
 Not Designated as Hedging Instruments |  | Location           |  | Amount |    
|Foreign
 currency exchange rate contracts          |  | Other expense, net |  | $      | (95 | )

15

---



Net Investment Hedges

Net investment
hedges are used to hedge the long-term investment (equity) in foreign
operations. For hedges that meet effectiveness requirements, the net
gains/(losses) related to changes in the current exchange rates, or spot rates,
are recorded as a cumulative translation adjustment, a component of accumulated other comprehensive loss on
the condensed consolidated balance sheets. Net gains/(losses) associated with
changes in forward currency exchange rates of the contracts are reflected in other expense, net in the condensed
consolidated statements of earnings. Recognition in earnings of amounts
previously recorded as a cumulative translation adjustment is limited to
circumstances such as complete or substantially complete liquidation of the
long-term investment (equity) in foreign operations. The cash flows from these
contracts are reported as investing activities in the condensed consolidated statements
of cash flows. As of July 30, 2010 and April 30, 2010, there were no open net
investment hedge contracts. For the three months ended July 30, 2010 and July
31, 2009, there were no reclassifications of the effective portion of net
investment hedges out of accumulated other
comprehensive loss into income; therefore, since the fourth quarter
of fiscal year 2009, $27 million in gains remained in cumulative translation
within accumulated other comprehensive loss.

Cash Flow Hedges

Forward
contracts designated as cash flow hedges are designed to hedge the variability
of cash flows associated with forecasted transactions denominated in a foreign
currency that will take place in the future. For derivative instruments that
are designated and qualify as a cash flow hedge, the effective portion of the
gain or loss on the derivative is reported as a component of accumulated other comprehensive loss and
reclassified into earnings in the same period or periods during which the
hedged transaction affects earnings. No gains or losses relating to
ineffectiveness of cash flow hedges were recognized in earnings during the
three months ended July 30, 2010 and July 31, 2009. No components of the hedge
contracts were excluded in the measurement of hedge ineffectiveness and no
hedges were derecognized or discontinued during the three months ended July 30,
2010 and July 31, 2009. The cash flows from these contracts are reported as
operating activities in the condensed consolidated statements of cash flows.
The gross notional amount of these contracts, designated as cash flow hedges,
outstanding at July 30, 2010 and April 30, 2010 was $3.946 billion and $3.656
billion, respectively, and will mature within the subsequent 36-month period.

The amount of
gains/(losses) and location of the gains/(losses) in the condensed consolidated
statements of earnings and other comprehensive income (OCI) related to
derivative instruments designated as cash flow hedges for the three months
ended July 30, 2010 and July 31, 2009 are as follows:

|                                                              |        |                                                                    |          |                                                                                                                        |                       |  |   |    |  
|------------------------------------------------------------- | ------ | ------------------------------------------------------------------ | -------- | ---------------------------------------------------------------------------------------------------------------------- | --------------------- |  | - | -- | -
|Three
 months ended
 July 30, 2010                            |        |                                                                    |          |                                                                                                                        |                      
|                                                              |        |                                                                    |          |                                                                                                                        |                      
|(in millions)Derivatives in Cash Flow
 Hedging Relationships  |        | Gross Losses Recognized in OCI on Effective
 Portion of Derivative |          | Effective Portion of Gains/(Losses) on Derivative
 Reclassified from
 Accumulated Other Comprehensive Loss into Income |                      
|                                                              |        |                                                                    |          |                                                                                                                        |                       | 
|                                                              | Amount |                                                                    | Location |                                                                                                                        | Amount                | 
|Foreign
 currency exchange rate contracts                     |        | $                                                                  | (75      | )                                                                                                                      | Other expense, net    |  | $ | 54 |  
|                                                              |        |                                                                    |          |                                                                                                                        | Cost of products sold |  |   | (1 | )
|Total                                                         |        | $                                                                  | (75      | )                                                                                                                      |                       |  | $ | 53 |  
|                                                              |        |                                                                    |          |                                                                                                                        |                       |  |   |    |  
|Three
 months ended
 July 31, 2009                            |        |                                                                    |          |                                                                                                                        |                      
|                                                              |        |                                                                    |          |                                                                                                                        |                      
|(in
 millions)Derivatives in Cash Flow
 Hedging Relationships |        | Gross Losses Recognized in OCI on Effective
 Portion of Derivative |          | Effective Portion of Gains on Derivative Reclassified from
 Accumulated Other Comprehensive Loss into Income           |                      
|                                                              |        |                                                                    |          |                                                                                                                        |                       | 
|                                                              | Amount |                                                                    | Location |                                                                                                                        | Amount                | 
|Foreign
 currency exchange rate contracts                     |        | $                                                                  | (340     | )                                                                                                                      | Other expense, net    |  | $ | 23 |  
|                                                              |        |                                                                    |          |                                                                                                                        | Cost of products sold |  |   | 8  |  
|Total                                                         |        | $                                                                  | (340     | )                                                                                                                      |                       |  | $ | 31 |  

As of July 30,
2010 and April 30, 2010, the Company had a balance of $42 million and $91
million in after-tax net unrealized gains associated with cash flow hedging
instruments recorded in accumulated other
comprehensive loss. The Company expects that $40 million of the
balance will be reclassified into the consolidated statement of earnings over
the next twelve months.

Fair Value Hedges

For derivative
instruments that are designated and qualify as fair value hedges, the gain or
loss on the derivatives as well as the offsetting gain or loss on the hedged
item attributable to the hedged risk are recognized in current earnings.

16

---



Interest rate
derivative instruments designated as fair value hedges are designed to manage
the exposure to interest rate movements and to reduce borrowing costs by
converting fixed-rate debt into floating-rate debt. Under these agreements, the
Company agrees to exchange, at specified intervals, the difference between
fixed and floating interest amounts calculated by reference to an agreed-upon
notional principal amount.

As of July 30,
2010 and April 30, 2010, the Company had interest rate swaps designated as fair
value hedges of underlying fixed rate obligations.

In March 2010,
the Company entered into 12 five-year fixed-to-floating interest rate swap
agreements with a consolidated notional amount of $1.850 billion. Nine of these
interest rate swap agreements were designated as fair value hedges of the fixed
interest rate obligation under the Companys $1.250 billion 3.000 percent
Senior Notes due 2015. The remaining three interest rate swap agreements were
designated as fair value hedges of the fixed interest rate obligation under the
Companys $600 million 4.750 percent Senior Notes due 2015. On the first nine
interest rate swap agreements, the Company pays variable interest equal to the
three-month London Interbank Offered Rate (LIBOR) plus 36.00 basis points and
it receives a fixed interest rate of 3.000 percent. On the remaining three
interest rate swap agreements, the Company pays variable interest equal to the
LIBOR plus 185 basis points and it receives a fixed interest rate of 4.750
percent.

Additionally,
in March 2010, the Company entered into nine three-year fixed-to-floating
interest rate swap agreements with a consolidated notional amount of $2.200
billion. These interest rate swap agreements were designated as fair value
hedges of the fixed interest rate obligation under the Companys $2.200 billion
1.625 percent Senior Convertible Notes due 2013. The Company pays variable
interest equal to the three-month LIBOR minus 19.70 basis points and it
receives a fixed interest rate of 1.625 percent. In July 2010, the Company
terminated interest rate swap agreements with a consolidated notional amount of
$550 million that were designated as fair value hedges of the fixed interest
rate obligation under the Companys $2.200 billion 1.625 percent Senior
Convertible Notes due 2013. At that time, the contracts were in an asset
position, resulting in cash receipts of $15 million, which included $3 million
of accrued interest. The gain from terminating the interest rate swap
agreements increased the outstanding balance of the Senior Convertible Notes
and is being amortized as a reduction of interest expense over the remaining
life of the Senior Convertible Notes. The cash flows from the termination of
these interest rate swap agreements have been reported as operating activities
in the condensed consolidated statement of cash flows.

In December
2009, the Company entered into three five-year fixed-to-floating interest rate
swap agreements, two with notional amounts of $75 million each and one with a
notional amount of $100 million. These interest rate swap agreements were
designated as fair value hedges of the fixed interest rate obligation under the
Companys $550 million 4.500 percent Senior Notes due 2014. On the first $75
million interest rate swap agreement, the Company pays variable interest equal
to the three-month LIBOR plus 181.25 basis points and it receives a fixed
interest rate of 4.500 percent. For the second $75 million interest rate swap
agreement, the Company pays variable interest equal to the three-month LIBOR
plus 196.50 basis points and it receives a fixed interest rate of 4.500
percent. For the $100 million interest rate swap agreement, the Company pays
variable interest equal to the three-month LIBOR plus 198.10 basis points and
it receives a fixed interest rate of 4.500 percent.

In June 2009,
the Company entered into two five-year fixed-to-floating interest rate swap
agreements with notional amounts of $150 million each. These interest rate swap
agreements were designated as fair value hedges of the fixed interest rate
obligation under the Companys $550 million 4.500 percent Senior Notes due
2014. On the first interest rate swap agreement, the Company pays variable
interest equal to the one-month LIBOR plus 134.00 basis points and it receives
a fixed interest rate of 4.500 percent. For the second interest rate swap
agreement, the Company pays variable interest equal to the one-month LIBOR plus
137.25 basis points and it receives a fixed interest rate of 4.500 percent.

The market
value of these interest rate swap agreements was a $152 million unrealized gain
and the market value of the hedged item was a $150 million unrealized loss at
July 30, 2010 which were recorded in long-term
debt with the offset recorded in other
assetson the condensed consolidated balance sheet. These fair value
hedges resulted in $2 million of ineffectiveness which was recorded as an
increase in interest expense, net
on the condensed consolidated statement of earnings for the three months ended
July 30, 2010. The gross notional amount of these contracts, designated as fair
value hedges outstanding at July 30, 2010 was $4.050 billion.

During the
three months ended July 31, 2009, the Company did not have any ineffective fair
value hedging instruments. In addition, the Company did not recognize any gains
or losses during the three months ended July 30, 2010 and July 31, 2009 on firm
commitments that no longer qualify as fair value hedges.

17

---



Balance Sheet Presentation

The following
table summarizes the location and fair value amounts of derivative instruments
reported in the condensed consolidated balance sheet as of July 30, 2010 and
April 30, 2010. The fair value amounts are presented on a gross basis and are
segregated between derivatives that are designated and qualify as hedging
instruments and those that are not, and are further segregated by type of
contract within those two categories.

|                                                        |  |                                            |  |                       |     |                         |                              |            |   |    |   |    | 
|------------------------------------------------------- |  | ------------------------------------------ |  | --------------------- | --- | ----------------------- | ---------------------------- | ---------- | - | -- | - | -- | 
|July 30, 2010                                           |  |                                            |  |                       |     |                         |                              |            |   |    |   |    | 
|                                                        |  |                                            |  |                       |     |                         |                              |            |   |    |   |    | 
|                                                        |  | Asset Derivatives                          |  | Liability Derivatives |    
|(in
 millions)                                          |  | Balance Sheet
 Location                    |  | Fair Value            |     | Balance Sheet
 Location |                              | Fair Value |  
|                                                        |  |                                            |  |                       |     |                         |                              |            |   |    |   |    | 
|Derivatives designated as hedging instruments           |  |                                            |  |                       |     |                         |                              |            |   |    |   |    | 
|Foreign
 currency exchange contracts                    |  | Prepaid
 expenses and other current assets |  | $                     | 184 |                         | Other
 accrued expenses      |            | $ | 56 |  
|Interest
 rate contracts                                |  | Other assets                               |  |                       | 152 |                         |                              |            |   |    |   |   
|Foreign
 currency exchange contracts                    |  | Other assets                               |  |                       | 33  |                         | Other
 long-term liabilities |            |   | 16 |  
|Total derivatives designated as hedging instruments     |  |                                            |  |                       | $   | 369                     |                              |            |   |    | $ | 72 | 
|                                                        |  |                                            |  |                       |     |                         |                              |            |   |    |   |    | 
|Derivatives not designated as hedging instruments       |  |                                            |  |                       |     |                         |                              |            |   |    |   |    | 
|Foreign
 currency exchange contracts                    |  | Prepaid
 expenses and other current assets |  | $                     |    |                         | Other
 accrued expenses      |            | $ | 3  |  
|Total derivatives not designated as hedging instruments |  |                                            |  |                       | $   |                        |                              |            |   |    | $ | 3  | 
|                                                        |  |                                            |  |                       |     |                         |                              |            |   |    |   |    | 
|Total derivatives                                       |  |                                            |  |                       | $   | 369                     |                              |            |   |    | $ | 75 | 
|                                                        |  |                                            |  |                       |     |                         |                              |            |   |    |   |    | 
|April 30, 2010                                          |  |                                            |  |                       |     |                         |                              |            |   |    |   |    | 
|                                                        |  |                                            |  |                       |     |                         |                              |            |   |    |   |    | 
|                                                        |  | Asset Derivatives                          |  | Liability Derivatives |    
|(in
 millions)                                          |  | Balance Sheet
 Location                    |  | Fair Value            |     | Balance Sheet
 Location |                              | Fair Value |  
|                                                        |  |                                            |  |                       |     |                         |                              |            |   |    |   |    | 
|Derivatives designated as hedging instruments           |  |                                            |  |                       |     |                         |                              |            |   |    |   |    | 
|Foreign
 currency exchange rate contracts               |  | Prepaid
 expenses and other current assets |  | $                     | 198 |                         | Other
 accrued expenses      |            | $ | 44 |  
|Interest
 rate contracts                                |  | Other assets                               |  |                       | 31  |                         |                              |            |   |    |   |   
|Foreign
 currency exchange rate contracts               |  | Other assets                               |  |                       | 65  |                         | Other
 long-term liabilities |            |   | 2  |  
|Total derivatives designated as hedging instruments     |  |                                            |  |                       | $   | 294                     |                              |            |   |    | $ | 46 | 
|                                                        |  |                                            |  |                       |     |                         |                              |            |   |    |   |    | 
|Derivatives not designated as hedging instruments       |  |                                            |  |                       |     |                         |                              |            |   |    |   |    | 
|Foreign
 currency exchange rate contracts               |  | Prepaid
 expenses and other current assets |  | $                     | 2   |                         | Other
 accrued expenses      |            | $ | 1  |  
|Total derivatives not designated as hedging instruments |  |                                            |  |                       | $   | 2                       |                              |            |   |    | $ | 1  | 
|                                                        |  |                                            |  |                       |     |                         |                              |            |   |    |   |    | 
|Total derivatives                                       |  |                                            |  |                       | $   | 296                     |                              |            |   |    | $ | 47 | 

18

---



Concentrations of Credit Risk

Financial
instruments, which potentially subject the Company to significant
concentrations of credit risk, consist principally of interest-bearing
investments, forward exchange derivative contracts, and trade accounts
receivable.

The Company
maintains cash and cash equivalents, investments, and certain other financial
instruments (including forward exchange contracts) with various major financial
institutions. The Company performs periodic evaluations of the relative credit
standings of these financial institutions and limits the amount of credit
exposure with any one institution. In addition, the Company has collateral
credit agreements with its primary derivatives counterparties. Under these
agreements either party is required to post eligible collateral when the market
value of transactions covered by the agreement exceeds specific thresholds,
thus limiting credit exposure for both parties. As of July 30, 2010 and April
30, 2010, the Company received cash collateral of $72 million and $123 million,
respectively, from its counterparty. The collateral primarily supports the
approximate fair value of the Companys derivative contracts. The collateral
received obligation was recorded as an increase in cash and cash equivalents with the offset recorded as an
increase in other accrued expenses
on the condensed consolidated balance sheets.

Concentrations
of credit risk with respect to trade accounts receivable are limited due to the
large number of customers and their dispersion across many geographic areas.
The Company monitors the creditworthiness of its customers to which it grants
credit terms in the normal course of business. However, a significant amount of
trade receivables are with national healthcare systems in many countries. In light
of the current economic state of many foreign countries, the Company continues
to monitor their creditworthiness. Although the Company does not currently
foresee a significant credit risk associated with these receivables, repayment
is dependent upon the financial stability of the economies of those countries.
As of July 30, 2010 and April 30, 2010, no customer represented more than 10
percent of the outstanding accounts receivable.

Note 10  Inventories

Inventories
are stated at the lower of cost or market, with cost determined on a first-in,
first-out basis. Inventory balances are as follows:

|                |  |                |       |                 |   |       | 
|--------------- |  | -------------- | ----- | --------------- | - | ----- | 
|(in
 millions)  |  | July 30,
 2010 |       | April 30,
 2010 |  
|Finished goods  |  | $              | 957   |                 | $ | 896   | 
|Work in process |  |                | 282   |                 |   | 269   | 
|Raw materials   |  |                | 338   |                 |   | 316   | 
|Total           |  | $              | 1,577 |                 | $ | 1,481 | 

Note 11  Goodwill and Other Intangible Assets

The changes in
the carrying amount of goodwill for the three months ended July 30, 2010 are as
follows:

|                                      |  |                             |       |                              |   |       |  |   |       |  
|------------------------------------- |  | --------------------------- | ----- | ---------------------------- | - | ----- |  | - | ----- | -
|(in
 millions)                        |  | Cardiac and
 Vascular Group |       | Restorative
 Therapies Group |   | Total | 
|Balance as of April 30, 2010          |  | $                           | 1,588 |                              | $ | 6,803 |  | $ | 8,391 |  
|Goodwill as
 a result of acquisitions |  |                             |      |                              |   | 16    |  |   | 16    |  
|Purchase
 accounting adjustments, net |  |                             | (4    | )                            |   | 1     |  |   | (3    | )
|Currency
 adjustment, net             |  |                             | (11   | )                            |   | 2     |  |   | (9    | )
|Balance as of July 30, 2010           |  | $                           | 1,573 |                              | $ | 6,822 |  | $ | 8,395 |  

Intangible assets, excluding goodwill, as of July 30, 2010 and April 30, 2010 are as follows:

|                                                    |  |                                    |        |                             |   |                 |   |       |     |       |   |      |   |   |        |  
|--------------------------------------------------- |  | ---------------------------------- | ------ | --------------------------- | - | --------------- | - | ----- | --- | ----- | - | ---- | - | - | ------ | -
|(in
 millions)                                      |  | Purchased
 Technology and
 Patents |        | Trademarks
 and
 Tradenames |   | Acquired
 IPR&D |   | Other |     | Total |  
|Amortizable intangible assets as of July 30, 2010:  |  |                                    |        |                             |   |                 |   |       |     |       |   |      |   |   |        |  
|Original cost                                       |  | $                                  | 3,329  |                             | $ | 373             |   | $     | 114 |       | $ | 259  |   | $ | 4,075  |  
|Accumulated amortization                            |  |                                    | (1,106 | )                           |   | (263            | ) |       |    |       |   | (196 | ) |   | (1,565 | )
|Carrying value                                      |  | $                                  | 2,223  |                             | $ | 110             |   | $     | 114 |       | $ | 63   |   | $ | 2,510  |  
|                                                    |  |                                    |        |                             |   |                 |   |       |     |       |   |      |   |   |        |  
|Amortizable intangible assets as of April 30, 2010: |  |                                    |        |                             |   |                 |   |       |     |       |   |      |   |   |        |  
|Original cost                                       |  | $                                  | 3,300  |                             | $ | 373             |   | $     | 114 |       | $ | 252  |   | $ | 4,039  |  
|Accumulated amortization                            |  |                                    | (1,040 | )                           |   | (254            | ) |       |    |       |   | (186 | ) |   | (1,480 | )
|Carrying value                                      |  | $                                  | 2,260  |                             | $ | 119             |   | $     | 114 |       | $ | 66   |   | $ | 2,559  |  

19

---



Amortization
expense for the three months ended July 30, 2010 and July 31, 2009 was $82
million and $78 million, respectively.

Estimated
aggregate amortization expense based on the current carrying value of
amortizable intangible assets, excluding any possible future amortization
associated with acquired IPR&D which has not met technological feasibility,
is as follows:

|                            |  |                       |       | 
|--------------------------- |  | --------------------- | ----- | 
|(in
 millions)
 Fiscal Year |  | Amortization
 Expense |      
|Remaining
 2011             |  | $                     | 240   | 
|2012                        |  |                       | 298   | 
|2013                        |  |                       | 281   | 
|2014                        |  |                       | 272   | 
|2015                        |  |                       | 258   | 
|Thereafter                  |  |                       | 1,047 | 
|                            |  | $                     | 2,396 | 

Note 12  Warranty Obligation

The Company
offers a warranty on various products. The Company estimates the costs that may
be incurred under its warranties and records a liability in the amount of such
costs at the time the product is sold. Factors that affect the Companys
warranty liability include the number of units sold, historical and anticipated
rates of warranty claims, and cost per claim. The Company periodically assesses
the adequacy of its recorded warranty liabilities and adjusts the amounts as
necessary. The amount of the reserve recorded is equal to the costs to repair
or otherwise satisfy the claim. The Company includes the covered costs
associated with field actions, if any, in cost
of products soldon the condensed consolidated statements of
earnings. The Company includes the warranty obligation in other accrued expensesand other long-term liabilitieson the
condensed consolidated balance sheets.

During the
first quarter of fiscal year 2010, the Company recorded a $16 million warranty
provision related to the July 2009 supplier-related Paradigm Quick-set infusion
set field action in its Diabetes business. In the second quarter of fiscal year
2010 the Company reached settlements with the suppliers involved in the recall
that offset the majority of the warranty provision.

Changes in the
Companys product warranties during the three months ended July 30, 2010 and
July 31, 2009 consisted of the following:

|                                       |  |                    |    |                |   |     |  
|-------------------------------------- |  | ------------------ | -- | -------------- | - | --- | -
|                                       |  | Three months ended |   
|(in
 millions)                         |  | July 30,
 2010     |    | July 31,
 2009 |  
|Balance at the beginning of the period |  | $                  | 45 |                | $ | 35  |  
|Warranty
 claims provision             |  |                    | 6  |                |   | 26  |  
|Settlements
 made                      |  |                    | (6 | )              |   | (16 | )
|Balance at the end of the period       |  | $                  | 45 |                | $ | 45  |  

20

---



Note 13  Interest Expense, Net

Interest
income and interest expense for the three months ended July 30, 2010 and July
31, 2009 are as follows:

|                       |  |                    |     |               |   |     |  
|---------------------- |  | ------------------ | --- | ------------- | - | --- | -
|                       |  | Three months ended |    
|(in
 millions)         |  | July 30, 2010      |     | July 31, 2009 |  
|Interest
 income       |  | $                  | (33 | )             | $ | (38 | )
|Interest
 expense      |  |                    | 107 |               |   | 104 |  
|Interest
 expense, net |  | $                  | 74  |               | $ | 66  |  

Interest
income includes interest earned on the Companys cash and cash equivalents,
short- and long-term investments, the net realized and unrealized gain or loss
on trading securities, and the net realized gain or loss on the sale or
impairment of available-for-sale debt securities. See Note 6 for further
discussion of these items.

Interest
expense includes the expense associated with the interest that the Company pays
on its outstanding borrowings, including short- and long-term investments, and
the amortization of debt issuance costs and debt discounts.

Note 14  Income Taxes

During the
three months ended July 30, 2010, the Company recorded a $10 million net
benefit associated with foreign dividend distributions, finalization of certain
tax returns, and changes to uncertain tax position reserves. These tax
adjustments are operational in nature and are recorded in provision for income taxes on the
condensed consolidated statement of earnings.

During the
three months ended July 30, 2010, the Companys gross unrecognized tax benefits
increased from $538 million to $554 million. In addition, the Company had
accrued interest and penalties of $102 million as of July 30, 2010. If all of
the Companys unrecognized tax benefits were recognized, approximately $473
million would impact the Companys effective tax rate.

The Company
and the U.S. Internal Revenue Service (IRS) are in settlement discussions as it
relates to the IRS audit of fiscal years 1997, 1998, and 1999 and the
allocation of income between Medtronic, Inc. and its wholly owned subsidiary in
Switzerland. As no settlement has been reached with the IRS, the Company
continues to record the gross unrecognized tax benefit as a long-term liability
as it relates to this uncertain tax position. The Company has recorded all
remaining gross unrecognized tax benefits as a long-term liability as well, as
it does not expect significant payments to occur or the total amount of
unrecognized tax benefits to change significantly over the next 12 months.

The Company
will continue to recognize interest and penalties related to income tax matters
in the provision for income taxes
in the condensed consolidated statements of earnings and record the liability
in the current or long-term accrued income
taxesin the condensed consolidated balance sheets, as appropriate.

As of July 30,
2010, there were no changes to significant unresolved matters with the IRS or foreign tax authorities from what was previously
disclosed in the Companys Annual Report on Form 10-K for the year ended April
30, 2010.

Note 15  Earnings Per Share

Basic earnings
per share is computed based on the weighted average number of common shares
outstanding. Diluted earnings per share is computed based on the weighted
average number of common shares outstanding increased by the number of
additional shares that would have been outstanding had the potentially dilutive
common shares been issued and reduced by the number of shares the Company could
have repurchased from the proceeds from issuance of the potentially dilutive
shares. Potentially dilutive shares of common stock include stock options and
other stock-based awards granted under stock-based compensation plans and
shares committed to be purchased under the employee stock purchase plan.

21

---



Presented
below is a reconciliation between basic and diluted earnings per share:

|                                               |  |                    |         |                |   |         | 
|---------------------------------------------- |  | ------------------ | ------- | -------------- | - | ------- | 
|                                               |  | Three months ended |        
|(in
 millions, except per share data)          |  | July 30,
 2010     |         | July 31,
 2009 |  
|Numerator:                                     |  |                    |         |                |   |         | 
|Net earnings                                   |  | $                  | 830     |                | $ | 445     | 
|Denominator:                                   |  |                    |         |                |   |         | 
|Basic 
 weighted average shares outstanding   |  |                    | 1,086.1 |                |   | 1,112.6 | 
|Effect of
 dilutive securities:                |  |                    |         |                |   |         | 
|Employee
 stock options                        |  |                    | 0.6     |                |   | 0.3     | 
|Employee
 restricted stock units               |  |                    | 2.7     |                |   | 1.2     | 
|Other                                          |  |                    | 0.3     |                |   | 0.5     | 
|Diluted 
 weighted average shares outstanding |  |                    | 1,089.7 |                |   | 1,114.6 | 
|                                               |  |                    |         |                |   |         | 
|Basic
 earnings per share                      |  | $                  | 0.76    |                | $ | 0.40    | 
|Diluted
 earnings per share                    |  | $                  | 0.76    |                | $ | 0.40    | 

The
calculation of weighted average diluted shares outstanding excludes options for
approximately 64 million common shares for the three months ended July 30, 2010
and July 31, 2009, as the exercise price of those options was greater than the
average market price for the period, resulting in an anti-dilutive effect on
diluted earnings per share. For the three months ended July 30, 2010 and July
31, 2009, common share equivalents related to the Companys $4.400 billion of
Senior Convertible Notes were anti-dilutive as the market price of the
Companys stock was below the conversion price of the Senior Convertible Notes
and, therefore, were excluded from the calculation of weighted average diluted
shares.

Note 16  Comprehensive Income and Accumulated Other Comprehensive Loss

In addition to
net earnings, comprehensive income includes changes in currency exchange rate
translation adjustments (including the change in current exchange rates, or
spot rates, of net investment hedges), unrealized gains and losses on currency
exchange rate derivative contracts qualifying and designated as cash flow
hedges, net changes in retirement obligation funded status, and unrealized
gains and losses on available-for-sale marketable securities. Comprehensive
income for the three months ended July 30, 2010 and July 31, 2009 was $784
million and $441 million, respectively.

Presented
below is a summary of activity for each component of accumulated other comprehensive loss:

|                             |  |                                         |     |                                      |   |                                        |   |                                                                           |      |                                         |   |     |   |   |      |  
|---------------------------- |  | --------------------------------------- | --- | ------------------------------------ | - | -------------------------------------- | - | ------------------------------------------------------------------------- | ---- | --------------------------------------- | - | --- | - | - | ---- | -
|(in
 millions)               |  | Unrealized
 Gain/(Loss) on
 Investments |     | Cumulative
 Translation
 Adjustments |   | Net Change in
 Retirement
 Obligations |   | Unrealized
 Gain/(Loss) on
 Foreign
 Currency
 Exchange Rate
 Derivatives |      | Accumulated
 Other
 Comprehensive
 Loss |  
|Balance as of April 30, 2010 |  | $                                       | (30 | )                                    | $ | 243                                    |   | $                                                                         | (612 | )                                       | $ | 91  |   | $ | (307 | )
|Period
 Change               |  |                                         | 21  |                                      |   | (25                                    | ) |                                                                           | 8    |                                         |   | (49 | ) |   | (46  | )
|Balance as of July 30, 2010  |  | $                                       | (9  | )                                    | $ | 218                                    |   | $                                                                         | (604 | )                                       | $ | 42  |   | $ | (353 | )

Translation
adjustments are not adjusted for income taxes as substantially all translation
adjustments relate to permanent investments in non-U.S. subsidiaries. The tax
benefit on the unrealized loss on foreign exchange rate derivatives for the
three months ended July 30, 2010 was $26 million. The tax expense on the
unrealized gain on investments for the three months ended July 30, 2010 was $12
million. The tax expense on the net change in retirement obligations was not
material for the three months ended July 30, 2010.

Note 17  Stock-Based Compensation

Under the fair
value recognition provisions of U.S. GAAP for accounting for stock-based
compensation, the Company measures stock-based compensation expense at the
grant date based on the fair value of the award and recognizes the compensation
expense over the requisite service period, which is generally the vesting
period. The Company elected the modified-prospective method of adopting this
guidance, under which prior periods were not retroactively restated. The provisions
of this guidance apply to awards granted after the April 29, 2006 effective
date. Stock-based compensation expense for the non-vested portion of awards
granted prior to the effective date is being recognized over the remaining
service period using the fair-value based compensation expense estimated under
the prior guidances pro forma disclosures.

22

---



The following
table presents the components and classification of stock-based compensation
expense recognized for the three months ended July 30, 2010 and July 31, 2009:

|                                                    |  |                    |     |                |   |     |  
|--------------------------------------------------- |  | ------------------ | --- | -------------- | - | --- | -
|                                                    |  | Three months ended |    
|(in
 millions)                                      |  | July 30,
 2010     |     | July 31,
 2009 |  
|Stock
 options                                      |  | $                  | 22  |                | $ | 33  |  
|Restricted
 stock awards                            |  |                    | 23  |                |   | 24  |  
|Employee
 stock purchase plan                       |  |                    | 4   |                |   | 5   |  
|Total
 stock-based compensation expense             |  | $                  | 49  |                | $ | 62  |  
|                                                    |  |                    |     |                |   |     |  
|Cost of
 products sold                              |  | $                  | 6   |                | $ | 7   |  
|Research and
 development expense                   |  |                    | 12  |                |   | 15  |  
|Selling,
 general, and administrative expense       |  |                    | 31  |                |   | 40  |  
|Total
 stock-based compensation expense             |  | $                  | 49  |                | $ | 62  |  
|                                                    |  |                    |     |                |   |     |  
|Income tax
 benefits                                |  |                    | (14 | )              |   | (19 | )
|                                                    |  |                    |     |                |   |     |  
|Total
 stock-based compensation expense, net of tax |  | $                  | 35  |                | $ | 43  |  

Note 18  Retirement Benefit Plans

The Company
sponsors various retirement benefit plans, including defined benefit pension
plans (pension benefits), post-retirement medical plans (post-retirement
benefits), defined contribution savings plans, and termination indemnity plans,
covering substantially all U.S. employees and many employees outside the U.S.
The net periodic benefit cost of the plans include the following components for
the three months ended July 30, 2010 and July 31, 2009:

|                                    |  |                       |     |                           |   |                          |   |                |    |                |   |                |   |   |    |   |   |    |  
|----------------------------------- |  | --------------------- | --- | ------------------------- | - | ------------------------ | - | -------------- | -- | -------------- | - | -------------- | - | - | -- | - | - | -- | -
|                                    |  | U.S. Pension Benefits |     | Non-U.S. Pension Benefits |   | Post-Retirement Benefits |  
|                                    |  | Three months ended    |     | Three months ended        |   | Three months ended       |  
|(in
 millions)                      |  | July 30,
 2010        |     | July 31,
 2009            |   | July 30,
 2010           |   | July 31,
 2009 |    | July 30,
 2010 |   | July 31,
 2009 |  
|Service cost                        |  | $                     | 22  |                           | $ | 15                       |   | $              | 9  |                | $ | 7              |   | $ | 5  |   | $ | 3  |  
|Interest
 cost                      |  |                       | 19  |                           |   | 17                       |   |                | 6  |                |   | 5              |   |   | 4  |   |   | 4  |  
|Expected
 return on plan assets     |  |                       | (26 | )                         |   | (25                      | ) |                | (6 | )              |   | (6             | ) |   | (3 | ) |   | (2 | )
|Amortization
 of net actuarial loss |  |                       | 8   |                           |   |                         |   |                | 1  |                |   |               |   |   | 1  |   |   |   |  
|Net periodic
 benefit cost          |  |                       | 23  |                           |   | 7                        |   |                | 10 |                |   | 6              |   |   | 7  |   |   | 5  |  
|Special
 termination benefits       |  |                       |    |                           |   | 7                        |   |                |   |                |   |               |   |   |   |   |   | 2  |  
|Total cost
 for period              |  | $                     | 23  |                           | $ | 14                       |   | $              | 10 |                | $ | 6              |   | $ | 7  |   | $ | 7  |  

As a result of
the fiscal year 2009 restructuring initiative that began in the fourth quarter
of fiscal year 2009, the Company recognized special termination benefits in the
three months ended July 31, 2009 related to employees electing to accept early
retirement packages provided under the restructuring initiatives. The
incremental expense from these special termination benefits is reflected in the
table above. See Note 5 for additional information regarding the fiscal year
2009 restructuring initiative.

Note 19  Contingencies

The Company is
involved in a number of legal actions. The outcomes of these legal actions are
not within the Companys complete control and may not be known for prolonged
periods of time. In some actions, the claimants seek damages, as well as other
relief, including injunctions barring the sale of products that are the subject
of the lawsuit, that could require significant expenditures or result in lost
revenues. In accordance with U.S. GAAP, the Company records a liability in the
consolidated financial statements for these actions when a loss is known or
considered probable and the amount can be reasonably estimated. If the
reasonable estimate of a known or probable loss is a range, and no amount
within the range is a better estimate than any other, the minimum amount of the
range is accrued. If a loss is possible but not known or probable, and can be
reasonably estimated, the estimated loss or range of loss is disclosed. In most
cases, significant judgment is required to estimate the amount and timing of a
loss to be recorded. While it is not possible to predict the outcome for most
of the matters discussed, the Company believes it is possible that costs
associated with them could have a material adverse impact on the Companys
consolidated earnings, financial position, or cash flows.

23

---



Litigation with Wyeth and Cordis Corporation

On February
22, 2008, Wyeth and Cordis Corporation (Cordis) filed a lawsuit against the
Company and its subsidiary, Medtronic AVE, Inc., in U.S. District Court for the
District of New Jersey, alleging that Medtronics Endeavor drug-eluting stent
infringes three U.S. Morris patents alleged to be owned by Wyeth and
exclusively licensed to Cordis. A trial date has been set for September 12,
2011. The Company is indemnified for the claims made by Wyeth and Cordis. The
Company has not recorded an expense related to damages in connection with these
matters because any potential loss is not currently probable or reasonably
estimable under U.S. GAAP.

Litigation with Edwards Lifesciences, Inc.

On March 19,
2010, the U.S. District Court for the District of Delaware added Medtronic
CoreValve LLC (CoreValve) as a party to litigation pending between Edwards
Lifesciences, Inc. (Edwards) and CoreValve, Inc. In the litigation, Edwards
asserted that CoreValves transcatheter aortic valve replacement product
infringed three U.S. Andersen patents owned by Edwards. Before trial, the
Court granted summary judgment to Medtronic as to two of the three patents.
Following a trial, on April 1, 2010 a jury found that CoreValve willfully
infringed a claim on the remaining Andersen patent and awarded total lost
profit and royalty damages of $74 million. On May 28, 2010, Edwards filed a
motion seeking an injunction against CoreValve. Medtronic has filed motions
with the trial court judge to overturn the jurys verdict and will defend
Edwards injunction motion.

On March 12,
2010, Edwards served a second lawsuit in the Delaware court upon CoreValve,
Medtronic Vascular, and Medtronic, asserting that Medtronics transcatheter
aortic valve replacement product from CoreValve infringed three U.S. Andersen
patents owned by Edwards, including two of the patents that were the subject of
the first lawsuit. Medtronic filed a motion to dismiss or stay the second
lawsuit on May 24, 2010.

Edwards also
previously asserted that the CoreValve product infringed an Andersen patent in
Germany and the United Kingdom, which is a counterpart to the U.S. Andersen
patents. Courts in both countries found that the CoreValve product does not
infringe the European Andersen patent. On February 11, 2010, a German appellate
court issued its opinion affirming the trial court ruling that the CoreValve
product does not infringe the Andersen patent in Germany. On June 30, 2010, the
United Kingdom appellate court affirmed a trial court ruling that the CoreValve
product does not infringe the Andersen patent in the United Kingdom. Edwards
can seek leave for further appeals in Germany and the United Kingdom.

The Company
has not recorded an expense related to damages in connection with these matters
because any potential loss is not currently probable or reasonably estimable
under U.S. GAAP.

Marquis/Maximo/InSync Matters

On February
10, 2005, Medtronic voluntarily began to advise physicians about the
possibility that a specific battery shorting mechanism might manifest itself in
a subset of implantable cardioverter defibrillators (ICDs) and cardiac
resynchronization therapy-defibrillators (CRT-Ds). These included certain
Marquis VR/DR and Maximo VR/DR ICDs and certain InSync I/II/III CRT-D devices.
Subsequent to this voluntary field action, a number of lawsuits were filed
against the Company alleging a variety of claims, including individuals
asserting claims of personal injury and third-party payors alleging entitlement
to reimbursement. These United States lawsuits were settled in 2008, and only a
relatively small number of individual cases remain. One third-party payor,
Kinetic Knife, dismissed its original action without prejudice and on November
5, 2008 filed a putative class action relating to the same subject matter.
Medtronic removed the case to the United States District Court for the District
of Minnesota. Pretrial proceedings are underway.

In addition,
class action product liability suits pending in Canada are consolidated in the
Ontario Superior Court of Justice. That court certified a class of individual
implant recipients and their family members for proceeding on December 6, 2007.
Additionally, the subrogated claims of the provincial health insurers to
recover costs incurred in providing medical services to the implant class are
claimed in the class proceeding. Pretrial proceedings are underway. The Company
has not recorded an expense related to damages for the remaining suits because
any potential loss is not currently probable or reasonably estimable under U.S.
GAAP.

24

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Sprint Fidelis Product Liability Matters

On October 15,
2007, the Company voluntarily suspended worldwide distribution of its Sprint
Fidelis (Fidelis) family of defibrillation leads. The leads are used to deliver
therapy in patients with ICDs, but are generally not used in pacemaker
patients. The U.S. Food and Drug Administration (FDA) subsequently classified
the Companys action as a Class I recall. As of September 1, 2010,
approximately 3,700 lawsuits regarding the Fidelis leads have been filed
against the Company, including approximately 47 putative class action suits
reflecting a total of approximately 8,100 individual personal injury cases. In
general, the suits allege claims of product liability, warranty, negligence,
unjust enrichment, emotional distress, and consumer protection violations. One
lawsuit includes a claim by an individual purporting to act as a surrogate for
the Center for Medicare and Medicaid Services, and one lawsuit has been brought
by a third-party payor as a putative class action suit. Approximately 2,600 of
the lawsuits have been commenced in state court, generally alleging similar
causes of action. Of those state court actions, almost all are pending before a
single judge in Hennepin County District Court in the state of Minnesota. On
October 22, 2009, that court granted, on grounds of federal preemption,
Medtronics motion to dismiss ten cases that the parties had agreed represented
all claims asserted in the cases pending before the Minnesota court.
Plaintiffs appeal of the dismissals was heard by the Minnesota Court of
Appeals on July 14, 2010. The Minnesota appellate court subsequently issued an
order staying further proceedings of the appeal until a pending appeal on the
same issues is resolved by the United States Court of Appeals for the Eighth
Circuit. The federal court cases have been consolidated for pretrial
proceedings before a single federal judge in the U.S. District Court for the
District of Minnesota pursuant to the Multi-District Litigation (MDL) rules. On
January 5, 2009, the MDL court dismissed with prejudice the master consolidated
complaint for individuals and the master consolidated complaint for third-party
payors on grounds of federal preemption. On May 12, 2009, the MDL court
dismissed with prejudice 229 cases that adopted the master consolidated
complaint and stayed all other cases pending further order of the court.
Plaintiffs appeal to the Eighth Circuit Court of Appeals was argued on April
12, 2010. In addition, one putative class action has been filed in the Ontario
Superior Court of Justice in Canada. On October 20, 2009, that court certified
a class proceeding, but denied class certification on plaintiffs claim for
punitive damages, which the plaintiffs appealed. On July 16, 2010, the appeal
was denied; plaintiffs have sought leave to take a further appeal. The Company
has not recorded an expense related to damages in connection with the matter
because any potential loss is not currently probable or reasonably estimable
under U.S. GAAP.

Shareholder Related Matters

On November 8,
2007, Stanley Kurzweil filed a putative class action complaint against the
Company and certain of its officers in the U.S. District Court for the District
of Minnesota, alleging violations of Section 10(b) of the Securities Exchange
Act of 1934 (the Exchange Act) and Rule 10b-5 thereunder. The complaint is
brought on behalf of persons or entities who purchased securities of Medtronic
during the period of June 25, 2007 through October 15, 2007. The complaint
alleges that materially false and misleading representations were made as to
the market acceptance and use of the Fidelis defibrillator leads to
artificially inflate Medtronics stock price. Pursuant to court order, the
caption of the case was changed to Medtronic, Inc., Securities Litigation, and
a consolidated putative class action complaint was filed on April 18, 2008. On
March 10, 2009, the court dismissed the complaint with prejudice and denied
plaintiffs leave to amend. Plaintiffs appeal to the Eighth Circuit Court of
Appeals was argued on May 12, 2010.

On November 29
and December 14, 2007, respectively, Feivel Gottlieb and Alan Weinberg filed
shareholder derivative actions in Hennepin County District Court in the state
of Minnesota against both the Company and certain of its officers and
directors, alleging breach of fiduciary duty, waste of corporate assets, and
other claims arising from the same subject matter as the consolidated class
action complaint. On July 28, 2008, the state court stayed these actions
pending final resolution of the related consolidated class action complaint.

In addition,
on August 11, 2008, Mark Brown filed a putative class action complaint against
the Company and certain directors, officers, and other company personnel in the
U.S. District Court for the District of Minnesota, alleging violations of the
Employee Retirement Income Security Act of 1974 (ERISA) arising from the same
subject matter as the Kurzweil consolidated putative class complaint. On
December 29, 2008, the plaintiff amended the complaint to add similar
allegations relating to alleged off-label promotion of INFUSE Bone Graft and to
amend the class. The defendants motion to dismiss was granted without
prejudice on May 26, 2009 on the grounds plaintiff lacked standing to assert
his claims. Plaintiffs appeal to the Eighth Circuit Court of Appeals was
argued on May 12, 2010.

On December
10, 2008, the Minneapolis Firefighters Relief Association filed a putative
class action complaint against the Company and two of its officers in the U.S.
District Court for the District of Minnesota, alleging violations of Section
10(b) of the Exchange Act and Rule 10b-5 thereunder. The complaint alleges that
the defendants made false and misleading public statements concerning the
INFUSE Bone Graft product which artificially inflated Medtronics stock price
during the period. On August 21, 2009, plaintiffs filed a consolidated putative
class action complaint expanding the class. Medtronics motion to dismiss the
consolidated complaint was denied on February 3, 2010, and pretrial proceedings
are underway.

On February
24, 2009, Christin Wright filed a putative class action complaint against the
Company and certain directors, officers, and other company personnel in the
U.S. District Court for the District of Minnesota, alleging violations of
ERISA. The plaintiff claimed the defendants breached fiduciary duties by
allegedly failing to properly disclose the September 2008 settlement of the litigation
with Fastenetix LLC and the October 2008 settlement of the Cordis litigation.
On March 17, 2010, defendants motion to dismiss the allegations in the
original complaint was granted without prejudice. On May 14, 2010, plaintiffs
filed an amended complaint to add allegations similar to those made in the
Brown case. Defendants motion to dismiss that amended complaint is scheduled
for hearing on September 16, 2010.

The Company
has not recorded an expense related to damages in connection with these shareholder
related matters because any potential loss is not currently probable or
reasonably estimable under U.S. GAAP.

25

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Mirowski

Medtronic is a
licensee to the RE 38,119 patent (119 Patent) and RE 38,897 patent (897
Patent) owned by Mirowski Family Ventures, LLC (Mirowski) relating to the
treatment of hemodynamic dysfunction. Medtronic and Mirowski dispute the
application of the 119 and 897 Patents to certain Medtronic cardiac
resynchronization products. On December 17, 2007, Medtronic filed an action in
U.S. District Court for the District of Delaware seeking a declaration that
none of its products infringe any valid claims of either the 119 or 897
Patents. If certain conditions are fulfilled, the 119 and/or 897 Patents are
determined to be valid and the Medtronic products are found to infringe the
119 and/or 897 Patents, Medtronic will be obligated to pay royalties to
Mirowski based upon sales of certain CRT-D products. A bench trial concluded on
March 13, 2010. As of April 30, 2010, the amount of disputed royalties and
interest related to CRT-D products was $109 million. This amount has not been
accrued because the outcome is not currently probable under U.S. GAAP.

In addition,
Medtronic is a licensee to the 4,407,288 Patent (288 Patent) owned by Mirowski
relating to ICDs. Until November 2001, Medtronic accrued and paid royalties
under the license based on a percentage of ICD sales. Medtronic and Mirowski
dispute the application of the 288 Patent to certain Medtronic ICD products.
In November 2001, Medtronic ceased paying royalties and entered into an
agreement with Mirowski to pay putative royalties into an interest-bearing
escrow account through the expiration of the 288 Patent in December of 2003.
As of April 30, 2010, the current balance in the interest-bearing escrow
account was $89 million. The parties also entered into a tolling agreement
deferring and conditioning any litigation of the obligation to pay royalties
upon certain conditions precedent.

Other Matters

On March 12,
2010, the Company received a civil investigative demand from the U.S.
Department of Justice pursuant to the federal False Claims Act seeking
information regarding the Companys knowledge about claims to Medicare for the
implantation of ICDs, including reimbursement advice given by the Company,
payments to persons or entities involved in decisions about implantation of
ICDs, and the national coverage determination relating to ICDs. The Company is
fully cooperating with this investigation.

On February
22, 2010, the Company received a civil investigative demand from the United
States Attorneys Office for the District of Massachusetts pursuant to the
federal False Claims Act seeking documents relating to the CoreValve clinical
trial and Medtronics interactions with hospitals, other medical institutions,
and physicians. The Company is fully cooperating with this investigation.

On September
16, 2009, the Company received a subpoena from the Office of Inspector General
for the Department of Health and Human Services in the District of California
requesting production of documents relating to the Companys cardiac rhythm
medical devices, including revenue, sales, marketing and promotional documents,
documents relating to reimbursement communications to customers pertaining to
the devices, documents relating to scientific studies and registries pertaining
to the devices, and documents relating to payments or items of value provided
to customers. The Company is fully cooperating with this inquiry.

On June 16,
2009, the Company received an administrative subpoena from the New Jersey
Attorney General, Division of Consumer Affairs, requesting production of
documents relating to the Companys clinical studies, its financial
arrangements with certain physicians and healthcare providers, and clinical
research done by certain physicians and healthcare providers. The Company is
fully cooperating with this inquiry.

On May 21,
2009, the Company received a subpoena from the United States Attorneys Office
for the District of Massachusetts pursuant to the Health Insurance Portability
& Accountability Act of 1996 (HIPAA) seeking documents related to a study
published in the British volume of the Journal
of Bone & Joint Surgery, and contracts, research grants,
speaking and education programs, and payments for certain named physicians. The
Company is fully cooperating with this inquiry.

On April 13,
2009, the Company received an administrative healthcare subpoena from the
United States Attorneys Office for the Northern District of Indiana requesting
documents relating to the Companys relationship with customers, as well as
documents relating to certain employees. The Company is fully cooperating with
this inquiry.

On February 9,
2009, the Company received letter notice that the United States Department of
Justice in the Southern District of Texas is investigating marketing practices,
reimbursement advice of the Company, and appropriateness of therapy delivery
relating to the Companys cardiac surgical ablation devices. On July 2, 2009, the
United States District Court for the Southern District of Texas ordered the
unsealing of a qui tam complaint related to the same matter that was filed
against Medtronic on November 17, 2008. On August 21, 2009, the Department of
Justice decided not to intervene at that time but reserved the right to
intervene in the future. The qui tam complaint was served on October 1, 2009.
On December 16, 2009, Medtronic filed a motion to dismiss the complaint.

26

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On December
18, 2008, the Company received a civil investigative demand from the
Massachusetts Attorney Generals Office, requesting production of documents
related to Medtronics INFUSE Bone Graft product. The Company is fully
cooperating with this investigation.

On October 6,
2008, the Company received a subpoena from the United States Attorneys Office
for the District of Massachusetts pursuant to HIPAA requesting production of
documents relating to Medtronics INFUSE Bone Graft product. The Company is
fully cooperating with this inquiry.

In late June 2008,
the Company received a subpoena issued by the United States Attorneys Office
for the District of Massachusetts pursuant to HIPAA, relating to the Companys
marketing of biliary stents. The Company is fully cooperating with this
inquiry. On February 19, 2010, a complaint captioned United States of America
ex rel Tricia Nowak and Enda Dodd v. Medtronic, filed in the United States
District Court for the District of Massachusetts and relating to similar issues
was unsealed. On April 23, 2010, Medtronic filed a motion to dismiss the
complaint, which will be heard by the Court on October 13, 2010.

On or about
October 31, 2007, the Company received a letter from the United States
Attorneys Office for the Eastern District of Pennsylvania requesting documents
relating to the Companys relationship with one of its customers and any
payments or things of value provided by the Company to physicians, physician
groups, hospitals, medical practices, or other entities relating to the
purchase of the Companys cardiac resynchronization therapy devices and cardiac
stents. The Company is fully cooperating with this inquiry.

On September
25, 2007 and November 16, 2007, the Company received letters from the U.S.
Securities and Exchange Commission (SEC) and U.S. Department of Justice,
respectively, requesting information relating to any potential violations of
the U.S. Foreign Corrupt Practices Act in connection with the sale of medical
devices in several non-U.S. countries. A number of competitors have publicly
disclosed receiving similar letters. Subsequently, the SEC and Department of
Justice have made additional requests for information from the Company. The
Company is fully cooperating with the requests.

Beginning on
September 20, 2007, the Company has received letter requests from Senator
Grassley of the U.S. Senate Finance Committee requesting information on a
variety of subjects, including financial ties between the medical device
industry and physicians; the Companys decision to suspend distribution of its
Fidelis family of defibrillation leads; financial ties between the Company and
physicians who use INFUSE Bone Graft; the Cardiac Research Foundation and
Columbia University; certain communications regarding INFUSE Bone Graft; and
the Companys clinical research projects with the U.S. military and
compensation paid to physicians working for the U.S. military. The Company is
fully cooperating with these requests.

On October 24,
2005, the Company received a subpoena from the United States Attorneys Office
for the District of Massachusetts issued under HIPAA requesting documents the
Company may have, if any, relating to pacemakers and defibrillators and related
components; monitoring equipment and services; a provision of benefits, if any,
to persons in a position to recommend purchases of such devices; and the
Companys training and compliance materials relating to the fraud and abuse and
federal Anti-Kickback statutes. In September 2008, the United States Attorneys
office for the District of Massachusetts informed Medtronic that it is no
longer pursuing its investigation of Medtronic, related to the October 24, 2005
subpoena. On September 5, 2008, Medtronic received a subpoena from the Office
of Inspector General for the Department of Health and Human Services in the
District of Minnesota, requesting production of substantially the same
materials covered in the 2005 Massachusetts subpoena. The Company is fully
cooperating with this inquiry.

In the normal
course of business, the Company periodically enters into agreements that
require it to indemnify customers or suppliers for specific risks, such as
claims for injury or property damage arising out of the Companys products or
the negligence of its personnel or claims alleging that its products infringe
third-party patents or other intellectual property. The Companys maximum
exposure under these indemnification provisions cannot be estimated, and the
Company has not accrued any liabilities within the condensed consolidated
financial statements. Historically, the Company has not experienced significant
losses on these types of indemnifications.

Note 20  Segment and Geographic Information

Segment information

As a result of
the changes discussed in Note 1, the Company now reports under two reportable
segments and two operating segments, the Cardiac and Vascular Group and the
Restorative Therapies Group. As such the segment information for the prior year
has been restated in accordance with authoritative guidance on segment
reporting. The Companys Cardiac and Vascular Group consists of three
businesses: CRDM, CardioVascular, and
Physio-Control. The primary products sold by this operating segment include
those for cardiac rhythm disorders, cardiovascular disease, and external
defibrillation. The Companys Restorative Therapies Group consists of four
businesses: Spinal, Neuromodulation, Diabetes, and Surgical Technologies. The
primary products sold by this operating segment include those for spinal
conditions and musculoskeletal trauma, neurological disorders, urological and
digestive disorders, diabetes, and ear, nose, and throat conditions.

27

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The Companys
management evaluates performance and allocates resources based on profit or
loss from operations before income taxes and interest expense, net, not
including special charges, restructuring charges, certain litigation charges,
net, IPR&D and certain acquisition-related costs, and certain tax
adjustments. The accounting policies of the reportable segments are the same as
those described in the summary of significant accounting policies in the
Companys Annual Report on Form 10-K for the year ended April 30, 2010.

Net sales of
the Companys reportable segments include end-customer revenues from the sale
of products they each develop and manufacture or distribute. Net sales and
earnings before income taxes by reportable segment are as follows:

|                             |  |                     |       |                 |   |       | 
|---------------------------- |  | ------------------- | ----- | --------------- | - | ----- | 
|                             |  | Three
 months ended |      
|(in millions)                |  | July
 30,
 2010     |       | July
 31,
 2009 |  
|Cardiac and
 Vascular Group  |  | $                   | 2,027 |                 | $ | 2,123 | 
|Restorative
 Therapies Group |  |                     | 1,746 |                 |   | 1,810 | 
|Total Net Sales              |  | $                   | 3,773 |                 | $ | 3,933 | 

|                                             |  |                     |       |                 |   |       |  
|-------------------------------------------- |  | ------------------- | ----- | --------------- | - | ----- | -
|                                             |  | Three
 months ended |      
|(in millions)                                |  | July
 30,
 2010     |       | July
 31,
 2009 |  
|Cardiac and
 Vascular Group                  |  | $                   | 717   |                 | $ | 699   |  
|Restorative
 Therapies Group                 |  |                     | 489   |                 |   | 525   |  
|Total of Reportable Segments                 |  |                     | 1,206 |                 |   | 1,224 |  
|Restructuring
 charges                       |  |                     |      |                 |   | (69   | )
|Certain
 litigation charges, net             |  |                     |      |                 |   | (444  | )
|IPR&D
 and certain acquisition-related costs |  |                     | (15   | )               |   |      |  
|Interest
 expense, net                       |  |                     | (74   | )               |   | (66   | )
|Corporate                                    |  |                     | (77   | )               |   | (84   | )
|Total Earnings Before Income Taxes           |  | $                   | 1,040 |                 | $ | 561   |  

The following
table presents the Companys net assets by reportable segment:

|                             |  |                 |        |                  |   |        |  
|---------------------------- |  | --------------- | ------ | ---------------- | - | ------ | -
|(in millions)                |  | July
 30,
 2010 |        | April
 30,
 2010 |  
|Cardiac and
 Vascular Group  |  | $               | 5,793  |                  | $ | 6,117  |  
|Restorative
 Therapies Group |  |                 | 10,558 |                  |   | 10,638 |  
|Total of Reportable Segments |  |                 | 16,351 |                  |   | 16,755 |  
|Short-term
 borrowings       |  |                 | (3,428 | )                |   | (2,575 | )
|Long-term
 debt              |  |                 | (7,080 | )                |   | (6,944 | )
|Corporate                    |  |                 | 8,758  |                  |   | 7,393  |  
|Total Net Assets             |  | $               | 14,601 |                  | $ | 14,629 |  

Geographic information

Net sales to
external customers by geography are as follows:

|                |  |                     |       |                 |   |       | 
|--------------- |  | ------------------- | ----- | --------------- | - | ----- | 
|                |  | Three
 months ended |      
|(in millions)   |  | July
 30,
 2010     |       | July
 31,
 2009 |  
|United
 States  |  | $                   | 2,229 |                 | $ | 2,391 | 
|Europe          |  |                     | 925   |                 |   | 968   | 
|Asia Pacific    |  |                     | 484   |                 |   | 453   | 
|Other
 Foreign  |  |                     | 135   |                 |   | 121   | 
|Total Net Sales |  | $                   | 3,773 |                 | $ | 3,933 | 

28

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Note 21  Subsequent Event

On August 12,
2010, the Company acquired ATS Medical and it became a wholly owned subsidiary
of the Company. Under the terms of the agreement, ATS Medical shareholders
received $4.00 per share in cash for each share of ATS Medical common stock
they owned. Total consideration for the transaction was approximately $370
million which includes the purchase of outstanding ATS Medical common stock and
the assumption and settlement of existing ATS Medical debt.

ATS Medical
develops, manufactures, and markets medical devices focused on cardiac surgery,
including heart valves and surgical cryoablation technology. It is expected
that the acquisition of ATS Medical will further expand the Companys existing
Structural Heart product portfolio, especially in emerging markets.

Item 2. Managements Discussion and Analysis
of Financial Condition and Results of Operations

UNDERSTANDING OUR FINANCIAL INFORMATION

The following
discussion and analysis provides information management believes to be relevant
to understanding the financial condition and results of operations of
Medtronic, Inc. and its subsidiaries (Medtronic or the Company, or we, us, or
our). For a full understanding of financial condition and results of
operations, you should read this discussion along with managements discussion
and analysis of financial condition and results of operations in our Annual
Report on Form 10-K for the year ended April 30, 2010. In addition, you should
read this discussion along with our condensed consolidated financial statements
and related Notes thereto as of July 30, 2010.

Financial Trends

Throughout
this managements discussion and analysis, you will read about transactions or
events that materially contribute to or reduce earnings and materially affect
financial trends. We refer to these transactions and events as either special
charges (such as asset impairment or contributions to The Medtronic
Foundation), restructuring charges, certain litigation charges, net, purchased
in-process research and development (IPR&D) and certain acquisition-related
costs, or certain tax adjustments. These charges, or benefits, result from
facts and circumstances that vary in frequency and/or impact to operations.
While understanding these charges or benefits is important to understanding and
evaluating financial trends, other transactions or events may also have a
material impact on financial trends. A complete understanding of the special
charges, restructuring charges, certain litigation charges, net, IPR&D and
certain acquisition-related costs, and certain tax adjustments is necessary in
order to estimate the likelihood that financial trends will continue.

Our fiscal
year-end is the last Friday in April, and therefore, the total weeks in a
fiscal year can fluctuate between 52 and 53 weeks. Fiscal year 2011 is a
52-week year. Fiscal year 2010 was a 53-week year. As a result, our first
quarter fiscal year 2011 results included one fewer week, resulting in an
unfavorable impact on our net sales for the three months ended July 30, 2010
compared to the same period in the prior year.

EXECUTIVE LEVEL OVERVIEW

We are the
global leader in medical technology - alleviating pain, restoring health, and
extending life for millions of people around the world. In the third quarter
of fiscal year 2010, we consolidated our businesses into two operating groups:
one combines our Cardiac Rhythm Disease Management (CRDM), CardioVascular, and
Physio-Control businesses, the other combines our Spinal, Neuromodulation,
Diabetes, and Surgical Technologies businesses.
This structure further advances our goal of operating as One Medtronic because it enables
us to capitalize on existing synergies related to customers and technologies across each business.

The creation of these two
operating groups did not change how we internally managed and reported the
results of these businesses in fiscal year 2010. Starting in the first quarter
of fiscal year 2011, due to changes in how we internally manage and report the
results of these businesses, we now operate under two reportable segments and
two operating segments, the Cardiac and Vascular Group (composed of the CRDM,
CardioVascular, and Physio-Control businesses) and the Restorative Therapies
Group (composed of the Spinal, Neuromodulation, Diabetes, and Surgical
Technologies businesses). During the first quarter of fiscal year 2011, the two
operating groups were formally named the Cardiac and Vascular Group and the
Restorative Therapies Group, respectively.

Through our
two operating segments, we develop, manufacture, and market our medical devices
in more than 120 countries. Our primary products include those for cardiac
rhythm disorders, cardiovascular disease, neurological disorders, spinal
conditions and musculoskeletal trauma, urological and digestive disorders,
diabetes, and ear, nose, and, throat conditions.

29

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Net earnings
for the first quarter of fiscal year 2011 were $830 million, or $0.76 per
diluted share, as compared to net earnings of $445 million, or $0.40 per
diluted share for the same period in the prior fiscal year, representing an
increase of 87 percent and 90 percent, respectively. Net earnings for the three
months ended July 30, 2010 included after-tax IPR&D and certain
acquisition-related costs that decreased net earnings by $11 million and had a
$0.01 negative impact on diluted earnings per share. Net earnings for the three
months ended July 31, 2009 included after-tax restructuring and certain
litigation charges, net that decreased net earnings by $410 million and had a
$0.36 impact on diluted earnings per share. See further discussion of these
charges in the Restructuring Charges, Certain Litigation Charges, Net, and IPR&D
and Certain Acquisition-Related Costs section of this managements discussion
and analysis.

The table
below illustrates net sales by operating segment for the three months ended
July 30, 2010 and July 31, 2009:

|                             |  |                    |       |                  |   |           |  |  |    |   
|---------------------------- |  | ------------------ | ----- | ---------------- | - | --------- |  |  | -- | --
|                             |  | Three months ended |       |                  |   |          
|(dollars in millions)        |  | July
 30, 
 2010   |       | July
 31, 
 2009 |   | %
 Change | 
|Cardiac and
 Vascular Group  |  | $                  | 2,027 |                  | $ | 2,123     |  |  | (5 | )%
|Restorative
 Therapies Group |  |                    | 1,746 |                  |   | 1,810     |  |  | (4 | ) 
|Total Net Sales              |  | $                  | 3,773 |                  | $ | 3,933     |  |  | (4 | )%

Net sales for
the first quarter of fiscal year 2011 were $3.773 billion, a decrease of 4
percent from the same period in the prior fiscal year. Foreign currency
translation had an unfavorable impact of $21 million on net sales when compared
to the same period in the prior fiscal year. The extra selling week in the same
period in the prior year also had an unfavorable impact on current quarter net
sales growth. Although we cannot precisely calculate the effect of the extra
selling week across each of our businesses, we believe it had an unfavorable
impact on the current quarter net sales of approximately $200 million.
Additionally, net sales were impacted by the slow down in certain market growth rates attributable to
reduced procedures in markets such as CRDM and Spinal.
The net
sales decrease in the current fiscal year was driven by a 5 percent decrease in
our Cardiac and Vascular Group and a 4 percent decrease in our Restorative
Therapies Group. The Cardiac and Vascular Groups negative performance was due
to weak net sales in our CRDM and Physio-Control businesses slightly offset by
strong net sales growth from our CardioVascular business. Our Restorative Therapies
Groups negative performance was due to weak net sales in our Spinal business
offset by strong net sales in the Diabetes and Surgical Technologies
businesses. See our discussion in the Net Sales section of this managements
discussion and analysis for more information on the results of our operating
segments.

We remain
committed to our Mission of developing lifesaving and life-enhancing therapies
to alleviate pain, restore health, and extend life. The diversity and depth of
our current product offerings enable us to provide medical therapies to
patients worldwide. We work to improve patient access through well-planned
studies which show the safety, efficacy, and cost-effectiveness of our
therapies, and our alliances with patients, clinicians, regulators, and
reimbursement agencies. Our investments in research and development, strategic
acquisitions, expanded clinical trials, and infrastructure provide the
foundation for our growth. We are confident in our ability to drive long-term
shareholder value using principles of our Mission, our strong product
pipelines, and continued commitment to innovative research and development.

CRITICAL ACCOUNTING ESTIMATES

We have
adopted various accounting policies to prepare the condensed consolidated
financial statements in accordance with accounting principles generally
accepted in the U.S. (U.S. GAAP). Our most significant accounting policies are
disclosed in Note 1 to the consolidated financial statements included in our
Annual Report on Form 10-K for the year ended April 30, 2010.

The
preparation of the condensed consolidated financial statements, in conformity
with U.S. GAAP, requires us to make estimates and assumptions that affect the
amounts reported in the condensed consolidated financial statements and accompanying
Notes. Our estimates and assumptions, including those related to bad debts,
inventories, intangible assets, asset impairment, legal proceedings, IPR&D,
contingent consideration, warranty obligations, product liability,
self-insurance, pension and post-retirement obligations, sales returns and
discounts, stock-based compensation, valuation of equity and debt securities,
and income tax reserves are updated as appropriate, which in most cases is
quarterly. We base our estimates on historical experience, actuarial
valuations, or various assumptions that are believed to be reasonable under the
circumstances.

Estimates are
considered to be critical if they meet both of the following criteria: (1) the
estimate requires assumptions about material matters that are uncertain at the
time the accounting estimates are made, and (2) material changes in the
estimates are reasonably likely to occur from period to period. Our critical
accounting estimates include the following:

30

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Legal Proceedings

We are involved
in a number of legal actions involving both product liability and intellectual
property disputes. The outcomes of these legal actions are not within our
complete control and may not be known for prolonged periods of time. In some
actions, the claimants seek damages as well as other relief, including
injunctions barring the sale of products that are the subject of the lawsuit,
that could require significant expenditures or result in lost revenues. In
accordance with U.S. GAAP, we record a liability in our consolidated financial
statements for these actions when a loss is known or considered probable and
the amount can be reasonably estimated. If the reasonable estimate of a known
or probable loss is a range, and no amount within the range is a better estimate
than any other, the minimum amount of the range is accrued. If a loss is
possible, but not known or probable, and can be reasonably estimated, the
estimated loss or range of loss is disclosed in the notes to the consolidated
financial statements. In most cases, significant judgment is required to
estimate the amount and timing of a loss to be recorded. Our significant legal
proceedings are discussed in Note 19 to the condensed consolidated financial
statements. While it is not possible to predict the outcome for most of the
matters discussed in Note 19 to the condensed consolidated financial
statements, we believe it is possible that costs associated with them could
have a material adverse impact on our consolidated earnings, financial
position, or cash flows.

Tax Strategies

Our effective
tax rate is based on income, statutory tax rates, and tax planning
opportunities available to us in the various jurisdictions in which we operate.
We establish reserves when, despite our belief that our tax return positions
are fully supportable, we believe that certain positions are likely to be
challenged and that we may or may not prevail. These reserves are established
and adjusted in accordance with the principles of U.S. GAAP. Under U.S. GAAP,
if we determine that a tax position is more likely than not of being sustained
upon audit, based solely on the technical merits of the position, we recognize
the benefit. We measure the benefit by determining the amount that is greater
than 50 percent likely of being realized upon settlement. We presume that all
tax positions will be examined by a taxing authority with full knowledge of all
relevant information. We regularly monitor our tax positions and tax
liabilities. We reevaluate the technical merits of our tax positions and
recognize an uncertain tax benefit, or derecognize a previously recorded tax
benefit, when (i) there is a completion of a tax audit, (ii) there is a change
in applicable tax law including a tax case or legislative guidance, or (iii)
there is an expiration of the statute of limitations. Significant judgment is
required in accounting for tax reserves. Although we believe that we have
adequately provided for liabilities resulting from tax assessments by taxing
authorities, positions taken by these tax authorities could have a material
impact on our effective tax rate in future periods.

In the event
there is a special or restructuring charge, certain litigation charge, net,
and/or IPR&D and certain acquisition-related costs recognized in our
operating results, the tax cost or benefit attributable to that item is
separately calculated and recorded. Because the effective rate can be
significantly impacted by these discrete items that take place in the period,
we often refer to our tax rate using both the effective rate and the non-GAAP
nominal tax rate. The non-GAAP nominal tax rate is defined as the income tax
provision as a percentage of earnings before income taxes, excluding special
and restructuring charges, certain litigation charges, net, IPR&D and certain
acquisition-related costs, and certain tax adjustments. We believe that this
resulting non-GAAP financial measure provides useful information to investors
because it excludes the effect of these discrete items so that investors can
compare our recurring results over multiple periods. Investors should consider
this non-GAAP measure in addition to, and not as a substitute for, financial
performance measures prepared in accordance with U.S. GAAP. In addition, this
non-GAAP financial measure may not be the same as similar measures presented by
other companies.

Tax
regulations require certain items to be included in the tax return at different
times than when those items are required to be recorded in the consolidated
financial statements. As a result, our effective tax rate reflected in our
consolidated financial statements is different than that reported in our tax
returns. Some of these differences are permanent, such as expenses that are not
deductible on our tax return, and some are temporary differences, such as
depreciation expense. Temporary differences create deferred tax assets and
liabilities. Deferred tax assets generally represent items that can be used as
a tax deduction or credit in our tax return in future years for which we have
already recorded the tax benefit in our consolidated statements of earnings. We
establish valuation allowances for our deferred tax assets when the amount of
expected future taxable income is not likely to support the use of the
deduction or credit. Deferred tax liabilities generally represent tax expense
recognized in our consolidated financial statements for which payment has been
deferred or expense has already been taken as a deduction on our tax return but
has not yet been recognized as an expense in our consolidated statements of
earnings.

The Companys
overall tax rate including the tax impact of IPR&D and certain
acquisition-related costs has resulted in an effective tax rate of 20.17
percent for the three months ended July 30, 2010. Excluding the impact of the
IPR&D and certain acquisition-related costs in the three months ended July
30, 2010, our operational and tax strategies have resulted in a non-GAAP
nominal tax rate of 20.27 percent versus the U.S. Federal statutory rate of
35.0 percent. An increase in our nominal tax rate of 1 percent would result in
an additional income tax provision for the three months ended July 30, 2010 of
approximately $11 million. See discussion of the tax rate and the tax
adjustments in the Income Taxes section of this managements discussion and
analysis.

31

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Valuation of IPR&D, Contingent
Consideration, Goodwill, and Other Intangible Assets

When we
acquire a business, the purchase price is allocated, as applicable, between
IPR&D, other identifiable intangible assets, net tangible assets, and
goodwill as required by U.S. GAAP. IPR&D is defined as the value assigned
to those projects for which the related products have not received regulatory
approval and have no alternative future use. Determining the portion of the purchase
price allocated to IPR&D and other intangible assets requires us to make
significant estimates. The amount of the purchase price allocated to IPR&D
and other intangible assets is determined by estimating the future cash flows
of each project or technology and discounting the net cash flows back to their
present values. The discount rate used is determined at the time of the
acquisition in accordance with accepted valuation methods. For IPR&D, these
valuation methodologies include consideration of the risk of the project not
achieving commercial feasibility.

Contingent
consideration is recorded at the acquisition date at the estimated fair value
of the contingent milestone payments for all acquisitions subsequent to April
24, 2009. The acquisition date fair value is measured based on the
consideration expected to be transferred (probability-weighted), discounted
back to present value. The discount rate used is determined at the time of the
acquisition in accordance with accepted valuation methods. The fair value of
the contingent milestone consideration is remeasured at the estimated fair
value at each reporting period with the change in fair value recognized as
income or expense in our consolidated statements of earnings.

Goodwill
represents the excess of the aggregate purchase price over the fair value of
net assets, including IPR&D, of acquired businesses. Goodwill is tested for
impairment annually or more frequently if changes in circumstance or the
occurrence of events suggest that the carrying amount may be impaired.

The test for
impairment requires us to make numerous estimates about fair value, most of
which are based on projected future cash flows. Our estimates associated with
the goodwill impairment tests are considered critical due to the amount of
goodwill recorded on our condensed consolidated balance sheets and the judgment
required in determining assumptions necessary to estimate fair value, including
projected future cash flows. Goodwill was $8.395 billion and $8.391 billion as
of July 30, 2010 and April 30, 2010, respectively.

Other
intangible assets include patents, trademarks, purchased technology, and
IPR&D. Intangible assets with a definite life are amortized on a
straight-line or accelerated basis, as appropriate, with estimated useful lives
ranging from three to 20 years. We review all intangible assets for impairment
annually or as changes in circumstances or the occurrence of events suggest the
remaining value may not be recoverable. Other intangible assets, net of
accumulated amortization, were $2.510 billion and $2.559 billion as of July 30,
2010 and April 30, 2010, respectively.

NEW ACCOUNTING PRONOUNCEMENTS

Information
regarding new accounting pronouncements is included in Note 2 to the condensed
consolidated financial statements in this Quarterly Report on Form 10-Q.

PENDING ACQUISITION

On August 16,
2010, we signed a definitive agreement to acquire Osteotech, Inc.
(Osteotech). Osteotech develops innovative biologic products for regenerative
medicine. Under the terms of the agreement, we will pay $6.50 per share in cash
for each share of Osteotech common stock. The total value of the transaction is
expected to be approximately $123 million.

SUBSEQUENT ACQUISITION

On August 12,
2010, we acquired ATS Medical, Inc. (ATS Medical). ATS Medical is a leading
developer, manufacturer, and marketer of products and services focused on
cardiac surgery, including heart valves and surgical cryoablation technology.
Under the terms of the agreement, ATS Medical shareholders received $4.00 per
share in cash for each share of ATS Medical common stock they owned. Total
consideration for the transaction was approximately $370 million which includes
the purchase of outstanding ATS Medical common stock and the assumption and
settlement of existing ATS Medical debt.

ACQUISITIONS

Three months ended July 30, 2010

During the
first quarter of fiscal year 2011, we acquired substantially all of the assets
of Axon Surgical (Axon), a privately held company. Prior to the acquisition, we
distributed a large portion of Axons product. We believe this acquisition will
allow us to bring to market the next generation of surgeon-directed and
professionally supported spinal neuromonitoring technology and expand the
availability of this technology. Total consideration for the transaction, net
of cash acquired, was $62 million, which includes the settlement of existing
Axon debt.

32

---



Three months ended July 31, 2009

There were no
acquisitions for the three months ended July 31, 2009.

In addition to
the acquisitions above, we periodically acquire certain tangible or intangible
assets from enterprises that do not otherwise qualify for accounting as a
business combination. These transactions are largely reflected in the condensed
consolidated statements of cash flows as a component of investing activities
under purchase of intellectual property.

NET SALES

The table
below illustrates net sales by business and operating segment for the three
months ended July 30, 2010 and July 31, 2009:

|                                   |  |                     |       |              |   |            |  |  |     |   
|---------------------------------- |  | ------------------- | ----- | ------------ | - | ---------- |  |  | --- | --
|                                   |  | Three
 months ended |       |              |   |           
|(dollars in millions)              |  | July 30,2010        |       | July 31,2009 |   | % 
 Change | 
|Defibrillation
 Systems            |  | $                   | 722   |              | $ | 775        |  |  | (7  | )%
|Pacing
 Systems                    |  |                     | 473   |              |   | 536        |  |  | (12 | ) 
|Other                              |  |                     | 31    |              |   | 26         |  |  | 19  |   
|CARDIAC
 RHYTHM DISEASE MANAGEMENT |  |                     | 1,226 |              |   | 1,337      |  |  | (8  | ) 
|Coronary and
 Peripheral           |  |                     | 372   |              |   | 353        |  |  | 5   |   
|Structural
 Heart                  |  |                     | 224   |              |   | 218        |  |  | 3   |   
|Endovascular                       |  |                     | 121   |              |   | 118        |  |  | 3   |   
|CARDIOVASCULAR                     |  |                     | 717   |              |   | 689        |  |  | 4   |   
|PHYSIO-CONTROL                     |  |                     | 84    |              |   | 97         |  |  | (13 | ) 
|TOTAL CARDIAC AND VASCULAR GROUP   |  |                     | 2,027 |              |   | 2,123      |  |  | (5  | ) 
|Core Spinal                        |  |                     | 622   |              |   | 696        |  |  | (11 | ) 
|Biologics                          |  |                     | 207   |              |   | 219        |  |  | (5  | ) 
|SPINAL                             |  |                     | 829   |              |   | 915        |  |  | (9  | ) 
|NEUROMODULATION                    |  |                     | 370   |              |   | 373        |  |  | (1  | ) 
|DIABETES                           |  |                     | 312   |              |   | 295        |  |  | 6   |   
|SURGICAL
 TECHNOLOGIES             |  |                     | 235   |              |   | 227        |  |  | 4   |   
|TOTAL RESTORATIVE THERAPIES GROUP  |  |                     | 1,746 |              |   | 1,810      |  |  | (4  | ) 
|TOTAL                              |  | $                   | 3,773 |              | $ | 3,933      |  |  | (4  | )%

Net sales for
the three months ended July 30, 2010 were unfavorably impacted by foreign
currency translation of $21 million when compared to the same period of the
prior fiscal year. The primary exchange rate movements that impact our
consolidated net sales growth are the U.S. dollar as compared to the Euro and
the Japanese Yen. The impact of foreign currency fluctuations on net sales is
not indicative of the impact on net earnings due to the offsetting foreign
currency impact on operating costs and expenses and our hedging activities. See
Item 3  Quantitative and Qualitative Disclosures About Market Risk in this
Quarterly Report on Form 10-Q, Note 9 to the condensed consolidated financial
statements in this Quarterly Report on From 10-Q, and Note 10 to the
consolidated financial statements included in our Annual Report on Form 10-K
for the year ended April 30, 2010 for further details on foreign currency
instruments and our related risk management strategies. The extra selling week
in the three months ended July 31, 2009 also had a negative impact on the net
sales comparison for the three months ended July 30, 2010.

Cardiac and Vascular Group

The Cardiac
and Vascular Group is composed of the CRDM, CardioVascular, and Physio-Control
businesses. The Cardiac and Vascular Groups products include pacemakers,
implantable defibrillators, leads and delivery systems, ablation products, electrophysiology
catheters, information systems for the management of patients with our CRDM
devices, coronary and peripheral stents and related delivery systems,
endovascular stent graft systems, heart valve replacement technologies, tissue
ablation systems, open heart and coronary bypass grafting surgical products,
external defibrillators including manual defibrillator/monitors used by
hospitals and emergency response personnel, and automated external
defibrillators used in commercial and public settings for the treatment of
cardiac arrest. The Cardiac and Vascular Group net sales for the three months
ended July 30, 2010 were $2.027 billion, a decrease of 5 percent over the same
period of the prior fiscal year. Foreign currency translation had an unfavorable
impact on net sales for the three months ended July 30, 2010 of approximately
$15 million when compared to the same period of the prior fiscal year. The
decrease in the Cardiac and Vascular Groups net sales was driven by weak net
sales in CRDM and Physio-Control partially offset by strong sales in
CardioVascular.

33

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Additionally,
the decrease in net sales was primarily a result of the slowdown in market
growth rates attributable to reduced procedures in certain markets, the extra
selling week in the first quarter of the prior fiscal year, and continued
pricing pressures due to reduced reimbursement in certain countries, such as
Japan, where R-Zone and foreign reference pricing changes resulted in a decline
in our selling prices.

CRDM net sales
for the three months ended July 30, 2010 were $1.226 billion, a decrease of 8
percent over the same period of the prior fiscal year. The decrease in CRDM net
sales was primarily due to the decline in sales of our defibrillation system
and pacing system products. Worldwide net sales in our defibrillation system
products declined because of pricing pressures due to the continued product mix
shift from initial implants to replacement implants, but were partially offset
by positive growth from the Protecta SmartShock (Protecta) family of devices
that were launched in certain markets outside the U.S. late in fiscal year
2010. Additionally, worldwide net sales declined in our pacing system products
because of the continued pressure in the Japan market as a result of the
Kappa/Sigma field action that was announced in the first quarter of fiscal year
2010.

CardioVascular
net sales for the three months ended July 30, 2010 were $717 million, an
increase of 4 percent over the same period of the prior fiscal year. The
increase in CardioVascular net sales was primarily due to growth outside the
U.S. in our Coronary and Peripheral, Structural Heart, and Endovascular
products. The primary contributors to net sales growth were the Resolute
drug-eluting stent and our Integrity bare metal stent within Coronary and
Peripheral, the Endurant Abdominal and Valiant Captivia Thoracic Stent Graft
Systems within Endovascular, and the continued acceptance of our CoreValve
transcatheter valve within Structural Heart. Additionally, the recent acquisition
of Invatec S.p.A (Invatec) positively contributed to the overall growth in net
sales of the CardioVascular business.

Physio-Control
net sales for the three months ended July 30, 2010 were $84 million, a decrease
of 13 percent over the same period of the prior fiscal year. The decrease in
Physio-Control net sales was primarily due to a supplier constraint issue that
caused a significant backlog of orders for the LIFEPAK 15 and LIFEPAK 20
monitors/defibrillators and the slowdown in spending by certain international
governments. We have subsequently resolved the supplier constraint issue and
expect to ship the back-ordered product in the second quarter of fiscal year
2011.

Looking ahead,
we expect our Cardiac and Vascular Group should be impacted by the following:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The recent
 slow down in market growth rates. Our performance in the Cardiac and Vascular
 Group has been and will continue to be contingent upon continued market
 growth and our ability to increase or maintain our market position. The
 current Cardiac and Vascular Group market is impacted by increasing pricing
 pressures and significant competition.                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | The timing
 of final resolution of our Mounds View U.S. Food and Drug Administration
 (FDA) warning letter. On July 21, 2010, the FDA began their follow-up
 inspection. The future launch timing of Protecta, Revo MRI SureScan, and
 Consulta cardiac resynchronization therapy-pacemakers is dependent on the
 resolution of our Mounds View FDA warning letter.                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Market
 acceptance outside the U.S. of our Protecta family of devices which was
 launched outside the U.S. late in the fourth quarter of fiscal year 2010. The
 Protecta portfolio will leverage the already established Vision 3D platform
 to deliver a full suite of single, dual, and triple chamber defibrillators
 that represent a significant new algorithm technology that should reduce the
 delivery of inappropriate shocks, which is a leading clinical request from
 physicians. Protecta is pending FDA approval.                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Launch and
 acceptance of the first Magnetic Resonance Imaging (MRI) pacing system
 developed specifically for use in MRI machines. During the fourth quarter of
 fiscal year 2010 we launched Advisa MRI SureScan, our next generation MRI
 pacing system in Europe and, provided the CRDM warning letter is lifted, in
 the second half of fiscal year 2011 we expect to launch Revo MRI SureScan,
 our first generation MRI pacing system in the U.S. Both Advisa MRI SureScan
 and Revo MRI SureScan are designed to address and mitigate interactions between
 the pacing system and the magnetic resonance environment.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Future
 growth from the launch of atrial fibrillation products in the U.S. We expect
 to launch the CryoCath Artic Front in the U.S. in the second half of fiscal
 year 2011 and our Ablation Frontiers system of ablation catheters and
 radiofrequency generators in the U.S. in calendar year 2011.                                                                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Continued
 acceptance of Resolute in markets outside the U.S. Resolute one-year clinical
 performance in the RESOLUTE All Comers Trial was found to be as safe and
 effective as a competitors drug eluting stent in unselected, complex
 patients.                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Launch of
 the new Integrity bare metal stent and Resolute Integrity coronary stent in
 certain international markets. The Integrity platform features a unique laser
 fused sinusoidal technology that is designed to significantly improve
 flexibility and conform ability to Driver and other technologies.
 Additionally, the Resolute Integrity coronary stent was launched in Europe in
 August 2010.                                                                                                                                                                                                                 

34

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Continued
 acceptance of Endeavor in the Japan market. Endeavor was launched in Japan in
 the first quarter of fiscal year 2010. We anticipate that increased
 competition will continue in the Japan marketplace as a result of two
 competitive products that were launched in the fourth quarter of fiscal year
 2010.                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Further
 growth in the U.S. and Japan from the Talent Thoracic Stent Graft System,
 which was initially released in fiscal year 2009 and the first quarter of
 fiscal year 2010, respectively. In addition, we expect to launch our Talent
 Abdominal Aortic Aneurysm Stent Graft System and improved delivery system,
 Xcelerant, for our Thoracic Stent Graft System in Japan and an improved
 delivery system, Captivia, for our Thoracic Stent Graft System in the U.S.;
 all in the second half of fiscal year 2011.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Sales growth
 outside the U.S. with continued acceptance of our next generation Endurant
 Abdominal Stent Graft System and the launch of our Valiant Thoracic Stent
 Graft System on the recently released Captivia delivery system. Valiant
 Captivia received CE Mark approval and was commercially launched in the
 second quarter of fiscal year 2010, and the Endurant Abdominal Stent Graft
 System was commercially launched in fiscal year 2009.                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Continued
 integration of Invatec and its affiliated companies into our CardioVascular
 business. We acquired Invatec and its affiliated companies in the fourth
 quarter of fiscal year 2010. Invatec is a developer of innovative medical
 technologies for interventional treatment of cardiovascular disease. We
 believe this acquisition should increase our competitive position in the
 peripheral vascular market.                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Continued
 acceptance of our CoreValve transcatheter heart valve technologies for the
 replacement of the aortic valve. CoreValves Percutaneous Revalving System
 has received CE Mark approval and is currently available outside the U.S.                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Future
 integration of ATS Medical which was acquired in the second quarter of fiscal
 year 2011. ATS Medical is a leading developer, manufacturer and marketer of
 products and services focused on cardiac surgery, including heart valves and
 surgical cryoablation technology. We believe this acquisition should increase
 our competitive position in the structural heart market.                                                                                                                                

Restorative Therapies Group

The
Restorative Therapies Group is composed of the Spinal, Neuromodulation,
Diabetes, and Surgical Technologies businesses. Products in the Restorative
Therapies Group include products for various areas of the spine, bone graft
substitutes, biologic products, implantable neurostimulation drug delivery
therapies for the treatment of chronic pain and movement disorders, implantable
neurostimulation therapies for obsessive-compulsive disorder (OCD), overactive
bladder, urinary retention, and gastroparesis, benign prostatic hyperplasia
devices, external insulin pumps, subcutaneous continuous glucose monitoring
(CGM) systems, and products to treat conditions of the ear, nose, and throat.
Additionally, this group manufactures and sells image-guided surgery and
intra-operative imaging systems. The Restorative Therapies Group net sales for
the three months ended July 30, 2010 were $1.746 billion, a decrease of 4
percent over the same period of the prior fiscal year. Foreign currency translation
had an unfavorable impact on net sales for the three months ended July 30, 2010
of approximately $6 million when compared to the same period of the prior
fiscal year. The decrease in net sales was primarily due to a decline in the
net sales of the Spinal business partially offset by strong performances in the
Diabetes and Surgical Technologies businesses. Net sales in the Neuromodulation
business remained relatively flat. Net sales for the Restorative Therapies
Group were also negatively affected by the extra selling week in the first
quarter of the prior fiscal year. See more detailed discussion of each
businesss performance below.

Spinal net
sales for the three months ended July 30, 2010 were $829 million, a decrease of
9 percent over the same period of the prior fiscal year. The decrease in Spinal
net sales was primarily due to a continued decrease in demand for the Kyphon
Balloon Kyphoplasty (BKP) driven in part by the August 2009 vertebroplasty
articles in the New England Journal of
Medicine. We have also seen a decrease in the number of Spinal
procedures as patients are postponing elective procedures due to the current
macroeconomic conditions. In addition, Spinal net sales were negatively
impacted by continued pricing pressures and a challenging reimbursement environment in many of our major markets.
 These decreases were slightly offset by an increase in the Core
Spinal business, excluding Kyphon, net sales outside the U.S. This was due to
increased use of our MAST line of less invasive technologies. Net sales growth
outside the U.S. was also positively impacted by the joint venture with
Shandong Weigao Group Medical Polymer Company Limited (Weigao). The joint
venture distributes Medtronics spinal products and Weigaos orthopedic
products in China.

Neuromodulation
net sales for the three months ended July 30, 2010 were $370 million, a
decrease of 1 percent over the same period of the prior fiscal year. The
decrease in net sales was primarily due to the extra selling week in the prior
fiscal year. Net sales were led by the sales of Activa PC and RC deep brain
stimulation (DBS) systems for movement disorders and InterStim Therapy for
overactive bladder, urinary retention, and bowel control outside the U.S.

35

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Diabetes net
sales for the three months ended July 30, 2010 were $312 million, an increase
of 6 percent over the same period of the prior fiscal year. The increase in net
sales was led by international sales growth of 7 percent. This was the result
of our Veo insulin pump that was recently launched in Europe and Asia. We also
saw an increase in CGM sales worldwide.

Surgical
Technologies net sales for the three months ended July 30, 2010 were $235
million, an increase of 4 percent over the same period in the prior fiscal
year. The increase in net sales was driven by strong performance worldwide of
the NIM 3.0 Nerve Monitoring System and the StealthStation S7 System.

Looking ahead,
we expect our Restorative Therapies Group should be impacted by the following:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Growth of
 the various markets and our ability to grow consistently within those
 markets. Our performance in the Restorative Therapies Group has been and will
 continue to be contingent upon continued market growth and our ability to
 increase or maintain our market position. The current Restorative Therapies
 Group market is impacted by increasing pricing pressures and significant
 competition within the Spinal and Neuromodulation businesses. 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Market
 acceptance of innovative new products, including the TSRH 3Dx Spinal System,
 which was launched in November 2009, and our new Solera product line, which
 began a limited launch in the U.S. at the end of the second quarter of fiscal
 year 2010. We anticipate the broader roll-out of these products in the second
 half of fiscal year 2011.                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Continued
 acceptance of our BKP technology. We believe worldwide growth continues to be
 negatively impacted by the vertebroplasty article in the New England Journal of Medicine. In
 addition, two new competitors entered the U.S. marketplace in the last few
 months.                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Anticipated
 launch of high pressure balloons and syringes, curettes, and fixation
 materials in the Spinal business in fiscal year 2011. Additionally, we expect
 a positive impact from improvement in international markets, including
 regulatory clearance and reimbursement approval for BKP in Japan during
 fiscal year 2011.                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Increased
 presence in China as a result of our joint venture with Weigao to distribute
 Medtronics spinal products and Weigaos orthopedic products in China.                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Expected
 future growth in our Biologics business, driven by new products such as
 AMPLIFY, which has been submitted for FDA approval, and by our pending
 acquisition of Osteotech, Inc. (Osteotech). Osteotech develops innovative
 biologic products for regenerative healing. The acquisition is expected to
 close sometime in the late fall.                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Ability to
 consistently grow within the pain stimulation market, which is characterized
 by significant competition. We remain focused on a number of key initiatives
 in the areas of sales and marketing execution as well as therapy adoption
 growth, which we expect will sustain our market leadership.                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Continued
 and future acceptance of our current indications for Medtronic DBS Therapy
 for the treatment of the most common movement disorders and OCD. The DBS
 Therapy portfolio includes Activa PC, our smallest and most advanced primary
 cell battery, and Activa RC, the only rechargeable DBS device. We continue to
 educate neurologists and the patient population on the treatment options that
 Medtronic DBS Therapy offers them.                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Continued
 acceptance of InterStim Therapy for the treatment of the symptoms of
 overactive bladder and urinary retention. InterStim Therapy for Bowel Control
 is also approved in Europe and is pending FDA approval in the U.S.                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Continued
 acceptance of the RestoreSensor, which was launched in Europe during the
 fourth quarter of fiscal year 2010. RestoreSensor is an innovative spinal
 cord stimulator featuring our exclusive AdaptiveStim technology. This
 technology addresses an unmet need for spinal cord stimulation patients
 through automatically adapting stimulation to changes in body position and
 activity, and minimizing the need for manual stimulation adjustments.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Continued
 acceptance from both physicians and patients of insulin-pump therapy and CGM
 therapy and continued acceptance and improved reimbursement of CGM
 technologies, which provide patients and physicians valuable insight into
 glucose levels.                                                                                                                                                                                                          

36

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Continued
 acceptance of new insulin pumps, including the MiniMed Paradigm Veo System,
 which offers low-glucose suspend that assists in protecting against the risk
 of hypoglycemia by automatically suspending insulin delivery when glucose
 falls below a specified threshold set by the user. The MiniMed Paradigm Veo
 System was launched throughout Asia and Europe during fiscal year 2010. In
 addition, the MiniMed Revel System was launched in the U.S. in the fourth
 quarter of fiscal year 2010. The launch of this system extended our line of
 sensor-augmented therapy options available on the market.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | Given the
 elective nature of an insulin pump and CGM for the management of diabetes and
 the possible high out-of-pocket costs to the customer, macroeconomic
 pressures could negatively impact the near-term sales growth within the
 Diabetes business.                                                                                                                                                                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | Continued
 acceptance of the StealthStation S7 and O-Arm Imaging Systems, especially
 with the launch of O-Arm 3.1 and Synergy Cranial 2.2 later this fiscal year.                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | Market
 acceptance of the NIM 3.0 Nerve Monitoring System.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

COSTS AND EXPENSES

The following
is a summary of major costs and expenses as a percent of net sales:

|                                             |  |                     |      |                  |  |      |  
|-------------------------------------------- |  | ------------------- | ---- | ---------------- |  | ---- | -
|                                             |  | Three
 months ended |     
|                                             |  | July
 30, 
 2010    |      | July
 31, 
 2009 | 
|Cost of
 products sold                       |  |                     | 23.7 | %                |  | 24.6 | %
|Research
 & development                      |  |                     | 9.8  |                  |  | 9.4  |  
|Selling,
 general, & administrative          |  |                     | 35.4 |                  |  | 34.8 |  
|Restructuring                                |  |                     |     |                  |  | 1.6  |  
|Certain
 litigation charges, net             |  |                     |     |                  |  | 11.3 |  
|IPR&D
 and certain acquisition-related costs |  |                     | 0.4  |                  |  |     |  
|Other
 expense, net                          |  |                     | 1.2  |                  |  | 2.4  |  
|Interest
 expense, net                       |  |                     | 2.0  |                  |  | 1.7  |  

Cost of Products Sold

Cost of
products sold for the three months ended July 30, 2010, as a percent of net
sales, decreased 0.9 percentage points to 23.7 percent when compared to the
same period in the prior fiscal year. Cost of products sold as a percent of net
sales in the three months ended July 30, 2010 was positively impacted by 0.5 of
a percentage point and 0.2 of a percentage point from the first quarter of
fiscal year 2010 voluntary recall of specific lots of Paradigm Quick-set
infusion sets in the U.S. and the restructuring charges recorded within cost of
products sold in the first quarter of fiscal year 2010, respectively, and 0.2
of a percentage point of favorable foreign currency translation. We continue to
execute our broad initiatives to reduce our costs of products sold. Please
refer to Note 12 of the condensed consolidated financial statements and the
Restructuring, Certain Litigation Charges, Net, and IPR&D and Certain
Acquisition-Related Costs section of this managements discussion and analysis
for additional information regarding the Paradigm Quick-set infusion set
voluntary recall and the restructuring charges, respectively, recorded in the
first quarter of fiscal year 2010.

Research and Development

Consistent
with prior periods, we have continued to invest in new technologies to drive
long-term future growth by spending aggressively on research and development
efforts. For the three months ended July 30, 2010, research and development
spending was $370 million, or 9.8 percent of net sales, increasing 0.4 of a
percentage point from the three months ended July 31, 2009 due to a decrease in
net sales from the prior period. We remain committed to developing technological enhancements and
new indications for existing products, and less invasive and new technologies
for new and emerging markets to address unmet medical needs. That commitment
leads to our initiation and participation in many clinical trials each fiscal
year as the demand for clinical and economic evidence increases. Furthermore,
we expect our development activities to help reduce patient care costs and the
length of hospital stays in the future. In addition to our investment in
research and development, we continue to access new technologies in areas
served by our existing businesses, as well as in new areas, through
acquisitions, licensing agreements, alliances, and certain strategic equity
investments.

37

---



Selling, General, and Administrative

Selling,
general, and administrative expense for the three months ended July 30, 2010
was $1.334 billion, which as a percent of net sales increased by 0.6 percentage
points to 35.4 percent, as compared to the same period of the prior fiscal
year. The increase in selling, general, and administrative expense as a percent
of net sales is due to the acquisition of Invatec, which had an impact of 0.2
of a percentage point, and the decrease in revenue for the quarter. We continue
to drive our initiatives to leverage our cost structure in order to help reduce
selling, general, and administrative expense.

Restructuring Charges, Certain Litigation
Charges, Net, and IPR&D and Certain Acquisition-Related Costs

Restructuring
charges, certain litigation charges, net, and IPR&D and certain
acquisition-related costs for the three months ended July 30, 2010 and July 31,
2009 were as follows:

|                                                                                                                            |  |                     |    |                  |   |      |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | -- | ---------------- | - | ---- | -
|                                                                                                                            |  | Three
 months ended |   
|(in millions)                                                                                                               |  | July
 30, 
 2010    |    | July
 31, 
 2009 |  
|Restructuring charges                                                                                                       |  | $                   |   |                  | $ | 69   |  
|Certain litigation charges, net                                                                                             |  |                     |   |                  |   | 444  |  
|IPR&D and certain acquisition-related
 costs                                                                                |  |                     | 15 |                  |   |     |  
|Total restructuring charges, certain
 litigation charges, net, and IPR&D and certain acquisition-related costs              |  |                     | 15 |                  |   | 513  |  
|Net tax impact of restructuring charges,
 certain litigation charges, net, and IPR&D and certain
 acquisition-related costs |  |                     | (4 | )                |   | (103 | )
|Total restructuring charges, certain
 litigation charges, net, and IPR&D and certain acquisition-related costs,
 net of tax |  | $                   | 11 |                  | $ | 410  |  

Restructuring

Fiscal Year 2009 Initiative

In the fourth
quarter of fiscal year 2009, as part of our One Medtronic strategy, we
recorded a $34 million restructuring charge, which consisted of employee
termination costs of $29 million and asset write-downs of $5 million. The One
Medtronic strategy focused on streamlining the organization and standardizing
or centralizing certain functional activities which were not unique to
individual businesses. In connection with these efforts to create One
Medtronic, this initiative was designed to streamline operations, by further
consolidating manufacturing and eliminating certain non-core product lines, and
to further align resources around our higher growth opportunities. This
initiative impacted most businesses and certain corporate functions. Of the $5
million of asset write-downs, $3 million related to inventory write-offs and
production-related asset impairments and therefore was recorded within cost of products sold in the consolidated
statement of earnings. The employee termination costs of $29 million consisted
of severance and the associated costs of continued medical benefits and
outplacement services.

As a
continuation of the fiscal year 2009 initiative, in the first quarter of fiscal
year 2010 we incurred $72 million of incremental restructuring charges, which
consisted of employee termination costs of $62 million and asset write-downs of
$10 million. Of the $10 million of asset write-downs, $7 million related to
inventory write-offs and production-related asset impairments and therefore was
recorded within cost of products sold
in the condensed consolidated statement of earnings. Included in the $62
million restructuring charge was $9 million of incremental defined benefit
pension and post-retirement related expenses for those employees who accepted
early retirement packages. For further discussion on the incremental defined
benefit pension and post-retirement related expenses, see Note 18 to the
condensed consolidated financial statements.

In the fourth
quarter of fiscal year 2010, we recorded a $12 million reversal of excess
restructuring reserves related to the fiscal year 2009 initiative. This
reversal was primarily a result of a higher than expected percentage of
employees identified for elimination finding positions elsewhere within the
Company.

During the
three months ended July 30, 2010, we did not incur any restructuring charges.

In connection
with the fiscal year 2009 initiative, as of the end of the first quarter of
fiscal year 2010, we had identified approximately 1,500 positions for
elimination which were achieved through early retirement packages offered to
employees, voluntary separation, and involuntary separation. As of July 30,
2010, the restructuring initiative was substantially complete and is expected
to produce annualized operating savings of approximately $125 million. These
savings will arise mostly from reduced compensation expense.

38

---



Certain Litigation Charges, Net

We classify
material litigation reserves and gains recognized as certain litigation
charges, net. During the three months ended July 30, 2010, there were no
certain litigation charges, net.

During the
three months ended July 31, 2009, we recorded certain litigation charges, net
of $444 million related to the global resolution of all outstanding
intellectual property litigation with Abbott Laboratories (Abbott). The terms
of the agreement stipulate that neither party will sue each other in the field
of coronary stent and stent delivery systems for a period of at least 10 years,
subject to certain conditions. Both parties also agreed to a cross-license of
the disputed patents within the defined field. The $444 million settlement
amount included a $400 million payment made to Abbott and a $42 million success
payment made to evYsio Medical Devices, LLC (evYsio). In addition, a $2 million
payment was made to evYsio in connection with an amendment to the parties
existing agreement in order to expand the scope of the definition of the
license field from evYsio.

IPR&D and Certain Acquisition-Related
Costs

During the
three months ended July 30, 2010, we recorded IPR&D and certain
acquisition-related costs of $15 million related to a milestone payment under
the existing terms of a royalty bearing, non-exclusive patent cross-licensing
agreement with NeuroPace, Inc.
Product commercialization related to this technology had not yet been achieved. As a result, in accordance with
authoritative guidance the payment was immediately expensed as IPR&D since technological feasibility had not yet been reached
and such technology has no future alternative use.

During the
three months ended July 31, 2009, there were no IPR&D and certain
acquisition-related costs.

Other Expense, Net

Other expense,
net includes intellectual property amortization expense, royalty income and
expense, realized equity security gains and losses, realized foreign currency
transaction and derivative gains and losses, and impairment charges on equity
securities. For the three months ended July 30, 2010, other expense, net was
$47 million, a decrease of $49 million compared to the same period in the prior
fiscal year. The decrease of $49 million for the three months ended July 30,
2010 is primarily due to the impact of foreign currency gains and losses. Total
foreign currency gains recorded in other expense, net in the first quarter of
fiscal year 2011 were $54 million, as compared to $31 million in the same
period in the prior fiscal year. Additionally, other expense, net in the first
quarter of fiscal year 2011 was positively impacted by an increase in licensing
payments we received in our CardioVascular business, compared to the prior
year.

Interest Expense, Net

Interest
expense, net includes interest earned on our investments, interest paid on our
borrowings, amortization of debt issuance costs and debt discounts, the net
realized and unrealized gain or loss on trading securities, and the net
realized gain or loss on the sale or impairment of available for sale debt
securities. For the three months ended July 30, 2010, we had interest expense,
net of $74 million as compared to interest expense, net of $66 million for the
same period of the prior fiscal year. The increase in interest expense, net was
primarily the result of decreased interest income earned on our investments as
interest rates decreased from the first quarter of fiscal year 2010.

INCOME TAXES

|                                                                                                                    |  |                    |       |                |   |       |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | -------------- | - | ----- | -
|                                                                                                                    |  | Three months ended |      
|(dollars in
 millions)                                                                                              |  | July 30,
 2010     |       | July 31,
 2009 |  
|Provision
 for income taxes                                                                                         |  | $                  | 210   |                | $ | 116   |  
|Effective
 tax rate                                                                                                 |  |                    | 20.17 | %              |   | 20.66 | %
|Impact of
 restructuring charges, certain litigation charges, net, and IPR&D and
 certain acquisition-related costs |  |                    | 0.10  |                |   | (0.31 | )
|Non-GAAP
 nominal tax rate (1)                                                                                      |  |                    | 20.27 | %              |   | 20.35 | %

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | Non-GAAP
 nominal tax rate is defined as the income tax provision as a percentage of
 earnings before income taxes, excluding restructuring charges, certain
 litigation charges, net, and IPR&D and certain acquisition-related costs.
 We believe that the resulting non-GAAP financial measure provides useful
 information to investors because it excludes the effect of these discrete
 items so that investors can compare our recurring results over multiple
 periods. Investors should consider this non-GAAP measure in addition to, and
 not as a substitute for, financial performance measures prepared in
 accordance with U.S. GAAP. In addition, this non-GAAP financial measure may
 not be the same as similar measures presented by other companies.

39

---



For the three
months ended July 30, 2010 and July 31, 2009, our effective tax rates were
20.17 percent and 20.66 percent, respectively. Excluding the impact of
restructuring charges, certain litigation charges, net, and IPR&D and
certain acquisition-related costs, our non-GAAP nominal tax rate for the three
months ended July 30, 2010 was 20.27 percent, compared to 20.35 percent, from
the same period of the prior fiscal year. The decrease in the Companys
non-GAAP nominal tax rate is primarily due to the increased tax benefits
derived from our international operations and the tax benefits from foreign dividend
distributions, which was partially offset by the expiration of the U.S. federal
research and development credit.

As of July 30,
2010, there were no changes to significant unresolved matters with the U.S.
Internal Revenue Service or foreign tax authorities from what we disclosed in
our Annual Report on Form 10-K for the year ended April 30, 2010.

See Note 14 to
the condensed consolidated financial statements for additional information.

LIQUIDITY AND CAPITAL RESOURCES

|                                                                                           |  |                |         |                 |   |         |  
|------------------------------------------------------------------------------------------ |  | -------------- | ------- | --------------- | - | ------- | -
|(dollars in
 millions)                                                                     |  | July 30,
 2010 |         | April 30,
 2010 |  
|Working
 capital                                                                           |  | $              | 4,386   |                 | $ | 4,718   |  
|Current
 ratio*                                                                            |  |                | 1.8:1.0 |                 |   | 1.9:1.0 |  
|Cash, cash
 equivalents, and short-term investments                                        |  | $              | 3,917   |                 | $ | 3,775   |  
|Long-term
 investments in debt and trading securities**                                    |  |                | 4,488   |                 |   | 4,089   |  
|Cash, cash equivalents, short-term
 investments, and long-term debt and trading securities |  | $              | 8,405   |                 | $ | 7,864   |  
|Short-term
 borrowings and long-term debt                                                  |  | $              | 10,508  |                 | $ | 9,519   |  
|Net cash
 position***                                                                      |  | $              | (2,103  | )               | $ | (1,655  | )

|    |  |                                                                                                                                                                                           
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   |  | Current ratio
 is the ratio of current assets to current liabilities.                                                                                                                     
|**  |  | Long-term
 investments include debt securities with a maturity date greater than one
 year from the end of the period and trading securities and exclude minority
 investments.           
|*** |  | Net cash position
 is the sum of cash, cash equivalents, short-term investments, and long-term
 investments in debt and trading securities less short-term borrowings and
 long-term debt.

We believe our
liquidity remains strong as of July 30, 2010 and our strong balance sheet and
liquidity provide us with flexibility in the future. We believe our existing
cash and investments, as well as our unused lines of credit and commercial
paper capacity of $2.490 billion, if needed, will satisfy our foreseeable
working capital requirements for at least the next twelve months. However, we
periodically consider various financing alternatives and may, from time to
time, seek to take advantage of favorable interest rate environments or other
market conditions. At July 30, 2010, our Standard and Poors Ratings Group and
Moodys Investors Service ratings remain unchanged as compared to the fiscal
year ending April 30, 2010 with long-term debt ratings of AA- and A1,
respectively, and strong short-term debt ratings of A-1+ and P-1, respectively.

The decrease
in our net cash position in the first quarter of fiscal year 2011 as compared
to the fiscal year ended April 30, 2010, is primarily due to an increase in
short-term borrowings used for share repurchases and other general corporate uses
during the three months ended July 30, 2010, partially offset by income
generated from operations.

We have future
contractual obligations and other minimum commercial commitments that are
entered into in the normal course of business. We believe our off-balance sheet
arrangements do not have a material current or anticipated future effect on our
consolidated earnings, financial position, or cash flows. See the Off-Balance
Sheet Arrangements and Long-Term Contractual Obligations section of this managements
discussion and analysis for further information.

When
applicable, Note 19 to the condensed consolidated financial statements provides
information regarding amounts we have accrued related to significant legal
proceedings. In accordance with U.S. GAAP, we record a liability in our
consolidated financial statements for these actions when a loss is known or
considered probable and the amount can be reasonably estimated. For information
regarding these payments, refer to Note 17 of the consolidated financial
statements included in our Annual Report on Form 10-K for the year ended April
30, 2010 and Note 4 of the current periods condensed consolidated financial
statements.

40

---



As of July 30,
2010 and April 30, 2010, approximately $6.356 billion and $5.576 billion,
respectively, of cash, cash equivalents, short-term investments, and long-term
investments in debt securities were held by our non-U.S. subsidiaries. These
funds are available for use by worldwide operations; however, if these funds
were repatriated to the U.S. or used for U.S. operations, the amounts would
generally be subject to U.S. tax. As a result, we have not chosen to repatriate
a significant portion of this cash but instead use cash generated from U.S.
operations and short- and long-term borrowings to meet our U.S. cash needs.
Long-term investments at July 30, 2010 also include $164 million of cash
invested in government securities held in an indemnification trust established
for self-insurance coverage for our directors and officers. These investments
are restricted and can only be used to indemnify or advance expenses related to
claims against our directors and/or officers.

We have
investments in marketable debt securities that are classified and accounted for
as available-for-sale. Our debt securities include U.S. and foreign government
and agency securities, corporate debt securities, certificates of deposit, and
mortgage backed and other asset backed securities including auction rate
securities. Market conditions over the past several years have included periods
of significant economic uncertainty and at times general market distress
especially in the banking and financial services sector. This uncertainty has
created reduced liquidity across the fixed income investment market, including
certain securities in which we have invested. As a result, some of our
investments have experienced reduced liquidity including unsuccessful monthly
auctions for our auction rate security holdings. Although certain securities
are illiquid, if we required capital we believe we could liquidate a
substantial amount of our portfolio and incur no material impairment loss or
borrow under our commercial paper program or lines of credit.

For the three
months ended July 30, 2010, other-than-temporary impairment losses on
available-for-sale debt securities were $9 million, of which $6 million was
recognized in other comprehensive income resulting in $3 million of charges
being recognized in earnings. In determining this other-than-temporary
impairment loss, U.S. GAAP specifies that we consider a variety of factors,
including the quality and estimated value of the underlying credit support for
our holding and the financial condition and credit rating of the issuer in
estimating the credit loss portion of other-than-temporary impairment losses.
Based on our assessment of the credit quality of the underlying collateral and
credit support available to each of the remaining securities in which we are
invested, we believe we have recorded all necessary other-than-temporary
impairments as we do not have the intent to sell, nor is it more likely than
not that we will be required to sell, before recovery of the amortized cost.
However, as of July 30, 2010, we have $83 million of gross unrealized losses on
our aggregate short-term and long-term available-for-sale debt securities of
$7.013 billion; if market conditions continue to deteriorate further, some of
these holdings may experience other-than-temporary impairment in the future
which could have a material impact on our financial results. Management is
required to use estimates and assumptions in its valuation of our investments,
which requires a high degree of judgment, and therefore actual results could
differ materially from those estimates. See Note 7 to the condensed consolidated
financial statements for additional information regarding fair value
measurements.

SUMMARY OF CASH FLOWS

|                                                              |  |                    |      |                |   |      |  
|------------------------------------------------------------- |  | ------------------ | ---- | -------------- | - | ---- | -
|                                                              |  | Three months ended |     
|(in
 millions)                                                |  | July 30,
 2010     |      | July 31,
 2009 |  
|Cash
 provided by (used in):                                  |  |                    |      |                |   |      |  
|Operating activities                                          |  | $                  | 805  |                | $ | 621  |  
|Investing activities                                          |  |                    | (789 | )              |   | (529 | )
|Financing activities                                          |  |                    | (46  | )              |   | (394 | )
|Effect of
 exchange rate changes on cash and cash equivalents |  |                    | (6   | )              |   | 53   |  
|Net change
 in cash and cash equivalents                      |  | $                  | (36  | )              | $ | (249 | )

Operating Activities

Our net cash
provided by operating activities was $805 million for the three months ended
July 30, 2010 compared to $621 million provided by operating activities for the
three months ended July 31, 2009. The $184 million increase in net cash
provided by operating activities was primarily attributable to the $494 million
of certain litigation payments made during the prior period partially offset by
an increase in annual incentive payments made during the current period as
compared to the same quarter in the prior fiscal year.

Investing Activities

Our net cash
used in investing activities was $789 million for the three months ended July
30, 2010 compared to $529 million used in investing activities for the three
months ended July 31, 2009. The increase in cash used for investing activities
in the three months ended July 30, 2010 is primarily related to an increase in
net purchases of marketable securities for the three months ended July 30, 2010
compared to the three months ended July 31, 2009.

41

---



Financing Activities

Our net cash
used in financing activities was $46 million for the three months ended July
30, 2010 compared to $394 million used in financing activities for the three
months ended July 31, 2009. The $348 million decrease in net cash used in
financing activities was primarily attributable to an increase in short-term
borrowings for the three months ended July 30, 2010 compared to the three
months ended July 31, 2009. The increase in short-term borrowing was caused by
an increase in commercial paper outstanding for share repurchases and other
general corporate uses that occurred during the three months ended July 30,
2010.

OFF-BALANCE SHEET ARRANGEMENTS AND LONG-TERM
CONTRACTUAL OBLIGATIONS

We acquire
assets still in development, enter into research and development arrangements,
and sponsor certain clinical trials that often require milestone and/or royalty
payments to a third party, contingent upon the occurrence of certain future
events. Milestone payments may be required contingent upon the successful
achievement of an important point in the development life cycle of a product or
upon certain pre-designated levels of achievement in clinical trials. In
addition, if required by the arrangement, we may have to make royalty payments
based on a percentage of sales related to the product under development or in
the event that regulatory approval for marketing is obtained. In situations
where we have no ability to influence the achievement of the milestone or
otherwise avoid the payment, we have included those milestone or minimum
royalty payments in the following table. However, the majority of these
arrangements give us the discretion to unilaterally make the decision to stop
development of a product or cease progress of a clinical trial, which would
allow us to avoid making the contingent payments. Although we are unlikely to
cease development if a device successfully achieves clinical testing
objectives, these payments are not included in the table of contractual
obligations because of the contingent nature of these payments and our ability
to avoid them if we decided to pursue a different path of development or
testing.

In the normal
course of business, we periodically enter into agreements that require us to
indemnify customers or suppliers for specific risks, such as claims for injury
or property damage arising out of our products or the negligence of our
personnel or claims alleging that our products infringe third-party patents or
other intellectual property. Our maximum exposure under these indemnification
provisions cannot be estimated, and we have not accrued any liabilities within
our condensed consolidated financial statements or included any indemnification
provisions in our commitments table. Historically, we have not experienced
significant losses on these types of indemnification obligations.

We believe our
off-balance sheet arrangements do not have a material current or anticipated
future effect on our consolidated earnings, financial position, or cash flows.
Presented below is a summary of contractual obligations and other minimum
commercial commitments as of July 30, 2010. See Note 8 to the condensed
consolidated financial statements for additional information regarding
long-term debt. Additionally, see Note 14 to the condensed consolidated
financial statements for additional information regarding accrued income tax
obligations, which are not reflected in the table below.

|                                                                                   |  |                         |       |                 |   |       |  |      |     |      |   |       |  |            |     |  |   |       |  |   |       | 
|---------------------------------------------------------------------------------- |  | ----------------------- | ----- | --------------- | - | ----- |  | ---- | --- | ---- | - | ----- |  | ---------- | --- |  | - | ----- |  | - | ----- | 
|                                                                                   |  | Maturity by Fiscal Year |      
|(in millions)                                                                      |  | Total                   |       | Remaining
 2011 |   | 2012  |  | 2013 |     | 2014 |   | 2015  |  | Thereafter |    
|Contractual obligations related to off-balance sheet arrangements:                 |  |                         |       |                 |   |       |  |      |     |      |   |       |  |            |     |  |   |       |  |   |       | 
|Operating leases (1)                                                               |  | $                       | 370   |                 | $ | 78    |  | $    | 83  |      | $ | 65    |  | $          | 48  |  | $ | 31    |  | $ | 65    | 
|Inventory purchases (2)                                                            |  |                         | 370   |                 |   | 176   |  |      | 153 |      |   | 15    |  |            | 12  |  |   | 10    |  |   | 4     | 
|Commitments to fund minority investments/contingent acquisition
 consideration (3) |  |                         | 423   |                 |   | 243   |  |      | 102 |      |   | 16    |  |            | 10  |  |   | 18    |  |   | 34    | 
|Interest payments (4)                                                              |  |                         | 2,748 |                 |   | 294   |  |      | 252 |      |   | 252   |  |            | 216 |  |   | 191   |  |   | 1,543 | 
|Other (5)                                                                          |  |                         | 190   |                 |   | 58    |  |      | 54  |      |   | 21    |  |            | 18  |  |   | 16    |  |   | 23    | 
|Total                                                                              |  | $                       | 4,101 |                 | $ | 849   |  | $    | 644 |      | $ | 369   |  | $          | 304 |  | $ | 266   |  | $ | 1,669 | 
|                                                                                   |  |                         |       |                 |   |       |  |      |     |      |   |       |  |            |     |  |   |       |  |   |       | 
|Contractual obligations reflected in the balance sheet:                            |  |                         |       |                 |   |       |  |      |     |      |   |       |  |            |     |  |   |       |  |   |       | 
|Long-term debt, including current portion (6)                                      |  | $                       | 9,865 |                 | $ | 2,614 |  | $    | 32  |      | $ | 2,263 |  | $          | 581 |  | $ | 1,293 |  | $ | 3,082 | 
|Capital leases                                                                     |  |                         | 18    |                 |   |      |  |      | 1   |      |   | 1     |  |            | 1   |  |   | 1     |  |   | 14    | 
|Total                                                                              |  | $                       | 9,883 |                 | $ | 2,614 |  | $    | 33  |      | $ | 2,264 |  | $          | 582 |  | $ | 1,294 |  | $ | 3,096 | 

42

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Certain
 leases require us to pay real estate taxes, insurance, maintenance, and other
 operating expenses associated with the leased premises. These future costs
 are not included in the schedule above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(2) | We have
 included inventory purchase commitments which are legally binding and specify
 minimum purchase quantities. These purchase commitments do not exceed our
 projected requirements and are in the normal course of business. These commitments
 do not include open purchase orders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(3) | Certain
 commitments related to the funding of minority investments and/or previous
 acquisitions are contingent upon the achievement of certain product-related
 milestones and various other favorable operational conditions. While it is
 not certain if and/or when these payments will be made, the maturity dates
 included in this table reflect our best estimates. In accordance with new
 authoritative accounting guidance on business combinations effective in fiscal
 year 2010, we are required to record the fair value of contingent acquisition
 considerations as a liability on the consolidated balance sheet on a
 prospective basis, therefore, contingent acquisition considerations are not
 included in the off-balance sheet disclosure for acquisitions subsequent to
 April 24, 2009. The table above excludes our subsequent acquisition of ATS
 Medical, Inc. and our pending acquisition of Osteotech, Inc.                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(4) | Interest
 payments in the table above reflect the interest on our outstanding debt,
 including the $3.000 billion of 2010 Senior Notes, $1.250 billion of 2009
 Senior Notes, $4.400 billion of Senior Convertible Notes, $1.000 billion of
 2005 Senior Notes and $15 million of Contingent Convertible Debentures. The
 interest rate on each outstanding obligation varies and interest is payable
 semi-annually. The interest rate is 3.000 percent on $1.250 billion of the
 2010 Senior Notes due 2015, 4.450 percent on $1.250 billion of the 2010
 Senior Notes due 2020, 5.550 percent on $500 million of the 2010 Senior Notes
 due 2040, 4.500 percent on $550 million of the 2009 Senior Notes due 2014,
 5.600 percent on $400 million of the 2009 Senior Notes due 2019, 6.500
 percent on $300 million of the 2009 Senior Notes due 2039, 1.500 percent on the
 $2.200 billion Senior Convertible Notes due 2011, 1.625 percent on the $2.200
 billion Senior Convertible Notes due 2013, 4.750 percent on the $400 million
 of 2005 Senior Notes due 2010, 4.750 percent on the $600 million of 2005
 Senior Notes due 2015, and 1.250 percent on the Contingent Convertible
 Debentures due 2021. The table above excludes the impact of the debt discount
 amortization on the Senior Convertible Notes.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(5) | These
 obligations include certain research and development arrangements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(6) | Long-term
 debt in the table above includes $3.000 billion 2010 Senior Notes, $1.250
 billion 2009 Senior Notes, $4.400 billion Senior Convertible Notes, $1.000
 billion 2005 Senior Notes, and $15 million related to our Contingent
 Convertible Debentures. The table above excludes the remaining fair value
 from the five-year interest rate swap agreements entered into in November
 2005 and the eight-year interest rate swap agreement entered into in June
 2007 that were terminated in December 2008, and the three-year interest rate
 swap agreements entered into in March 2010 that were terminated in July 2010.
 The table above includes the impact of the five-year interest rate swaps
 entered into in June 2009, December 2009, and March 2010 along with the
 three-year interest rate swap agreements entered into in March 2010. See Note
 9 to the condensed consolidated financial statements for additional
 information regarding the interest rate swap agreement terminations.                                                                                                                                                                                                                                                                                                          

DEBT AND CAPITAL

Our capital
structure consists of equity and interest-bearing debt. Interest-bearing debt
as a percentage of total interest-bearing debt and equity was 42 percent as of
July 30, 2010 and 39 percent at April 30, 2010.

Share Repurchase Program

In June 2009,
our Board of Directors authorized the repurchase of up to 60 million shares of
our common stock.

As part of our
focus on returning value to our shareholders shares are repurchased from time
to time. During the three months ended July 30, 2010, we repurchased
approximately 15.3 million shares at an average price per share of $41.82. As
of July 30, 2010, we had approximately 35.5 million shares remaining under
current buyback authorizations approved by the Board of Directors.

Financing Arrangements

We have issued
a combination of bank borrowing and commercial paper to fund our short-term
needs. Short-term debt, including the current portion of our long-term debt and
capital lease obligations, as of July 30, 2010 was $3.428 billion compared to
$2.575 billion as of April 30, 2010. We utilize a combination of Contingent
Convertible Debentures, Senior Convertible Notes, and Senior Notes to meet our
long-term financing needs. Long-term debt excluding the current portion as of
July 30, 2010 was $7.080 billion compared to $6.944 billion as of April 30,
2010. For more information on our financing arrangements, see Note 8 to the
condensed consolidated financial statements.

Credit Arrangements and Debt Ratings

We had
existing unsecured lines of credit of approximately $2.870 billion with various
banks at July 30, 2010. The existing lines of credit included a five-year
$1.750 billion syndicated credit facility dated December 20, 2006 that will
expire on December 20, 2011 (Credit Facility). The Credit Facility provides
backup funding for the commercial paper program and may also be used for
general corporate purposes. The Credit Facility provides us with the ability to
increase its capacity by an additional $500 million at any time during the life
of the five-year term of the agreement.

43

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On November 2,
2007, we entered into a credit agreement with the Bank of Tokyo-Mitsubishi UFJ,
Ltd. The credit agreement provides for a $300 million unsecured revolving
credit facility maturing November 2, 2010. In addition to certain initial fees,
we are obligated to pay a commitment fee based on the total revolving
commitment.

As of July 30,
2010 and April 30, 2010, we had unused lines of credit and commercial paper
capacity of approximately $2.490 billion and $3.274 billion, respectively.

We maintain a
commercial paper program that allows us to have a maximum of $2.250 billion in
commercial paper outstanding, with maturities up to 364 days from the date of
issuance. As of July 30, 2010, outstanding commercial paper totaled $725
million. There was no outstanding commercial paper as of April 30, 2010. During
the three months ended July 30, 2010, the weighted average original maturity of
the commercial paper outstanding was approximately 33 days and the weighted
average interest rate was 0.262 percent. The issuance of commercial paper
reduces the amount of credit available under our existing lines of credit.

In connection
with the issuance of the Contingent Convertible Debentures, 2010 Senior Notes,
2009 Senior Notes, 2005 Senior Notes, Senior Convertible Notes, and commercial
paper, Standard and Poors Ratings Group and Moodys Investors Service issued
debt ratings of AA- and A1, respectively, and strong short-term debt ratings of
A-1+ and P-1, respectively. These ratings remain unchanged as compared to the
fiscal year ending April 30, 2010. For more information on credit arrangements,
see Note 8 to the condensed consolidated financial statements.

OPERATIONS OUTSIDE OF THE UNITED STATES

The table
below illustrates U.S. net sales versus net sales outside the U.S. for the
three months ended July 30, 2010 and July 31, 2009:

|                    |  |                    |       |                |   |       | 
|------------------- |  | ------------------ | ----- | -------------- | - | ----- | 
|                    |  | Three months ended |      
|(in
 millions)      |  | July 30,
 2010     |       | July 31,
 2009 |  
|U.S. net
 sales     |  | $                  | 2,229 |                | $ | 2,391 | 
|Non-U.S. net
 sales |  |                    | 1,544 |                |   | 1,542 | 
|Total net
 sales    |  | $                  | 3,773 |                | $ | 3,933 | 

For the three
months ended July 30, 2010, consolidated net sales outside the U.S. were flat
 compared to the same period of the prior year. Foreign currency had an
unfavorable impact of $21 million on net sales during the current period. For
the three months ended July 30, 2010, our performance outside the U.S. was
impacted by strong CardioVascular and Diabetes net sales, offset by weak net
sales in CRDM. CardioVascular net sales were led by increased sales of our
CoreValve transcatheter valves and the acquisition of Invatec. Diabetes net
sales increased as a result of strong pump sales driven by Veo. The decline in
CRDM net sales was due to the slow down in market growth rates and continued
pricing pressures due to reduced reimbursement in places like Japan.

Net sales
outside the U.S. are accompanied by certain financial risks, such as collection
of receivables, which typically have longer payment terms. Outstanding
receivables from customers outside the U.S. totaled $1.849 billion as of July
30, 2010, or 56 percent, of total outstanding accounts receivable, and $1.855
billion as of April 30, 2010, or 55 percent, of total outstanding accounts
receivable.

CAUTIONARY FACTORS THAT MAY AFFECT FUTURE
RESULTS

Certain
statements contained in this Quarterly Report on Form 10-Q and other written
and oral statements made from time to time by us do not relate strictly to
historical or current facts. As such, they are considered forward-looking
statements which provide current expectations or forecasts of future events.
Our forward-looking statements generally relate to our growth strategies,
financial results, product development, regulatory approvals, competitive
strengths, intellectual property rights, litigation and tax matters, mergers
and acquisitions, market acceptance of our products, accounting estimates,
financing activities, ongoing contractual obligations, and sales efforts. Such
statements can be identified by the use of terminology such as anticipate,
believe, could, estimate, expect, forecast, intend, looking
ahead, may, plan, possible, potential, project, should, will,
and similar words or expressions. One must carefully consider forward-looking
statements and understand that such statements may be affected by inaccurate
assumptions and may involve a variety of risks and uncertainties, known and
unknown, including, among others, risks related to competition in the medical
device industry, reduction or interruption on our supply, quality problems,
liquidity, decreasing prices, adverse regulatory action, litigation success,
self-insurance, healthcare policy changes, and international operations, as
well as those discussed in the section entitled Risk Factors in our Annual
Report on Form 10-K for the year ended April 30, 2010. Consequently, no
forward-looking statement can be guaranteed and actual results may vary
materially. We intend to take advantage of the Safe Harbor provisions of the
Private Securities Litigation Reform Act of 1995 regarding our forward-looking
statements, and are including this sentence for the express purpose of enabling
us to use the protections of the safe harbor with respect to all
forward-looking statements.

44

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We undertake
no obligation to update any statement we make, but investors are advised to
consult any further disclosures by us in our filings with the Securities and
Exchange Commission, especially on Forms 10-K, 10-Q, and 8-K, in which we may
discuss in more detail various important factors that could cause actual
results to differ from expected or historical results. In addition, actual
results may differ materially from those anticipated due to a number of
factors, including, among others, those discussed in the section entitled Risk
Factors in our Annual Report on Form 10-K for the year ended April 30, 2010.
It is not possible 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 potentially inaccurate assumptions.

Item 3.
Quantitative and Qualitative Disclosures About Market Risk

Due to the
global nature of our operations, we are subject to the exposures that arise
from currency exchange rate fluctuations. In a period where the U.S. dollar is
strengthening/weakening as compared to other currencies, our revenues and
expenses denominated in foreign currency are translated into U.S. dollars at a
lower/higher value than they would be in an otherwise constant currency
exchange rate environment. We manage these exposures using operational and
economic hedges as well as derivative financial instruments. The primary
currencies hedged are the Euro and the Japanese Yen.

Our objective
in managing exposure to currency exchange rate fluctuations is to minimize
earnings and cash flow volatility associated with currency exchange rate
changes. We enter into various contracts, principally forward contracts that
change in value as currency exchange rates change, to protect the U.S. dollar
value of existing foreign currency assets, liabilities, net investments, and
probable commitments. The gains and losses on these contracts offset changes in
the value of the related exposures. It is our policy to enter into currency
exchange rate hedging transactions only to the extent true exposures exist; we
do not enter into currency exchange rate hedging transactions for speculative
purposes.

We had foreign
exchange rate derivative contracts outstanding in notional amounts of $6.586
billion and $5.495 billion as of July 30, 2010 and April 30, 2010,
respectively. The fair value of these contracts as of July 30, 2010 was $141
million more than the original contract value. A sensitivity analysis of
changes in the fair value of all currency exchange rate derivative contracts at
July 30, 2010 indicates that, if the U.S. dollar uniformly
strengthened/weakened by 10 percent against all currencies, the fair value of
these contracts would increase/decrease by $576 million, respectively. Any
gains and losses on the fair value of derivative contracts would be largely
offset by gains and losses on the underlying transactions. These offsetting
gains and losses are not reflected in the above analysis. We are also exposed
to interest rate changes affecting principally our investments in interest rate
sensitive instruments, which include our fixed-to-floating interest rate swap
agreements. A sensitivity analysis of the impact on our interest rate sensitive
financial instruments of a hypothetical 10 percent change in short-term
interest rates compared to interest rates as of July 30, 2010 indicates that
the fair value of these instruments would correspondingly change by $34
million.

We have
investments in marketable debt securities that are classified and accounted for
as available-for-sale. Our debt securities include U.S. government and agency
securities, foreign government and agency securities, corporate debt
securities, certificates of deposit, and mortgage backed and other asset backed
securities including auction rate securities. For a discussion of current
market conditions and the impact on Medtronic, please see the Liquidity and
Capital Resources section of this managements discussion and analysis.

Item 4. Controls
and Procedures

Evaluation of disclosure controls and procedures

Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934 (the Exchange Act)) and changes in the
Companys internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) as of the end of the period covered by this
report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of the period covered by
this quarterly report, our disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Exchange Act) are effective and are adequately designed
to ensure that information required to be disclosed by us in the reports we
file or submit under the Exchange Act is recorded, processed, summarized, and
reported, within the time periods specified by the U.S. Securities and Exchange
Commissions applicable rules and forms.

45

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Changes in internal control

There have
been no changes in the Companys internal control over financial reporting
during the period covered by this Quarterly Report on Form 10-Q that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.

PART II  OTHER INFORMATION

Item 1. Legal Proceedings

A discussion
of the Companys policies with respect to legal proceedings is included in the
managements discussion and analysis and our legal proceedings and other loss
contingencies are described in Note 19 of the condensed consolidated financial
statements.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

The following
table provides information about the shares repurchased by Medtronic during the
first quarter of fiscal year 2011:

|               |  |                                        |  |                                   |       |                                                                              |            |                                                                          |            | 
|-------------- |  | -------------------------------------- |  | --------------------------------- | ----- | ---------------------------------------------------------------------------- | ---------- | ------------------------------------------------------------------------ | ---------- | 
|Fiscal
 Period |  | Total
 Number of
 Shares Purchased (1) |  | Average
 
 Price Paid 
 per Share |       | Total
 Number of Shares
 Purchased as a Part of
 Publicly Announced
 Program |            | Maximum
 Number
 of Shares that May
 Yet Be Purchased
 Under the Program |           
|5/1/10-5/28/10 |  | 15,301,589                             |  | $                                 | 41.82 |                                                                              | 15,301,589 |                                                                          | 35,530,064 | 
|5/29/10-7/2/10 |  |                                       |  |                                   |      |                                                                              |           |                                                                          | 35,530,064 | 
|7/3/10-7/30/10 |  |                                       |  |                                   |      |                                                                              |           |                                                                          | 35,530,064 | 
|Total          |  | 15,301,589                             |  | $                                 | 41.82 |                                                                              | 15,301,589 |                                                                          | 35,530,064 | 

| | 
| | 

|    |                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In June
 2009, the Companys Board of Directors authorized the repurchase of 60
 million shares of the Companys stock. As authorized by the Board of
 Directors our program expires when its total number of authorized shares has
 been repurchased.

46

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Item 6. Exhibits

|    |          |                                                                                                      
|--- | -------- | -----------------------------------------------------------------------------------------------------
|(a) | Exhibits |                                                                                                      
|    |          |                                                                                                      
|    | 12.1     | Medtronic,
 Inc. Computation of Ratio of Earnings to Fixed Charges.                                  
|    |          |                                                                                                      
|    | 31.1     | Certification
 of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
 of 2002.
|    |          |                                                                                                      
|    | 31.2     | Certification
 of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
 of 2002.
|    |          |                                                                                                      
|    | 32.1     | Certification
 of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
 of 2002.
|    |          |                                                                                                      
|    | 32.2     | Certification
 of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
 of 2002.
|    |          |                                                                                                      

47

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SIGNATURES

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

|                         |                                      
|------------------------ | -------------------------------------
|                         | Medtronic,
 Inc.                     
|                         | (Registrant)                         
|                         |                                      
|Date:
 September 8, 2010 | /s/ William
 A. Hawkins              
|                         | William A.
 Hawkins                  
|                         | Chairman and
 Chief Executive Officer
|                         |                                      
|Date:
 September 8, 2010 | /s/ Gary L.
 Ellis                   
|                         | Gary L.
 Ellis                       
|                         | Senior Vice
 President and           
|                         | Chief
 Financial Officer             
|                         |                                      

48

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