Exhibit 13

Managements Discussion and Analysis of
Financial Condition and Results of Operations

OVERVIEW

Our business
is focused on the development, manufacture and distribution of cardiovascular
medical devices for the global cardiac rhythm management, cardiology, cardiac
surgery and atrial fibrillation therapy areas and implantable neurostimulation
medical devices for the management of chronic pain. We sell our products in
more than 100 countries around the world. Our largest geographic markets are the
United States, Europe, Japan and Asia Pacific. Our four operating segments are
Cardiac Rhythm Management (CRM), Cardiovascular (CV), Atrial Fibrillation (AF),
and Neuromodulation (Neuro). Our principal products in each operating segment
are as follows: CRM  tachycardia implantable cardioverter defibrillator
systems (ICDs) and bradycardia pacemaker systems (pacemakers); CV  vascular
closure devices, heart valve replacement and repair products and pressure
measurement guidewires; AF  electrophysiology introducers and catheters,
advanced cardiac mapping, navigation and recording systems and ablation
systems; and Neuro  neurostimulation devices. References to St. Jude
Medical, St. Jude, the Company, we, us and our are to St. Jude
Medical, Inc. and its subsidiaries.

Our industry
has undergone significant consolidation in the last decade and is highly
competitive. Our strategy requires significant investment in research and
development in order to introduce new products. We are focused on improving our
operating margins through a variety of techniques, including the production of
high quality products, the development of leading edge technology, the
enhancement of our existing products and continuous improvement of our
manufacturing processes. We expect cost containment pressure on healthcare
systems as well as competitive pressures in the industry will continue to place
downward pressure on prices for our products.

We participate
in several different medical device markets, each of which has its own expected
growth rate. A significant portion of our net sales relate to CRM devices 
ICDs and pacemakers. Management remains focused on increasing our worldwide CRM
market share, as we are one of three principal manufacturers and suppliers in
the global CRM market. In order to help accomplish this objective, we have
continued to expand our selling organizations and introduce new CRM products.
We are also investing in our other three major growth platforms  atrial
fibrillation, neuromodulation and cardiovascular, to increase our market share.

During 2008,
we expanded our growth programs through the acquisitions of EP MedSystems, Inc.
(EP MedSystems), MediGuide Inc. (MediGuide), and Radi Medical Systems AB (Radi
Medical Systems). Our EP MedSystems acquisition strengthens our portfolio of
products providing visualization, diagnosis and treatment of heart rhythm
disorders. The MediGuide acquisition brings a new technology that, with
additional research and development efforts, may benefit all of our major growth
businesses. MediGuide has been focused on developing a proprietary Medical
Positioning System (gMPSTM) technology that provides localization
and tracking capability for interventional medical devices. The Radi Medical
Systems acquisition expands our reach into two segments of the cardiovascular
market in which we previously had not participated: 1) physiological assessment
of intravascular pressure during a cardiovascular procedure, which provides
physicians additional diagnostic information to better treat their patients and
2) assisted manual compression devices for vascular closure, which helps arrest
bleeding of the radial and femoral arteries following an intravascular device
procedure.

We utilize a
52/53-week fiscal year ending on the Saturday nearest December 31st.
Fiscal year 2008 consisted of 53 weeks and ended on January 3, 2009, and fiscal
years 2007 and 2006 consisted of 52 weeks and ended on December 29, 2007 and
December 30, 2006, respectively. The additional week in fiscal year 2008 has been
reflected in our fourth quarter results.

Net sales in
2008 increased 15% compared to 2007 led by sales growth in ICDs and
pacemakers as well as products to treat atrial fibrillation. Foreign currency
translation had a favorable impact on net sales of $120.4 million when compared
to fiscal year 2007. Compared to 2007, our 2008 ICD net sales grew nearly 18%
to $1,534.2 million and our pacemaker net sales grew approximately 10% to
$1,167.3 million, both as a result of strong volume growth. Additionally, 2008
AF net sales increased 33%, compared to 2007, to $545.5 million, due to
continued market acceptance of device-based procedures to treat the symptoms of
atrial fibrillation. Refer to the Segment
Performance section for a more detailed discussion of our net sales
results by operating segment.

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Our 2008 net
earnings of $384.3 million and diluted net earnings per share of $1.10 declined
31.3% and 30.8%, respectively, compared to 2007 net earnings of $559.0 million
and diluted net earnings per share of $1.59. Fiscal year 2008 net
earnings included in-process research and development (IPR&D) charges of
$319.4 million, after-tax special charges of $72.7 million, after-tax
non-profit contribution expenses of $22.2 million and after-tax investment impairment
charges of $8.0 million for a combined impact of $422.3 million, or $1.21 per
diluted share. Fiscal year 2007 net earnings included after-tax special charges
of $77.2 million and an after-tax investment impairment charge of $15.7 million
for a combined impact of $92.9 million, or $0.26 per diluted share. Compared to
2007, our net earnings and diluted net earnings per share benefited from
increased net sales growth in all of our operating segments with net sales in
our CRM and AF operating segments growing 14% and 33%, respectively.

Our 2008
results included $319.4 million of IPR&D charges, or $0.92 per diluted
share, primarily related to our MediGuide acquisition, and $72.7 million, or
$0.21 per diluted share of after-tax special charges, which consisted of the
following: $59.3 million, or $0.17 per diluted share, primarily associated with
the impairment of a technology license agreement and the impairment of
purchased technology intangible assets related to our 2005 Velocimed LLC
(Velocimed) acquisition; $8.7 million, or $0.03 per diluted share, of
inventory-related charges; and $4.7 million, or $0.01 per diluted share,
related to providing our Merlin@home wireless patient monitoring system to
existing St. Jude Medical CRM patients at no charge. Our 2008 results also
included $22.2 million, or $0.06 per diluted share, of after-tax contribution
expenses to non-profit organizations including the St. Jude Medical Foundation,
and $8.0 million, or $0.02 per diluted share, of after-tax investment
impairment charges. Refer to Notes 8 and 9 of the Consolidated Financial
Statements for further details of these charges.

Our 2007
results included after-tax special charges of $77.2 million, which consisted of
$21.9 million, or $0.06 per diluted share, related to the settlement of a
patent litigation matter; $21.4 million, or $0.06 per diluted share, associated
with streamlining our operations; $19.0 million, or $0.05 per diluted share,
related to discontinued inventory and older model programmer write-offs; and
$14.9 million, or $0.04 per diluted share, associated with the impairment of
intangible assets related to a terminated distribution agreement. Additionally,
our 2007 results included a $15.7 million after-tax investment impairment, or
$0.04 per diluted share. Refer to Notes 8 and 9 of the Consolidated Financial
Statements for further details of these charges.

We generated
$945.6 million of operating cash flows during 2008, compared to $865.6 million
of operating cash flows during 2007. We ended the year with $136.4 million of
cash and cash equivalents and $1,201.6 million of total debt. We have strong
short-term credit ratings, with an A2 rating from Standard & Poors and a
P2 rating from Moodys. During the second quarter of 2008, Standard &
Poors raised our long-term debt rating to A- from BBB+. Additionally, we
repurchased 6.7 million shares of our common stock for $300.0 million during
2008 and 23.6 million shares of our common stock for $1.0 billion in 2007.

NEW ACCOUNTING PRONOUNCEMENTS

Information
regarding new accounting pronouncements is included in Note 1 to the
Consolidated Financial Statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

On an ongoing
basis, we evaluate our estimates and assumptions, including those related to
our accounts receivable allowance for doubtful accounts; estimated useful lives
of diagnostic equipment; valuation of IPR&D, other intangible assets and
goodwill; income taxes; legal reserves and insurance receivables; and
stock-based compensation. We base our estimates on historical experience and
various other assumptions that are believed to be reasonable under the
circumstances, and the results form the basis for making judgments about the
reported values of assets, liabilities, revenues and expenses. Actual results
may differ from these estimates. We believe that the following represent our
most critical accounting estimates:

Accounts Receivable Allowance for Doubtful
Accounts: We grant credit to customers in the normal
course of business, and generally do not require collateral or any other
security to support our accounts receivable. We maintain an allowance for
doubtful accounts for potential credit losses, which primarily consists of
reserves for specific customer balances that we believe may not be collectible.
We determine the adequacy of this allowance by regularly reviewing the age of
accounts receivable, customer financial conditions and credit histories, and
current economic conditions. In some developed markets and in many emerging
markets, payment of certain accounts receivable balances are made by the
individual countries healthcare systems for which payment is dependent, to
some extent, upon the political and economic environment within those
countries. Although we consider our allowance for doubtful accounts to be
adequate, if the financial condition of our customers or the individual
countries healthcare systems were to deteriorate and impair their ability to
make payments to us, additional allowances may be required in future periods.
The allowance for doubtful accounts was $29.0 million at January 3, 2009 and
$26.7 million at December 29, 2007.

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Estimated Useful Lives of Diagnostic
Equipment: Diagnostic equipment is recorded at cost
and is depreciated using the straight-line method over its estimated useful
life of three to five years. Diagnostic equipment primarily consists of
programmers that are used by physicians and healthcare professionals to program
and analyze data from ICDs and pacemakers. The estimated useful life of this
equipment is determined based on our estimates of its usage by the physicians
and healthcare professionals, factoring in expected new technology platforms
and rollouts. To the extent that we experience changes in the usage of this
equipment or there are introductions of new technologies to the market, the
estimated useful lives of this equipment may change in a future period.
Diagnostic equipment had a net carrying value of $205.3 million at January 3,
2009 and $189.5 million at December 29, 2007.

Valuation of IPR&D, Other Intangible
Assets and Goodwill: When we acquire another company,
the purchase price is allocated, as applicable, between IPR&D, other
identifiable intangible assets, tangible assets and goodwill. Determining the
portion of the purchase price allocated to IPR&D and other intangible
assets requires us to make significant estimates.

IPR&D is
defined as the value assigned to those projects for which the related products
have not yet reached technological feasibility and have no future alternative
use. The primary basis for determining the technological feasibility of these
projects at the time of acquisition is obtaining regulatory approval to market
the underlying products in an applicable geographic region. In accordance with
Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations (SFAS No. 141), we
expense the value attributed to these projects in conjunction with the
acquisition. In 2008, we recorded IPR&D of $319.4 million. No IPR&D
charges were incurred during fiscal years 2007 or 2006. Any IPR&D acquired
in a business acquisition in fiscal year 2009 and future periods will be
subject to SFAS No. 141 (revised 2007), Business
Combinations (SFAS No. 141(R)). Under these new accounting
requirements, the fair value of IPR&D will be capitalized as
indefinite-lived intangible assets until completion of the IPR&D project or
abandonment. Upon completion of the development (generally when regulatory
approval to market the product is obtained), acquired IPR&D assets would be
amortized over their useful life. If the IPR&D projects are abandoned, the
related IPR&D assets would likely be impaired and written down to their remaining
fair value, if any. See the New Accounting Pronouncements section that follows
for details on the adoption and new accounting provisions of SFAS No. 141(R).

We use the
income approach to establish the fair value of IPR&D as of the acquisition
date. This approach establishes fair value by estimating the after-tax cash
flows attributable to a project over its useful life and then discounting these
after-tax cash flows back to a present value. We base our revenue assumptions
on estimates of relevant market sizes, expected market growth, and trends in
technology as well as anticipated product introductions by competitors. In
arriving at the value of the projects, we consider, among other factors, the
stage of completion, the complexity of the work completed, the costs incurred,
the projected cost of completion, the contribution of core technologies and
other acquired assets, the expected introduction date and the estimated useful
life of the technology. The discount rate used is determined at the time of
acquisition and includes consideration of the assessed risk of the project not
being developed to commercial feasibility.

At the time of
acquisition, we expect all acquired IPR&D will reach technological
feasibility, but there can be no assurance that the commercial viability of
these projects will actually be achieved. The nature of the efforts to develop
the acquired technologies into commercially viable products consists
principally of planning, designing and conducting clinical trials necessary to obtain
regulatory approvals. The risks associated with achieving commercialization
include, but are not limited to, delay or failure to obtain regulatory
approvals to conduct clinical trials, failure of clinical trials, delay or
failure to obtain required market clearances, and patent litigation. If
commercial viability is not achieved, we would not realize the original
estimated financial benefits expected for these projects. We fund all costs to
complete IPR&D projects with internally generated cash flows.

The fair value
of other identifiable intangible assets is based on detailed valuations using
the income approach. Other intangible assets consist of purchased technology
and patents, customer lists and relationships, distribution agreements,
licenses, trademarks and tradenames, which are amortized using the
straight-line method over their estimated useful lives, ranging from 3 to 20
years. We review other intangible assets for impairment as changes in
circumstance or the occurrence of events suggest the carrying value may not be
recoverable. Other intangible assets, net of accumulated amortization, were
$493.5 million at January 3, 2009 and $498.7 million at December 29, 2007.

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Goodwill
represents the excess of the aggregate purchase price over the fair value of
net assets, including IPR&D, of the acquired businesses. Goodwill is tested
for impairment annually or more frequently if changes in circumstance or the
occurrence of events suggest impairment exists. The test for impairment
requires us to make several estimates about fair value, most of which are based
on projected future cash flows. Our estimates associated with the goodwill
impairment tests are considered critical due to the amount of goodwill recorded
on our consolidated balance sheets and the judgment required in determining
fair value amounts, including projected future cash flows and the use of an
appropriate risk-adjusted discount rate. Goodwill was $1,984.6 million at
January 3, 2009 and $1,657.3 million at December 29, 2007.

Income Taxes: As
part of the process of preparing our consolidated financial statements, we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves estimating the actual current tax expense as
well as assessing temporary differences in the treatment of items for tax and
financial accounting purposes. These timing differences result in deferred tax
assets and liabilities, which are included in our consolidated balance sheet.
We also assess the likelihood that our deferred tax assets will be recovered
from future taxable income, and to the extent that we believe that recovery is
not likely, a valuation allowance is established. At January 3, 2009, we had
$350.5 million of gross deferred tax assets, including net operating loss and
tax credit carryforwards that will expire from 2012 to 2025 if not utilized. We
believe that our deferred tax assets, including the net operating loss and tax
credit carryforwards, will be fully realized based upon our estimates of future
taxable income. As such, we have not recorded any valuation allowance for our
deferred tax assets. If our estimates of future taxable income are not met, a
valuation allowance for some of these deferred tax assets would be required.

We have not
recorded U.S. deferred income taxes on certain of our non-U.S. subsidiaries
undistributed earnings, as such amounts are intended to be reinvested outside
the United States indefinitely. However, should we change our business and tax
strategies in the future and decide to repatriate a portion of these earnings
to one of our U.S. subsidiaries, including cash maintained by these non-U.S.
subsidiaries, additional U.S. tax liabilities would be incurred. It is not
practical to estimate the amount of additional U.S. tax liabilities we would
incur.

We are subject
to U.S. federal income tax as well as income tax of multiple state and foreign
jurisdictions. We have substantially concluded all U.S. federal income tax
matters for all tax years through 2001. Substantially all material foreign,
state, and local income tax matters have been concluded for all tax years
through 1999. The U.S. Internal Revenue Service (IRS) completed an audit of our
2002-2005 tax returns, and proposed adjustments in its audit report issued in
November 2008. We intend to vigorously defend our positions and initiated
defense of these adjustments at the IRS appellate level in January 2009. An
unfavorable outcome could have a material negative impact on our effective
income tax rate in future periods.

We record our
income tax provisions based on our knowledge of all relevant facts and
circumstances, including the existing tax laws, our experience with previous
settlement agreements, the status of current IRS examinations and our
understanding of how the tax authorities view certain relevant industry and
commercial matters. Although we have recorded all income tax accruals in
accordance with FIN 48 and SFAS No. 109, our accruals represent accounting
estimates that are subject to the inherent uncertainties associated with the
tax audit process, and therefore include certain contingencies. At January 3,
2009, our liability for unrecognized tax benefits was $82.7 million, and our
accrual for interest and penalties was $21.7 million. We believe that any
potential tax assessments from the various tax authorities that are not covered
by our income tax accruals will not have a material adverse impact on our
consolidated financial position or cash flows; however, they may be material to
our consolidated earnings of a future period.

Legal Reserves and Insurance Receivables:
We operate in an industry that is susceptible to significant product liability
and intellectual property claims. As a result, we are involved in a number of
legal proceedings, the outcomes of which are not in our complete control and
may not be known for extended periods of time. In accordance with SFAS No. 5, Accounting for Contingencies (SFAS No. 5),
we record a liability in our consolidated financial statements for costs
related to claims, including future legal costs, settlements and judgments
where we have assessed that a loss is probable and an amount can be reasonably
estimated. Product liability claims may be brought by individuals seeking
relief for themselves or, increasingly, by groups seeking to represent a class.
In addition, claims may be asserted against us in the future related to events
that are not known to us at the present time. Our significant legal proceedings
are discussed in detail in Note 5 to the Consolidated Financial Statements.
While it is not possible to predict the outcome for most of the legal
proceedings discussed in Note 5, the costs associated with such proceedings
could have a material adverse effect on our consolidated earnings, financial
position or cash flows of a future period.

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We record a
receivable from our product liability insurance carriers for amounts expected
to be recovered. This includes amounts for legal matters where we have incurred
defense costs or where we have recorded a liability for probable and estimable
future legal costs, settlements or judgments. We record a receivable for the
amount of insurance we expect to recover based on our assessment of the
specific insurance policies, the nature of the claim, our experience with
similar claims and our assessment of collectability based on our insurers
financial condition. To the extent our insurance carriers ultimately do not
reimburse us, either because such costs are deemed to be outside the scope of
our product liability insurance policies or because our insurers may not be
able to meet their payment obligations to us, the related losses we incur
relating to these unreimbursed costs could have a material adverse effect on
our consolidated earnings or cash flows.

Stock-Based Compensation:
Effective January 1, 2006, we adopted the provisions of, and account for
stock-based compensation in accordance with, SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123(R)).
Under the fair value recognition provisions of SFAS No. 123(R), we measure stock-based
compensation cost at the grant date based on the fair value of the award and
recognize the compensation expense over the requisite service period, which is
the vesting period. We elected the modified-prospective method of adopting SFAS
No. 123(R), under which prior periods are not retroactively revised. The
valuation provisions of SFAS No. 123(R) apply to awards granted after the
January 1, 2006 effective date. Estimated stock-based compensation expense for
awards granted prior to the effective date that remained unvested on the
effective date are recognized over the remaining service period using the
compensation cost estimated for SFAS No. 123, Accounting
for Stock-Based Compensation pro forma disclosures.

We believe
that stock-based compensation aligns the interests of managers and non-employee
directors with the interests of shareholders; therefore, we do not currently
expect to significantly change our various stock-based compensation programs.
See Note 7 to the Consolidated Financial Statements for further information
regarding our stock-based compensation programs.

We use the
Black-Scholes standard option pricing model (Black-Scholes model) to determine
the fair value of stock options and employee stock purchase rights. The
determination of the fair value of the awards on the date of grant using the
Black-Scholes model is affected by our stock price as well as assumptions of
other variables, including projected employee stock option exercise behaviors
(expected option life), risk-free interest rate, expected volatility of our
stock price in future periods and expected dividend yield.

We analyze
historical employee exercise and termination data to estimate the expected life
assumption. We believe that historical data currently represents the best
estimate of the expected life of a new employee option. We also stratify our
employee population based upon distinctive exercise behavior patterns. The
risk-free interest rate we use is based on the U.S. Treasury zero-coupon yield
curve on the grant date for a maturity similar to the expected life of the
options. In December 2008, we began calculating our expected volatility
assumption by equally weighting historical and implied volatility. Previously,
we calculated the expected volatility assumption exclusively on the implied
volatility of market-traded options. We changed the method of determining
expected volatility to take into consideration how future volatility experience
over the expected life of the option may differ from short-term volatility experience
and thus provide a better estimate of expected volatility over the expected
life of employee stock options. The impact of changing the method of
determining expected volatility was not material to fiscal year 2008 stock
compensation expense. Refer to Note 7 of the Consolidated Financial Statements
for further details regarding the change in our expected volatility assumption.
Because we do not anticipate paying any cash dividends in the foreseeable
future, we use an expected dividend yield of zero. The amount of stock-based
compensation expense we recognize during a period is based on the portion of
the awards that are ultimately expected to vest. We estimate pre-vesting option
forfeitures at the time of grant by analyzing historical data and revise those
estimates in subsequent periods if actual forfeitures differ from those
estimates.

If factors
change and we employ different assumptions for estimating stock-based
compensation expense in future periods or if we decide to use a different
valuation model, the expense in future periods may differ significantly from
what we have recorded in the current period and could materially affect our net
earnings and net earnings per share of a future period.

ACQUISITIONS

On July 3,
2008, we completed the acquisition of EP MedSystems for $95.7 million
(consisting of $59.0 million in net cash consideration and direct acquisition
costs and 0.9 million shares of St. Jude Medical common stock). EP MedSystems
had been publicly traded on the NASDAQ Capital Market under the ticker symbol
EPMD. EP MedSystems is based in West Berlin, New Jersey and develops,
manufactures and markets medical devices for the electrophysiology market which
are used for visualization, diagnosis and treatment of heart rhythm disorders.
We acquired EP MedSystems to strengthen our portfolio of products used to treat
heart rhythm disorders. EP MedSystems has become part of our Atrial
Fibrillation division.

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On December
19, 2008, we completed the acquisition of Radi Medical Systems for $248.9 million
in net cash consideration, including direct acquisition costs. Radi Medical
Systems is based in Uppsala, Sweden and develops, manufactures and markets
products that provide precise measurements of intravascular pressure during a
cardiovascular procedure and manual compression systems that arrest bleeding of
the femoral and radial arteries following an intravascular medical device
procedure. We acquired Radi Medical Systems to accelerate our cardiovascular
growth platform in these two segments of the cardiovascular medical device
market in which we previously had not participated. Radi Medical Systems has
become part of our Cardiovascular division.

On December
22, 2008, we completed the acquisition of MediGuide for $285.2 million in net
consideration, which includes future estimated cash consideration payments of
approximately $145 million and direct acquisition costs. MediGuide was a development-stage
company based in Haifa, Israel and has been focused on developing its Medical
Positioning System (gMPSTM) technology for localization and tracking
capability for interventional medical devices. We plan to expend additional
research and development efforts to achieve technological feasibility for this
technology. MediGuide has become part of our Atrial Fibrillation division.

SEGMENT PERFORMANCE

Our four
operating segments are Cardiac Rhythm Management (CRM), Cardiovascular (CV),
Atrial Fibrillation (AF), and Neuromodulation (Neuro). The primary products
produced by each operating segment are: CRM  ICDs and pacemakers; CV 
vascular closure devices, heart valve replacement and repair products and
pressure measurement guidewires; AF  electrophysiology introducers and
catheters, advanced cardiac mapping, navigation and recording systems and
ablation systems; and Neuro  neurostimulation devices.

We aggregate
our four operating segments into two reportable segments based upon their
similar operational and economic characteristics: CRM/Neuro and CV/AF. Net
sales of our reportable segments include end-customer revenue from the sale of
products they each develop and manufacture or distribute. The costs included in
each of the reportable segments operating results include the direct costs of
the products sold to end-customers and operating expenses managed by each of
the reportable segments. Certain operating expenses managed by our selling and
corporate functions, including all stock-based compensation expense, impairment
charges and special charges have not been recorded in the individual reportable
segments. As a result, reportable segment operating profit is not
representative of the operating profit of the products in these reportable
segments.

The following
table presents net sales and operating profit by reportable segment (in
thousands):

|                  |  |           |           |       |   |           |  |       |            |   |   |           | 
|----------------- |  | --------- | --------- | ----- | - | --------- |  | ----- | ---------- | - | - | --------- | 
|                  |  | CRM/Neuro |           | CV/AF |   | Other     |  | Total |           
|Fiscal
 Year 2008 |  |           |           |       |   |           |  |       |            |   |   |           | 
|Net sales         |  | $         | 2,955,603 |       | $ | 1,407,648 |  | $     |           |   | $ | 4,363,251 | 
|Operating profit  |  |           | 1,824,023 |       |   | 736,979   |  |       | (1,905,955 | ) |   | 655,047   | 
|                  |  |           |           |       |   |           |  |       |            |   |   |           | 
|Fiscal
 Year 2007 |  |           |           |       |   |           |  |       |            |   |   |           | 
|Net sales         |  | $         | 2,577,975 |       | $ | 1,201,302 |  | $     |           |   | $ | 3,779,277 | 
|Operating profit  |  |           | 1,576,439 |       |   | 579,325   |  |       | (1,362,261 | ) |   | 793,503   | 
|                  |  |           |           |       |   |           |  |       |            |   |   |           | 
|Fiscal
 Year 2006 |  |           |           |       |   |           |  |       |            |   |   |           | 
|Net sales         |  | $         | 2,235,128 |       | $ | 1,067,319 |  | $     |           |   | $ | 3,302,447 | 
|Operating profit  |  |           | 1,337,479 |       |   | 502,244   |  |       | (1,096,640 | ) |   | 743,083   | 

The following
discussion of the changes in our net sales is provided by class of similar
products within our four operating segments, which is the primary focus of our
sales activities.

Cardiac Rhythm Management

|                   |  |      |           |      |   |           |  |                         |           |                         |  |      |   |  |      |  
|------------------ |  | ---- | --------- | ---- | - | --------- |  | ----------------------- | --------- | ----------------------- |  | ---- | - |  | ---- | -
|(in thousands)     |  | 2008 |           | 2007 |   | 2006      |  | 2008 vs. 2007
 % Change |           | 2007 vs. 2006
 % Change | 
|ICD systems        |  | $    | 1,534,212 |      | $ | 1,304,899 |  | $                       | 1,099,906 |                         |  | 17.6 | % |  | 18.6 | %
|Pacemaker
 systems |  |      | 1,167,251 |      |   | 1,063,182 |  |                         | 955,859   |                         |  | 9.8  | % |  | 11.2 | %
|                   |  | $    | 2,701,463 |      | $ | 2,368,081 |  | $                       | 2,055,765 |                         |  | 14.1 | % |  | 15.2 | %

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Cardiac Rhythm
Management 2008 net sales increased 14% to $2,701.5 million compared to 2007
due to strong volume growth. Foreign currency translation had a $69.0 million
favorable impact on 2008 net sales compared to 2007. Net sales of ICDs
increased approximately 18% to $1,534.2 million driven by strong volume growth.
The volume growth in ICD net sales in 2008 was broad-based across both U.S. and
international markets, which reflects our continued market penetration into new
customer accounts and strong market demand for our cardiac resynchronization
therapy ICDs. In the United States, 2008 ICD net sales of $985.4 million
increased 11% over last year. Internationally, 2008 ICD net sales of $548.8
million increased nearly 32% compared to 2007. Foreign currency translation had
a $28.8 million favorable impact on international ICD net sales compared to
2007. Pacemaker systems 2008 net sales increased nearly 10% to $1,167.3 million
driven by strong volume growth, which was also broad-based across both U.S. and
international markets. In the United States, 2008 pacemaker net sales of $521.9
million increased 3% compared to 2007. Internationally, 2008 pacemaker net
sales of $645.4 million increased 16% over last year. Foreign currency
translation had a $40.2 million favorable impact on international pacemaker net
sales in 2008 compared to 2007.

Cardiac Rhythm
Management 2007 net sales increased by 15% to $2,368.1 million compared to 2006
due to strong volume growth. Foreign currency translation had a $63.0 million
favorable impact on 2007 net sales compared to 2006. Net sales of ICDs
increased nearly 19% to $1,304.9 million driven by strong volume growth. The
volume growth in ICD net sales in 2007 was broad-based across both U.S. and
international markets. In the United States, 2007 ICD net sales of $887.8
million increased 11% over 2006. Internationally, 2007 ICD net sales of $417.1
million increased nearly 38% compared to 2006. Foreign currency translation had
a $30.0 million favorable impact on international ICD net sales compared to
2006. Pacemaker systems 2007 net sales increased 11% to nearly $1,063.2 million
driven by strong volume growth, which was also broad-based across both U.S. and
international markets. In the United States, 2007 pacemaker net sales of $507.9
million increased 9% compared to 2006. Internationally, 2007 pacemaker net
sales of $555.3 million increased 13% over 2006. Foreign currency translation
had a $33.0 million favorable impact on international pacemaker net sales in
2007 compared to 2006.

Cardiovascular

|                               |  |      |         |      |   |         |  |                         |         |                         |  |      |   |  |      |  
|------------------------------ |  | ---- | ------- | ---- | - | ------- |  | ----------------------- | ------- | ----------------------- |  | ---- | - |  | ---- | -
|(in thousands)                 |  | 2008 |         | 2007 |   | 2006    |  | 2008 vs. 2007
 % Change |         | 2007 vs. 2006
 % Change | 
|Vascular
 closure devices      |  | $    | 367,893 |      | $ | 353,987 |  | $                       | 341,259 |                         |  | 3.9  | % |  | 3.7  | %
|Heart valve
 products          |  |      | 321,534 |      |   | 290,196 |  |                         | 270,507 |                         |  | 10.8 | % |  | 7.3  | %
|Other
 cardiovascular products |  |      | 172,709 |      |   | 146,447 |  |                         | 129,846 |                         |  | 17.9 | % |  | 12.8 | %
|                               |  | $    | 862,136 |      | $ | 790,630 |  | $                       | 741,612 |                         |  | 9.0  | % |  | 6.6  | %

Cardiovascular
2008 net sales increased 9% to $862.1 million compared to 2007 driven by increased
sales volumes and favorable foreign currency translation impacts, led by both
heart valve products and other cardiovascular products. Foreign currency
translation had a $34.0 million favorable impact on CV net sales compared to
2007. Net sales of vascular closure devices increased approximately 4% compared
to 2007 due to sales volume growth of Angio-Seal, which continues to be the
market share leader in the vascular closure device market. Heart valve net
sales increased 11% compared to 2007 due to increased sales volumes for both
tissue heart valves and mechanical heart valves. Other cardiovascular products
net sales increased approximately 18% compared to last year due to increased
sales volumes and favorable foreign currency translation.

Cardiovascular
2007 net sales increased nearly 7% to $790.6 million compared to 2006 driven by
strong volume growth for tissue heart valves and favorable product mix for our
other cardiovascular products. Foreign currency translation had a $22.4 million
favorable impact on CV net sales compared to 2006. Net sales of vascular
closure devices increased approximately 4% compared to 2006 due to sales volume
growth of Angio-Seal. Heart valve net sales increased 7% compared to 2006
primarily due to an increase in tissue heart valve sales volumes, driven by
market growth, which was partially offset by declines in sales of mechanical
heart valves. Other cardiovascular products net sales increased nearly 13%
compared to 2006.

Atrial Fibrillation

|                              |  |      |         |      |   |         |  |                         |         |                         |  |      |   |  |      |  
|----------------------------- |  | ---- | ------- | ---- | - | ------- |  | ----------------------- | ------- | ----------------------- |  | ---- | - |  | ---- | -
|(in thousands)                |  | 2008 |         | 2007 |   | 2006    |  | 2008 vs. 2007
 % Change |         | 2007 vs. 2006
 % Change | 
|Atrial fibrillation
 products |  | $    | 545,512 |      | $ | 410,672 |  | $                       | 325,707 |                         |  | 32.8 | % |  | 26.1 | %

Atrial
Fibrillation 2008 net sales increased approximately 33% to $545.5 million
compared to 2007 net sales. The increase in AF net sales was driven by volume
growth from continued market acceptance of device-based procedures to treat the
symptoms of atrial fibrillation. Our access, diagnosis, visualization and
ablation products assist physicians in diagnosing and treating atrial
fibrillation and other irregular heart rhythms. Foreign currency translation
had a favorable impact on AF net sales of $16.0 million compared to 2007.

7

---

Atrial
Fibrillation 2007 net sales increased 26% to $410.7 million compared to 2006
net sales. The increase in AF net sales was driven by strong volume growth.
Foreign currency translation had a favorable impact on AF net sales of
approximately $12.3 million compared to 2006.

Neuromodulation

|                         |  |      |         |      |   |         |  |                         |         |                         |  |      |   |  |      |  
|------------------------ |  | ---- | ------- | ---- | - | ------- |  | ----------------------- | ------- | ----------------------- |  | ---- | - |  | ---- | -
|(in thousands)           |  | 2008 |         | 2007 |   | 2006    |  | 2008 vs. 2007
 % Change |         | 2007 vs. 2006
 % Change | 
|Neurostimulation devices |  | $    | 254,140 |      | $ | 209,894 |  | $                       | 179,363 |                         |  | 21.1 | % |  | 17.0 | %
|                         |  |      |         |      |   |         |  |                         |         |                         |  |      |   |  |      |  

Neuromodulation
2008 net sales increased 21% to $254.1 million compared to 2007 net sales. The
increase in Neuro net sales was driven by continued growth in the
neuromodulation market and strong volume growth driven by new product
introductions. Foreign currency translation did not have a significant impact
on 2008 net sales.

Neuromodulation
2007 net sales increased 17% to $209.9 million over 2006 net sales of $179.4
million due to sales volume increases in a growing market for neurostimulation
devices. Foreign currency translation did not have a significant impact on 2007
net sales.

RESULTS OF OPERATIONS

Net Sales

|               |  |      |           |      |   |           |  |                         |           |                         |  |      |   |  |      |  
|-------------- |  | ---- | --------- | ---- | - | --------- |  | ----------------------- | --------- | ----------------------- |  | ---- | - |  | ---- | -
|(in thousands) |  | 2008 |           | 2007 |   | 2006      |  | 2008 vs. 2007
 % Change |           | 2007 vs. 2006
 % Change | 
|Net sales      |  | $    | 4,363,251 |      | $ | 3,779,277 |  | $                       | 3,302,447 |                         |  | 15.5 | % |  | 14.4 | %

Overall, 2008
net sales increased 15% compared to 2007. Net sales growth was favorably
impacted by strong volume growth, driven by CRM and AF product sales. Additionally,
foreign currency had a $120.4 million, or 3%, favorable impact on net sales,
primarily due to the strengthening of both the Euro and Japanese Yen against
the U.S. Dollar.

Overall, 2007
net sales increased 14% compared to 2006. Net sales growth was favorably
impacted by strong volume growth, driven by CRM and AF product sales.
Additionally, foreign currency translation had a $99.6 million, or 3%,
favorable impact on net sales, primarily due to the strengthening of the Euro
against the U.S. Dollar.

Net sales by
geographic location of the customer were as follows (in thousands):

|               |  |      |           |      |   |           |  |   |           | 
|-------------- |  | ---- | --------- | ---- | - | --------- |  | - | --------- | 
|               |  | 2008 |           | 2007 |   | 2006      | 
|United
 States |  | $    | 2,319,645 |      | $ | 2,107,015 |  | $ | 1,920,623 | 
|International  |  |      |           |      |   |           |  |   |           | 
|Europe         |  |      | 1,152,601 |      |   | 936,526   |  |   | 763,526   | 
|Japan          |  |      | 387,648   |      |   | 321,826   |  |   | 289,716   | 
|Asia Pacific   |  |      | 234,073   |      |   | 192,793   |  |   | 148,953   | 
|Other          |  |      | 269,284   |      |   | 221,117   |  |   | 179,629   | 
|               |  |      | 2,043,606 |      |   | 1,672,262 |  |   | 1,381,824 | 
|               |  | $    | 4,363,251 |      | $ | 3,779,277 |  | $ | 3,302,447 | 

Foreign
currency translation relating to our international operations can have a
significant impact on our operating results from year to year. The two main
currencies influencing our operating results are the Euro and the Japanese Yen.
As discussed above, foreign currency translation had a $120.4 million favorable
impact on 2008 net sales, while the translation impact in 2007 had a $99.6
million favorable impact on net sales. These impacts to net sales are not
indicative of the net earnings impact of foreign currency translation due to
partially offsetting foreign currency translation impacts on cost of sales and
operating expenses.

8

---

|                        |  |      |           |      |   |           |   |   |           |  
|----------------------- |  | ---- | --------- | ---- | - | --------- | - | - | --------- | -
|Gross Profit            |  |      |           |      |   |           |   |   |           |  
|                        |  |      |           |      |   |           |   |   |           |  
|(in thousands)          |  | 2008 |           | 2007 |   | 2006      |  
|Gross profit            |  | $    | 3,192,710 |      | $ | 2,737,683 |   | $ | 2,388,934 |  
|Percentage of net sales |  |      | 73.2      | %    |   | 72.4      | % |   | 72.3      | %

Gross profit
for 2008 totaled $3,192.7 million, or 73.2% of net sales, compared with
$2,737.7 million, or 72.4% of net sales in 2007. Special charges in 2008
negatively impacted our gross profit by approximately 1.5 percentage points
consisting primarily of charges related to the impairment of a technology
license agreement, termination costs related to certain raw material purchase
contracts, inventory obsolescence charges associated with a terminated
distribution agreement and charges related to providing our new remote patient
monitoring system to existing St. Jude Medical CRM patients at no charge.
Special charges in 2007 negatively impacted our gross profit margin by
approximately 1.0 percentage point and were associated with our 2007
restructuring activities. The improvement in our 2008 gross profit percentage
as a percent of net sales is due to favorable foreign currency translation and
favorable product mix from higher margin products. Refer to Note 8 of the
Consolidated Financial Statements for further details of the special charges
impacting our 2008 and 2007 gross profit.

Gross profit
for 2007 totaled $2,737.7 million, or 72.4% of net sales, compared with
$2,388.9 million, or 72.3% of net sales, for 2006. As discussed above, special
charges negatively impacted our 2007 gross profit percentage by approximately
1.0 percentage point. The improvement in our 2007 gross profit percentage as a
percent of net sales compared to 2006 reflects favorable product mix and
increased manufacturing efficiencies, partially offset by increased diagnostic
equipment depreciation expense resulting from the rollout of our Merlin
programmer platform for our ICDs and pacemakers.

Selling, General and
Administrative (SG&A) Expense

|                                             |  |      |           |      |   |           |   |   |           |  
|-------------------------------------------- |  | ---- | --------- | ---- | - | --------- | - | - | --------- | -
|(in thousands)                               |  | 2008 |           | 2007 |   | 2006      |  
|Selling, general and
 administrative expense |  | $    | 1,636,526 |      | $ | 1,382,466 |   | $ | 1,195,030 |  
|Percentage of net sales                      |  |      | 37.5      | %    |   | 36.6      | % |   | 36.2      | %

SG&A
expense for 2008 totaled $1,636.5 million, or 37.5% of net sales, compared with
$1,382.5 million, or 36.6% of net sales in 2007. The increase in SG&A
expense as a percent of net sales is primarily due to $35.0 million of
contributions to non-profit organizations, including the St. Jude Medical
Foundation.

SG&A
expense for 2007 totaled $1,382.5 million, or 36.6% of net sales, compared with
$1,195.0 million, or 36.2% of net sales in 2006. The increase in SG&A
expense as a percent of net sales reflects the full-year impact of investments
made in expanding our U.S. selling organization infrastructure and market
development programs, which began in the second quarter of 2006.

Research and
Development (R&D) Expense

|                                  |  |      |         |      |   |         |   |   |         |  
|--------------------------------- |  | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|(in thousands)                    |  | 2008 |         | 2007 |   | 2006    |  
|Research and development
 expense |  | $    | 531,799 |      | $ | 476,332 |   | $ | 431,102 |  
|Percentage of net sales           |  |      | 12.2    | %    |   | 12.6    | % |   | 13.1    | %

R&D
expense in 2008 totaled $531.8 million, or 12.2% of net sales, compared with
$476.3 million, or 12.6% of net sales in 2007. While 2008 R&D expense as a
percent of net sales decreased compared to 2007, total R&D expense
increased over 11% compared to the prior year, reflecting our continuing
commitment to fund future long-term growth opportunities. We will continue to
balance delivering short-term results with the right investments in long-term
growth drivers, and expect that R&D expense as a percentage of net sales
will range from 12% to 13% in 2009.

R&D
expense in 2007 totaled $476.3 million, or 12.6% of net sales, compared with
$431.1 million, or 13.1% of net sales in 2006. While 2007 R&D expense as a
percent of net sales decreased compared to 2006, total R&D expense
increased over 10% compared to 2006, reflecting our continuing commitment to
fund future long-term growth opportunities.

9

---

Purchased In-Process
Research and Development (IPR&D) Charges

|                                                       |  |      |         |      |   |      |  |   |   | 
|------------------------------------------------------ |  | ---- | ------- | ---- | - | ---- |  | - | - | 
|(in thousands)                                         |  | 2008 |         | 2007 |   | 2006 | 
|Purchased in-process
 research and development charges |  | $    | 319,354 |      | $ |     |  | $ |  | 

IPR&D is
defined as the value assigned to those projects for which the related products
have not yet reached technological feasibility and have no future alternative
use. The primary basis for determining the technological feasibility of these
projects at the time of acquisition is obtaining regulatory approval to market
the underlying products in an applicable geographic region. We expense the
value attributed to these projects in conjunction with the related business
acquisition or asset purchase.

MediGuide, Inc.: In
December 2008, we acquired privately-held MediGuide a development-stage company
that has been focused on developing its Medical Positioning System (gMPSTM)
technology for localization and tracking capability for interventional medical
devices. The acquisition will provide the Company with exclusive rights to use
and develop MediGuides gMPSTM technology. As MediGuide was a
development-stage company, the excess of the purchase price over the fair value
of the net assets acquired was allocated on a pro-rata basis to the net assets
acquired. Accordingly, the excess purchase price was allocated to IPR&D,
the principal asset acquired. At the date of acquisition, $306.2 million of the
purchase price was expensed as IPR&D since technological feasibility of the
underlying projects had not yet been reached and such technology had no future
alternative use. We expect to incur up to approximately $30 million to bring
the technology to commercial viability on a worldwide basis within two to three
years.

Other: In December
2008, we also made an additional minority investment in a developmental-stage
company and, in accordance with step-acquisition accounting treatment under the
equity method of accounting, allocated the excess purchase price over the fair
value of the investees net assets to IPR&D the principal asset acquired.
At the additional investment date, $11.6 million of IPR&D was expensed since
technological feasibility of the underlying projects had not yet been reached
and such technology had no future alternative use. Additionally, we recognized
$1.6 million of IPR&D charges related to the purchase of intellectual
property in our CRM and CV segments since the related technological feasibility
had not yet been reached and such technology had no future alternative use.

Special Charges

|                              |  |      |         |      |   |         |  |   |        | 
|----------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | ------ | 
|(in thousands)                |  | 2008 |         | 2007 |   | 2006    | 
|Cost of sales special charges |  | $    | 64,603  |      | $ | 38,292  |  | $ | 15,108 | 
|Special charges               |  |      | 49,984  |      |   | 85,382  |  |   | 19,719 | 
|                              |  | $    | 114,587 |      | $ | 123,674 |  | $ | 34,827 | 

Fiscal Year 2008

Impairment
Charges: In September 2004, we completed making payments under a technology
license agreement and were granted a fully paid-up license that provided access
to patents covering technology used in our CRM devices.  In accordance with
SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, whenever events or changes in
circumstances indicate that a long-lived assets carrying amount may not be
recoverable, we test the asset for impairment. In 2008, we determined that a
large portion of the technology under the license agreement was no longer fully
utilized in our products and that certain of the patents under the license were
no longer valid based upon recent patent law developments. Based upon these
developments and changes in circumstances, we recognized an impairment charge
of $43.5 million to cost of sales to write the technology license agreement
down to its fair value.

In 2008, we
experienced lower than forecasted sales of certain products in the
Cardiovascular division associated with our 2005 acquisition of Velocimed. Based upon the recent unfavorable sales performance
as well as negative clinical trial results, we reduced the future revenue and
cash flow projections relating to these products. Accordingly, we tested the
related purchased technology intangible assets for impairment in the fourth
quarter of 2008 and recognized a $37.0 million impairment charge to write down
the related intangible assets to their remaining fair value. We also recognized
other impairment charges of $5.8 million in 2008 primarily related to assets in
the Cardiovascular division that will no longer be utilized.

10

---

In December
2008, we discontinued the use of the Advanced Neuromodulation Systems, Inc.
(ANS) tradename. We had acquired ANS in November 2005 and used the related
tradename through its discontinuance in December 2008. Accordingly, we wrote
off the ANS tradename intangible assets and recognized a $1.7 million
impairment charge.

Inventory-related Charges:
In 2008 we entered into purchase contracts in the normal course of business for
certain raw material commodities that are used in the manufacture of our
products. Favorable decreases in commodity prices in the fourth quarter of 2008
resulted in our election to terminate and exit the contracts, paying $10.7
million in termination costs, which was recorded as a special charge in cost of
sales.

We also
recognized inventory obsolescence charges related to inventory that is not
expected to be sold due to the termination of a distribution agreement in
Japan. When we elected to terminate the distribution agreement in December
2007, we recorded a $4.0 million special charge in 2007 related to inventory
that we estimated would not be sold. We increased this estimate in 2008 and
recorded an additional $3.0 million special charge in cost of sales.

Other Charges: In
2008, we launched our MerlinTM@home wireless patient monitoring
system and committed to provide this system without charge to our existing St.
Jude Medical CRM patients. In connection with the completion of this roll-out
in the fourth quarter of 2008, we recorded a $7.4 million special charge in
cost of sales to accrue for the related costs. We also recognized $5.5 million
of other unrelated costs.

Fiscal Year 2007

Patent Litigation:
In June 2007, we settled a patent litigation matter with Guidant Corporation (a
subsidiary of Boston Scientific Corporation) and Mirowski Family Ventures,
L.L.C. and recorded a special charge of $35.0 million.

Restructuring Activities:
In December 2007, management continued its efforts to streamline operations and
implemented additional restructuring actions primarily focused at our
international locations. As a result, we recorded special charges totaling
$29.1 million in 2007 consisting of employee termination costs ($17.9 million)
and other costs ($11.2 million). Of the total $29.1 million charge, $5.9
million was recorded in cost of sales. Employee termination costs related to
severance and benefit costs for approximately 200 individuals identified for
employment termination. These costs were recorded after management determined
that such severance and benefits were probable and estimable, in accordance
with SFAS No. 112, Employers Accounting for
Postemployment Benefits. Other costs primarily represented contract
termination costs. The majority of actions and related payments for these
restructuring activities were completed by January 3, 2009.

Impairment Charges:
We recognized impairment charges of $23.7 million related to acquired
intangible assets associated with a distribution agreement with a supplier of
medical products to our Japanese distribution subsidiary. In December 2007, we
provided notice to the supplier that we were terminating the distribution
agreement. As a result, we recognized an impairment charge to state the related
intangible assets at their remaining fair value. We had acquired the intangible
assets as part of our acquisition in Japan of Getz Bros. Co., Ltd. in April
2003. The distribution agreement was terminated in June 2008.

Additionally,
in connection with completing our United States roll-out of the Merlin
programmer platform for our ICDs and pacemakers, we recorded an $11.8 million
special charge in cost of sales to write off the remaining carrying value of
older model programmer diagnostic equipment. We also recognized $6.0 million of
asset write-offs relating to the carrying value of assets that will no longer
be utilized, of which $2.5 million was recorded in cost of sales.

Discontinued Inventory:
In 2007, we recorded a $14.1 million special charge in cost of sales relating
to inventory that would be scrapped in connection with managements decision to
terminate certain product lines in our CV and AF divisions that were redundant
with other existing products lines. By eliminating product lines with redundant
characteristics, we do not anticipate any material short-term or long-term
impact on future revenue or gross profit percentages.

Additionally,
in connection with our decision to terminate the distribution agreement in Japan
(see Impairment Charges discussed previously), we recorded a $4.0 million
special charge in cost of sales to write off the related inventory that will
not be sold.

Fiscal Year 2006

Restructuring Activities:
During the third quarter of 2006, management performed a review of the
organizational structure of our former Cardiac Surgery and Cardiology divisions
and our international selling organization. In August 2006, management approved
restructuring plans to streamline operations within our former Cardiac Surgery
and Cardiology divisions by combining them into one new Cardiovascular division
and also implemented changes in our international selling organization to
enhance the efficiency and effectiveness of sales and customer service
operations in certain international geographies.

11

---

As a result of
these restructuring plans, we recorded special charges totaling $34.8 million
in 2006 consisting of employee termination costs ($14.7 million), inventory
write-downs ($8.7 million), asset write-downs ($7.3 million) and other exit
costs ($4.1 million). Of the total $34.8 million special charge, $15.1 million
was recorded in cost of sales. In connection with these restructuring plans,
approximately 140 individuals were identified for employment termination. In addition,
management discontinued certain product lines and disposed of related assets.
We also discontinued the use of the Getz trademarks in Japan, and wrote off the
related $4.2 million acquired intangible assets. All actions related to these
restructuring activities were completed in 2006 and 2007.

Other Income
(Expense)

|                            |  |      |         |      |   |         |   |   |         |  
|--------------------------- |  | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|(in thousands)              |  | 2008 |         | 2007 |   | 2006    |  
|Interest income             |  | $    | 16,315  |      | $ | 4,374   |   | $ | 9,266   |  
|Interest expense            |  |      | (22,581 | )    |   | (38,229 | ) |   | (33,883 | )
|Other                       |  |      | (18,040 | )    |   | (15,343 | ) |   | 2,175   |  
|Other income (expense), net |  | $    | (24,306 | )    | $ | (49,198 | ) | $ | (22,442 | )

The favorable
change in other income (expense) during 2008 compared to 2007 was the result of
lower interest expense driven by lower average outstanding debt balances as
well as the full year 2008 benefit of lower interest rates on our outstanding
debt balances. The increase in interest income during 2008 was due to higher
average invested cash balances compared to 2007. During 2008, we recognized
$12.9 million of pre-tax impairment charges as other expense related to a
decline in the fair values of certain investments that were deemed to be
other-than-temporary. In 2007, we recognized a $25.1 million pre-tax impairment
charge as other expense related to our investment in ProRhythm, Inc.
(ProRhythm). This 2007 impairment charge was partially offset by a pre-tax gain
of $7.9 million recognized as other income related to the sale of our Conor
Medical, Inc. common stock investment.

The unfavorable
change in other income (expense) during 2007 compared to 2006 was primarily the
result of the $25.1 million ProRhythm impairment charge, which was partially
offset by the realized pre-tax gain of $7.9 million related to the sale of our
Conor Medical, Inc. common stock investment. Interest expense increased during
2007 compared to 2006 driven by higher average debt balances in 2007. During
the first quarter of 2007, we borrowed $350.0 million under an interim
liquidity facility and issued additional commercial paper to finance the
repurchase of approximately $700 million of our common stock. These borrowings
were repaid in April 2007 with proceeds from the issuance of $1.2 billion
aggregate principal amount of 1.22% Convertible Senior Debentures (1.22%
Convertible Debentures). Interest income decreased in 2007 compared to 2006 due
to lower average invested cash balances in 2007.

Income Taxes

|                                 |  |      |   |      |   |      |  
|-------------------------------- |  | ---- | - | ---- | - | ---- | -
|                                 |  |      |   |      |   |      |  
|(as a percent of
pre-tax income) |  | 2008 |   | 2007 |   | 2006 |  
|Effective tax rate               |  | 39.1 | % | 24.9 | % | 23.9 | %

Our effective
tax rate was 39.1% in 2008 compared to 24.9% in 2007. Non-deductible IPR&D
charges and 2008 special charges and investment impairment charges unfavorably
impacted the 2008 effective rate by 11.6 percentage points. In 2007, special
charges as well as the ProRhythm investment impairment charge favorably
impacted the 2007 effective tax rate by 2.1 percentage points. Refer to Notes 8
and 9 of the Consolidated Financial Statements for further details regarding these
2008 and 2007 charges.

|                                         |  |      |         |      |   |         |  |                         |         |                         |  |       |   |  |     |  
|---------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | ----------------------- | ------- | ----------------------- |  | ----- | - |  | --- | -
|Net Earnings                             |  |      |         |      |   |         |  |                         |         |                         |  |       |   |  |     |  
|                                         |  |      |         |      |   |         |  |                         |         |                         |  |       |   |  |     |  
|(in thousands,
except per share amounts) |  | 2008 |         | 2007 |   | 2006    |  | 2008 vs. 2007
 % Change |         | 2007 vs. 2006
 % Change | 
|Net earnings                             |  | $    | 384,327 |      | $ | 559,038 |  | $                       | 548,251 |                         |  | -31.3 | % |  | 2.0 | %
|Diluted net earnings per share           |  | $    | 1.10    |      | $ | 1.59    |  | $                       | 1.47    |                         |  | -30.8 | % |  | 8.2 | %

12

---

Net earnings
were $384.3 million in 2008, a 31.3% decrease over 2007 net earnings of $559.0
million. Diluted net earnings per share were $1.10 in 2008, a 30.8% decrease
over 2007 diluted net earnings per share of $1.59. Net earnings for 2008
included IPR&D charges of $319.4 million, after-tax special charges of
$72.7 million, after-tax contribution expenses of $22.2 million and after-tax
investment impairment charges of $8.0 million for a combined impact of $422.3
million, or $1.21 per diluted share. Net earnings for 2007 included after-tax
special charges of $77.2 million and an after-tax investment impairment charge
of $15.7 million, for a combined impact of $92.9 million, or $0.26 per diluted
share. Refer to Notes 8 and 9 of the Consolidated Financial Statements for
further details regarding these 2008 and 2007 charges. Compared to 2007, our
net earnings and diluted net earnings per share benefited from increased net
sales growth in all of our operating segments with net sales in our CRM and AF
operating segments growing 14% and 33%, respectively.

Net earnings
were $559.0 million in 2007, a 2.0% increase over 2006 net earnings of $548.3
million. Diluted net earnings per share were $1.59 in 2007, an 8.2% increase
over 2006 diluted net earnings per share of $1.47. Net earnings for 2007
included after-tax special charges of $77.2 million and the after-tax investment
impairment charge of $15.7 million, for a combined impact of $92.9 million, or
$0.26 per diluted share. Net earnings for 2006 included after-tax special
charges of $22.0 million, or $0.06 per diluted share, related to restructuring
activities. Compared to 2006, the increase in net earnings and diluted net
earnings per share were driven primarily by net sales growth in our CRM and AF
operating segments. Additionally, the relatively larger increase in our diluted
net earnings per share compared to our net earnings growth was primarily a
result of our common stock repurchases, resulting in lower shares outstanding.
From April 2006 through May 2007, we returned $1.7 billion to shareholders in
the form of share repurchases.

LIQUIDITY

We believe
that our existing cash balances, available borrowing capacity under our
commercial paper program and long-term committed credit facility and future
cash generated from operations will be sufficient to meet our working capital,
capital investment and debt service requirements over the next twelve months
and in the foreseeable future thereafter. In the fourth quarter of 2008, we
borrowed $500.0 million from our $1.0 billion long-term committed credit
facility. We also entered into a 3-year, unsecured term loan totaling $360.0
million and another 3-year, unsecured term loan totaling 8.0 billion Japanese
Yen (the equivalent of $88.2 million at January 3, 2009). The proceeds were
used to retire our 1.22% Convertible Debentures and fund two acquisitions: Radi
Medical Systems and MediGuide. Although we believe that our earnings, cash
flows and balance sheet position will permit us to obtain additional debt
financing or equity capital, should additional suitable investment
opportunities arise, recent disruptions in the global financial markets may
adversely impact the availability and cost of capital.

At January 3,
2009, our short-term credit ratings were A2 from Standard & Poors and P2
from Moodys. Our Standard & Poors long-term debt rating at January 3,
2009 was A-. The ratings are not a recommendation to buy, sell or hold our
securities, may be changed, superseded or withdrawn at any time and should be
evaluated independently of any other rating.

At January 3,
2009, a large portion of our cash and cash equivalents was held by our non-U.S.
subsidiaries. These funds are only available for use by our U.S. operations if
they are repatriated into the United States. The funds repatriated would be
subject to additional U.S. taxes upon repatriation; however, it is not
practical to estimate the amount of additional U.S. tax liabilities we would
incur.

We use two
primary measures that focus on accounts receivable and inventory  days sales
outstanding (DSO) and days inventory on hand (DIOH). We use DSO as a measure
that places emphasis on how quickly we collect our accounts receivable balances
from customers. We use DIOH, which can also be expressed as a measure of the
estimated number of days of cost of sales on hand, and as a measure that places
emphasis on how efficiently we are managing our inventory levels. These
measures may not be computed the same as similarly titled measures used by
other companies.

Our DSO
(ending net accounts receivable divided by average daily sales for the quarter)
decreased from 92 days at December 29, 2007 to 88 days at January 3, 2009
primarily as a result of our increased receivable collection efforts during the
fourth quarter of 2008 over the prior year period. Our DIOH (ending net
inventory divided by average daily cost of sales for the most recent six months)
increased from 152 days at December 29, 2007 to 160 days at January 3, 2009.
Special charges recorded in 2008 and 2007 cost of sales reduced our January 3,
2009 DIOH and December 29, 2007 DIOH by 19 days and 11 days, respectively.
Foreign currency translation impacts and the December acquisition of Radi
Medical Systems increased our January 3, 2009 DIOH by 10 days. Taking these
DIOH impacts into consideration, our January 3, 2009 DIOH increased 6 days over
December 29, 2007. This increase is the result of our inventory levels
increasing to support our increased sales growth and recent product launches.

13

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A summary of
our cash flows from operating, investing and financing activities is provided
in the following table (in thousands):

|                                                                       |  |      |          |      |   |          |   |   |          |  
|---------------------------------------------------------------------- |  | ---- | -------- | ---- | - | -------- | - | - | -------- | -
|                                                                       |  | 2008 |          | 2007 |   | 2006     |  
|Net cash provided by (used
 in):                                       |  |      |          |      |   |          |   |   |          |  
|Operating activities                                                   |  | $    | 945,592  |      | $ | 865,569  |   | $ | 648,811  |  
|Investing activities                                                   |  |      | (871,073 | )    |   | (306,315 | ) |   | (325,639 | )
|Financing activities                                                   |  |      | (322,493 | )    |   | (259,484 | ) |   | (786,241 | )
|Effect of currency exchange
 rate changes on cash and cash equivalents |  |      | (4,677   | )    |   | 9,436    |   |   | 8,389    |  
|Net increase (decrease) in
 cash and cash equivalents                  |  | $    | (252,651 | )    | $ | 309,206  |   | $ | (454,680 | )

Cash Flows from
Operating Activities


Cash provided
by operating activities was $945.6 million for 2008 compared to $865.6 million
for 2007 and $648.8 million for 2006. Operating cash flows can fluctuate
significantly from period to period due to payment timing differences of working
capital accounts such as accounts receivable and accounts payable. Operating
cash flows improved during 2008 compared to 2007 and 2006 due to better
management of working capital.


Cash Flows from
Investing Activities


Cash used in
investing activities was $871.1 million in 2008 compared to $306.3 million in
2007 and $325.6 million in 2006. Our purchases of property, plant and
equipment, which totaled $343.9 million, $287.2 million, and $267.9 million in
2008, 2007 and 2006, respectively, reflect our continued investment in our
product growth platforms currently in place. During 2008, we spent $490.0
million of net cash consideration on acquisitions, with Radi Medical Systems,
MediGuide and EP MedSystems being the most significant. Correspondingly, we spent
only $12.2 million and $38.8 million in 2007 and 2006, respectively, to acquire
various businesses involved in the distribution of our products. During 2007,
we also received proceeds of $12.9 million due to liquidating our minority
interest in Conor Medical, Inc., as a result of its acquisition by Johnson and
Johnson, Inc.


Cash Flows from
Financing Activities


Cash used in
financing activities was $322.5 million in 2008 compared to $259.5 million in
2007 and $786.2 million in 2006. Our financing cash flows can fluctuate
significantly depending upon our liquidity needs and the amount of stock option
exercises and the extent of our common stock repurchases. During 2008, we
borrowed $500.0 million from our $1.0 billion long-term committed credit
facility to fund the repayment of our $1.2 billion 1.22% Convertible
Debentures. Additionally, we entered into a 3-year, unsecured term loan
totaling $360.0 million and a 3-year, unsecured term loan totaling 8.0 billion
Japanese Yen (the equivalent of $88.2 million at January 3, 2009). During 2008,
we also used our outstanding cash balances to repurchase $300.0 million of our
common stock. Comparatively, during 2007, we repurchased approximately $1.0
billion of our common stock, which was financed through a combination of a
portion of the proceeds from the issuance of $1.2 billion of 1.22% Convertible
Debentures, proceeds from the issuance of commercial paper and borrowings under
an interim liquidity facility. Approximately $700 million of proceeds from the
issuance of our 1.22% Convertible Debentures were used to repay commercial
paper borrowings and borrowings under an interim liquidity facility. We also
used $101.0 million of proceeds from the issuance of our 1.22% Convertible
Debentures to purchase a call option to receive shares of our common stock.
During 2006, we repurchased $700.0 million of our common stock and funded the
payment of $654.5 million of our 2.80% Convertible Senior Debentures due 2035
(2.80% Convertible Debentures), both of which were primarily financed through
proceeds from the issuance of commercial paper. Proceeds from stock options
exercised and stock issued, inclusive of the related excess tax benefits,
provided $215.0 million, $284.7 million and $105.9 million of cash inflows
during 2008, 2007 and 2006, respectively. Proceeds from stock options exercised
and stock issued can fluctuate significantly based upon, among other things,
the amount and exercise price of stock options exercised and the fair market
value of our common stock when stock options are exercised.


DEBT AND CREDIT FACILITIES

Total debt
decreased to $1,201.6 million at January 3, 2009 from $1,388.0 million at
December 29, 2007 primarily due to the maturity of the Companys $1.2 billion
1.22% Convertible Debentures. The retirement of our 1.22% Convertible
Debentures on December 15, 2008 was funded by new borrowings and cash from
operations.

14

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We have a
long-term $1.0 billion committed credit facility used to support our commercial
paper program and for general corporate purposes. Borrowings under this
facility bear interest at the United States Prime Rate (Prime Rate) or the United States Dollar London
InterBank Offered Rate (LIBOR) plus 0.235%, at our election. In the event over
half of the facility is drawn upon, an additional five basis points is added to
the elected prime or LIBOR rate. Additionally, the interest rate is subject to
adjustment in the event of a change in our credit ratings. In October 2008, we
borrowed $500.0 million from our $1.0 billion long-term committed credit
facility to fund the repayment of our 1.22% Convertible Debentures. There were
no outstanding borrowings under this credit facility during fiscal years 2007
or 2006.

Our commercial
paper program provides for the issuance of short-term, unsecured commercial
paper with maturities up to 270 days. We had outstanding commercial paper
borrowings of $19.4 million at January 3, 2009 and no outstanding commercial
paper borrowings at December 29, 2007. During 2008 and 2007 we issued
commercial paper at weighted average effective interest rates of 1.0% and 5.4%,
respectively. Any future commercial paper borrowings would bear interest at the
applicable then-current market rates.

In December
2008, we entered into a 3-year, unsecured term loan totaling $360.0 million,
which can be used for general corporate purposes or to refinance certain other
outstanding borrowings of the Company. These borrowings bear interest at LIBOR
plus 2.0%, although we may also elect the Prime Rate plus 1.0%, which is
subject to adjustment in the event of a change in our credit ratings. We are
required to make quarterly principal payments in the amount of 5% of the
original outstanding borrowings. We had the option to make additional
borrowings under this term loan, and in January 2009, we elected to borrow an additional
$180.0 million resulting in total borrowings of $540.0 million under this
3-year term loan.

In December
2008, we entered into a 3-year, Yen-denominated unsecured term loan in Japan
(Yen Term Loan) totaling 8.0 billion Japanese Yen (the equivalent of $88.2
million at January 3, 2009). The borrowings bear interest at the Yen LIBOR plus
2.0%. Interest payments are required on a semi-annual basis and the entire
principal balance is due in December 2011. The principal amount recorded on the
balance sheet fluctuates based on the effects of foreign currency translation.

During the
first quarter of 2007, we had borrowed $350.0 million under an interim
liquidity facility to finance a portion of the common stock repurchases made
during the first half of 2007. Borrowings under this liquidity facility bore
interest at LIBOR plus 0.35%. On April 25, 2007, this facility expired and we
repaid the related outstanding borrowings using a portion of the proceeds from
the issuance of the 1.22% Convertible Debentures.

In May 2003,
we issued 7-year, 1.02% Yen-denominated notes in Japan (Yen Notes) totaling
20.9 billion Yen (the equivalent of $230.1 million at January 3, 2009 and
$182.5 million at December 29, 2007). Interest payments are required on a
semi-annual basis and the entire principal balance is due in May 2010. The
principal amount recorded on our balance sheet fluctuates based on the effects
of foreign currency translation.

In April 2007,
we issued $1.2 billion aggregate principal amount of 1.22% Convertible Debentures
that matured on December 15, 2008. Interest payments related to the 1.22%
Convertible Debentures are required on a semi-annual basis. Under certain
circumstances, holders had the right to convert their 1.22% Convertible
Debentures at an initial conversion rate of 19.2101 shares of our common stock
per $1,000 principal amount of the 1.22% Convertible Debentures (equivalent to
an initial conversion price of approximately $52.06 per share). Upon
conversion, we were required to satisfy up to 100% of the principal amount of
the 1.22% Convertible Debentures solely in cash, with any amounts above the
principal amount to be satisfied in shares of our common stock, cash or a
combination of common stock and cash, at our election. On December 15, 2008, we
retired the 1.22% Convertible Debentures for cash, which was primarily funded
by borrowings and cash from operations.

In April 2007,
we sold warrants for 23.1 million shares of our common stock in a private
transaction and received proceeds of $35.0 million. Over a two-month period
beginning in April 2009, we may be required to issue shares of our common stock
to the counterparty if the average price of our common stock during a defined
period exceeds the warrant exercise price of approximately $60.73 per share.

In December
2005, we issued $660.0 million aggregate principal amount of 2.80% Convertible
Debentures that mature in December 2035. Interest on the 2.80% Convertible
Debentures is payable on a semi-annual basis. Contingent interest of 0.25% is
payable in certain circumstances. Holders of the 2.80% Convertible Debentures
can require us to repurchase for cash some or all of the 2.80% Convertible
Debentures on December 15 in the years 2006, 2008, 2010, 2015, 2020, 2025 and
2030 or upon the occurrence of certain events. In December 2006 and December
2008, holders required us to repurchase $654.5 million and $5.1 million,
respectively, of the 2.80% Convertible Debentures for cash. As of January 3,
2009, $0.4 million aggregate principal amount of the 2.80% Convertible
Debentures remained outstanding. We have the right to redeem some or all of the
2.80% Convertible Debentures for cash at any time. The 2.80% Convertible
Debentures are convertible into less than six thousand shares of our common
stock if the price of our common stock exceeds $64.51 per share. The total
number of contingently issuable shares that could be issued to satisfy
conversion of the remaining $0.4 million aggregate principal amount of the
2.80% Convertible Debentures is not material.

15

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Our $1.0
billion committed credit facility, $360.0 million term loan and Yen Notes
contain certain operating and financial covenants. Specifically, the credit
facility and $360.0 million term loan require that we have a leverage ratio
(defined as the ratio of total debt to EBITDA (net earnings before interest,
income taxes, depreciation and amortization)) not exceeding 3.0 to 1.0. The Yen
Notes require that we have a ratio of total debt to total capitalization not
exceeding 55% and a ratio of consolidated EBIT (net earnings before interest
and income taxes) to consolidated interest expense of at least 3.0 to 1.0.
Under the credit facility, $360.0 million term loan and Yen Notes we also have
certain limitations on how we conduct our business, including limitations on
additional liens or indebtedness and limitations on certain acquisitions,
mergers, investments and dispositions of assets. We were in compliance with all
of our debt covenants during fiscal years 2008, 2007 and 2006.

SHARE REPURCHASES

On February
22, 2008, our Board of Directors authorized a share repurchase program of up to
$250.0 million of our outstanding common stock. On April 8, 2008, our Board of
Directors authorized an additional $50.0 million of share repurchases as part
of this share repurchase program. We ultimately completed the repurchases under
the program on May 1, 2008. In total, we repurchased 6.7 million shares for
$300.0 million at an average repurchase price of $44.51 per share.

On January 25,
2007, our Board of Directors authorized a share repurchase program of up to
$1.0 billion of our outstanding common stock. In the first quarter of 2007, we
repurchased $700.0 million of our outstanding common stock. We completed the
repurchases under the program on May 8, 2007. In total, we repurchased 23.6
million shares for $1.0 billion at an average repurchase price of $42.34 per
share.

DIVIDENDS

We did not
declare or pay any cash dividends during 2008, 2007 or 2006. We currently
intend to retain our earnings for use in the operation and expansion of our
business and therefore do not anticipate paying any cash dividends in the
foreseeable future.

OFF-BALANCE SHEET ARRANGEMENTS AND
CONTRACTUAL OBLIGATIONS

We believe
that our off-balance sheet arrangements do not have a material current or
anticipated future effect on our consolidated earnings, financial position or
cash flows. Our off-balance sheet arrangements principally consist of operating
leases for various facilities and equipment, purchase commitments and
contingent acquisition commitments.

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. In addition, under our bylaws and indemnification
agreements we have entered into with our executive officers and directors, we
may be required to indemnify our executive officers and directors for losses
arising from their conduct in an official capacity on behalf of St. Jude
Medical. We may also be required to indemnify officers and directors of certain
companies that we have acquired for losses arising from their conduct on behalf
of their companies prior to the closing of our acquisition. Our maximum
exposure under these indemnification obligations cannot be estimated, and we
have not accrued any liabilities within our consolidated financial statements
or included any indemnification provisions in our commitments table.
Historically, we have not experienced significant losses on these types of
indemnifications.

In addition to the amounts
shown in the following table, our noncurrent liability for unrecognized tax
benefits was $82.7 million as of January 3, 2009, and we are uncertain as to if
or when such amounts may be settled. Related to these unrecognized tax
benefits, our liability for potential penalties and interest was $21.7 million
as of January 3, 2009.

16

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A summary of
contractual obligations and other minimum commercial commitments as of January
3, 2009 is as follows (in thousands):

|                                                                    |  |                        |           |                   |   |            |  |            |           |                    |   |         |  |   |        | 
|------------------------------------------------------------------- |  | ---------------------- | --------- | ----------------- | - | ---------- |  | ---------- | --------- | ------------------ | - | ------- |  | - | ------ | 
|                                                                    |  | Payments Due by Period |          
|                                                                    |  | Total                  |           | Less than
 1 Year |   | 1-3
 Years |  | 3-5
 Years |           | More than
 5 Years |  
|Contractual obligations related to off-balance
 sheet arrangements: |  |                        |           |                   |   |            |  |            |           |                    |   |         |  |   |        | 
|Operating leases                                                    |  | $                      | 95,597    |                   | $ | 26,426     |  | $          | 35,691    |                    | $ | 22,208  |  | $ | 11,272 | 
|Purchase commitments (a)                                            |  |                        | 352,183   |                   |   | 321,151    |  |            | 31,032    |                    |   |        |  |   |       | 
|Contingent consideration payments (b)                               |  |                        | 311,695   |                   |   | 152,926    |  |            | 51,131    |                    |   | 87,555  |  |   | 20,083 | 
|Total                                                               |  | $                      | 759,475   |                   | $ | 500,503    |  | $          | 117,854   |                    | $ | 109,763 |  | $ | 31,355 | 
|                                                                    |  |                        |           |                   |   |            |  |            |           |                    |   |         |  |   |        | 
|Contractual obligations reflected in the balance
 sheet:            |  |                        |           |                   |   |            |  |            |           |                    |   |         |  |   |        | 
|Long-term debt (c)                                                  |  |                        | 1,175,046 |                   |   | 117,333    |  |            | 1,057,713 |                    |   |        |  |   |       | 
|Total                                                               |  | $                      | 1,934,521 |                   | $ | 617,836    |  | $          | 1,175,567 |                    | $ | 109,763 |  | $ | 31,355 | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | These
 amounts include commitments for inventory purchases and capital expenditures
 that do not exceed our projected requirements and are in the normal course of
 business. The purchase commitment amounts do not represent the entire
 anticipated purchases and capital expenditures in the future, but only those
 for which we are contractually obligated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | (b) | These
 amounts include contingent commitments to acquire various businesses involved
 in the distribution of our products and other contingent acquisition
 consideration payments. In connection with certain acquisitions, we may agree
 to provide additional consideration payments upon the achievement of certain
 product development milestones, which may include but are not limited to:
 successful levels of achievement in clinical trials and certain product
 regulatory approvals. We may also provide for additional consideration
 payments to be made upon the achievement of certain levels of future product
 sales. While it is not certain if and/or when these payments will be made, we
 have included the payments in the table based on our best estimates of the
 dates when we expect the milestones and/or contingencies will be met.
| | (c) | These
 amounts include scheduled interest and principal payments on our long-term
 debt. See Note 4 to the Consolidated Financial Statements for additional
 information on our long-term debt obligations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

MARKET RISK

We are exposed
to foreign currency exchange rate fluctuations due to transactions denominated
primarily in Euros, Japanese Yen, Canadian Dollars, Australian Dollars,
Brazilian Reals, British Pounds, and Swedish Kronor. When the U.S. Dollar
weakens against foreign currencies, the dollar value of sales denominated in
foreign currencies increases. When the U.S. Dollar strengthens against foreign
currencies, the dollar value of sales denominated in foreign currencies
decreases. A hypothetical 10% change in the value of the U.S. Dollar in
relation to our most significant foreign currency exposures would have had an
impact of approximately $188 million on our 2008 net sales. This amount is not
indicative of the hypothetical net earnings impact due to partially offsetting
impacts on the related cost of sales and operating expenses in the applicable
foreign currencies.

During 2008,
we hedged a portion of our foreign currency exchange rate risk through the use
of forward exchange contracts. The gains and losses on these contracts offset
the losses and gains on the foreign currency exposure being managed. In 2008,
we hedged over $400 million of currency exposures primarily related to
intercompany receivables and payables arising from intercompany purchases of
manufactured products. At January 3, 2009, we did not have a material amount of
forward currency exchange contracts outstanding. We do not enter into contracts
for trading or speculative purposes. Our policy is to enter into hedging
contracts with major financial institutions that have at least an A (or
equivalent) credit rating. Although we are exposed to credit loss in the event
of nonperformance by counterparties on our outstanding derivative contracts, we
do not anticipate nonperformance by any of the counterparties. We did not to
enter into any hedging contracts during 2007 and 2006. We continue to evaluate
our foreign currency exchange rate risk and the different mechanisms for use in
managing such risk, including using derivative financial instruments and operational hedges, such as
international manufacturing operations.
Our derivative financial instruments accounting policy is discussed in detail
in Note 1 to the Consolidated Financial Statements.

17

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Although we
have not entered into any derivative hedging contracts to hedge the net asset
exposure of our foreign subsidiaries, we have elected to use natural hedging
strategies in certain geographies. We have naturally hedged a portion of our
Yen-denominated net asset exposure by issuing long-term Yen-denominated debt.

We are also
exposed to fair value risk on our Yen Notes, which have a fixed interest rate
of 1.02%. As of January 3, 2009, the fair value of these notes approximated
their carrying value. A hypothetical 10% change in interest rates would have an
impact of approximately $0.3 million on the fair value of the Yen Notes, which
is not material to our consolidated earnings or financial position.

Our remaining
debt principally consists of credit facility borrowings, 3-year term loans in
both Japan and the United States and commercial paper borrowings, all of which
bear interest at variable rates. Because we entered into these borrowing
arrangements in December 2008, a hypothetical 10% change in interest rates
would not have had a material impact on our 2008 interest expense. Assuming
average outstanding borrowings of $1.0 billion during 2009, a hypothetical 10%
change in interest rates (based upon a weighted average interest rate of 2.5%
at January 3, 2009) would have an impact of approximately $0.5 million on our
2009 interest expense.

We are also
exposed to equity market risk on our marketable equity security investments. We
hold certain marketable equity securities of emerging technology companies. Our
investments in these companies had a fair value of $22.1 million at January 3,
2009, which are subject to the underlying price risk of the public equity
markets.

COMPETITION AND OTHER CONSIDERATIONS

We expect that
market demand, government regulation and reimbursement policies, and societal
pressures will continue to change the worldwide healthcare industry resulting
in further business consolidations and alliances. We participate with industry
groups to promote the use of advanced medical device technology in a
cost-conscious environment.

The global
medical technology industry is highly competitive and is characterized by rapid
product development and technological change. Our products must continually
improve technologically and provide improved clinical outcomes due to the
competitive nature of the industry. In addition, competitors have historically
employed litigation to gain a competitive advantage.

Competition is
anticipated to continue to place pressure on pricing and terms, including a
trend toward vendor-owned (consignment) inventory at hospitals. Also,
healthcare reform is expected to result in further hospital consolidations over
time with related pressure on pricing and terms.

The CRM market
is highly competitive. Our two principal competitors in these markets are
larger than us and have invested substantial amounts in R&D. Rapid
technological change in these markets is expected to continue, requiring us to
invest heavily in R&D and to effectively market our products.

The
cardiovascular market is also highly competitive with numerous competitors. The
majority of our sales is generated from our vascular closure devices and heart
valve replacement and repair products. We continue to hold the number one
market position in the vascular closure device market; however, the market for
vascular closure devices is highly competitive and there are several companies
in addition to St. Jude Medical that manufacture and market these products
worldwide. The cardiovascular market also includes cardiac surgery products
such as mechanical heart valves, tissue heart valves and valve repair products,
which are also highly competitive. Cardiac surgery therapies continue to shift
to tissue valves and repair products from mechanical heart valves.

The atrial
fibrillation therapy area is broadening to include multiple therapy methods and
treatments which include drugs, percutaneous delivery of diagnostic and
ablation catheters, external electrical cardioversion and defibrillation, implantable
defibrillators and open-heart surgery. As a result, we have numerous
competitors in the emerging atrial fibrillation market. Larger competitors have
begun to expand their presence in the atrial fibrillation market by leveraging
their cardiac rhythm management capabilities and through acquisitions.

18

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The
neuromodulation market is one of medical technologys fastest growing segments.
Competitive pressures will increase in the future as our two principal
competitors attempt to secure and grow their positions in the neuromodulation
market. Other companies are attempting and will attempt in the future to bring
new products or therapies into this market. Barriers to entry for new competitors are high, due to a long and
expensive product development and regulatory approval process as well as the
intellectual property and patent positions existing in the market. However,
other larger medical device companies may be able to enter the neuromodulation
market by leveraging their existing medical device capabilities, thereby
decreasing the time and resources required to enter the market.

We operate in
an industry that is susceptible to significant product liability claims. These
claims may be brought by individuals seeking relief for themselves or,
increasingly, by groups seeking to represent a class. In addition, product
liability claims may be asserted against us in the future relative to events
that are not known to us at the present time. Our product liability insurance
coverage is designed to help protect us against a catastrophic claim. Our
product liability insurance coverage for the period June 15, 2008 through June
15, 2009 is $350 million, with a $50 million per occurrence deductible or a
$100 million deductible if the claims are deemed an integrated occurrence under
the policies.

Group
purchasing organizations, independent delivery networks and large single
accounts, such as the Veterans Administration
in the United States, continue to consolidate purchasing decisions for some of
our hospital customers. We have contracts in place with many of these
organizations. In some circumstances, our inability to obtain a contract with
such an organization could adversely affect our efforts to sell our products to
that organizations hospitals.

CAUTIONARY STATEMENTS

In this
discussion and in other written or oral statements made from time to time, we
have included and may include statements that constitute forward-looking
statements with respect to the financial condition, results of operations,
plans, objectives, new products, future performance and business of St. Jude
Medical, Inc. and its subsidiaries. Statements preceded by, followed by or that
include words such as may, will, expect, anticipate, continue,
estimate, forecast, project, believe or similar expressions are
intended to identify some of the forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 and are included, along
with this statement, for purposes of complying with the safe harbor provisions
of that Act. These forward-looking statements involve risks and uncertainties.
By identifying these statements for you in this manner, we are alerting you to
the possibility that actual results may differ, possibly materially, from the
results indicated by these forward-looking statements. We undertake no
obligation to update any forward-looking statements. Actual results may differ
materially from those contemplated by the forward-looking statements due to,
among others, the risks and uncertainties discussed in the previous section
entitled Off-Balance Sheet Arrangements and
Contractual Obligations, Market RiskandCompetition and Other Considerations and in Part I, Item
1A, Risk Factors of our Annual Report on Form 10-K as well as the various
factors described below. Since it is not possible to foresee all such factors,
you should not consider these factors to be a complete list of all risks or
uncertainties. We believe the most significant factors that could affect our
future operations and results are set forth in the list below.

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.  | Any
 legislative or administrative reform to the U.S. Medicare or Medicaid systems
 or international reimbursement systems that significantly reduces
 reimbursement for procedures using our medical devices or denies coverage for
 such procedures, as well as adverse decisions relating to our products by
 administrators of such systems on coverage or reimbursement issues.                                                          
| | 2.  | Assertion,
 acquisition or grant of key patents by or to others that have the effect of
 excluding us from market segments or requiring us to pay royalties.                                                                                                                                                                                                                                                                                  
| | 3.  | Economic
 factors, including inflation, contraction in capital markets, changes in
 interest rates, and changes in foreign currency exchange rates.                                                                                                                                                                                                                                                                                           
| | 4.  | Product
 introductions by competitors that have advanced technology, better features
 or lower pricing.                                                                                                                                                                                                                                                                                                                                       
| | 5.  | Price
 increases by suppliers of key components, some of which are sole-sourced.                                                                                                                                                                                                                                                                                                                                                              
| | 6.  | A reduction
 in the number of procedures using our devices caused by cost-containment
 pressures or the development of or preferences for alternative therapies.                                                                                                                                                                                                                                                                              
| | 7.  | Safety,
 performance or efficacy concerns about our products, many of which are
 expected to be implanted for many years, leading to recalls and/or
 advisories with the attendant expenses and declining sales.                                                                                                                                                                                                                              
| | 8.  | Declining
 industry-wide sales caused by product recalls or advisories by our
 competitors that result in loss of physician and/or patient confidence in the
 safety, performance or efficacy of sophisticated medical devices in general
 and/or the types of medical devices recalled in particular.                                                                                                                                        
| | 9.  | Changes in
 laws, regulations or administrative practices affecting government regulation
 of our products, such as FDA laws and regulations that increase the time
 and/or expense of obtaining approval for products or impose additional
 burdens on the manufacture and sale of medical devices.                                                                                                                                          
| | 10. | Regulatory
 actions arising from concern over Bovine Spongiform Encephalopathy, sometimes
 referred to as mad cow disease, that have the effect of limiting our
 ability to market products using bovine collagen, such as Angio-Seal, or
 products using bovine pericardial material, such as our Bicor® and Epic
 tissue heart valves, or that impose added costs on the procurement of bovine
 collagen or bovine pericardial material.

19

---

| |     |                                                                                                                                                                                                                                                                   
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 11. | Difficulties
 obtaining, or the inability to obtain, appropriate levels of product
 liability insurance or the refusal of our insurance carriers to pay for
 losses we incur.                                                                                     
| | 12. | The ability
 of our Silzone® product liability insurers to meet their obligations to us.                                                                                                                                                                          
| | 13. | Severe
 weather or other natural disasters that cause damage to the facilities of our
 critical suppliers or one or more of our facilities, such as an earthquake
 affecting our facilities in California or a hurricane affecting our
 facilities in Puerto Rico.
| | 14. | Healthcare
 industry consolidation leading to demands for price concessions and/or
 limitations on, or the elimination of, our ability to sell in significant
 market segments.                                                                                   
| | 15. | Adverse
 developments in investigations and governmental proceedings, including the
 investigation of business practices in the cardiac rhythm management industry
 by the U.S. Attorneys Office in Boston.                                                      
| | 16. | Adverse
 developments in litigation, including product liability litigation, patent or
 other intellectual property litigation or shareholder litigation.                                                                                                         
| | 17. | Inability to
 successfully integrate the businesses that we have acquired in recent years
 and that we plan to acquire.                                                                                                                                           
| | 18. | Failure to
 successfully complete clinical trials for new indications for our products
 and/or failure to successfully develop markets for such new indications.                                                                                                  
| | 19. | Changes in
 accounting rules that adversely affect the characterization of our results of
 operations, financial position or cash flows.                                                                                                                          
| | 20. | The
 disruptions in the financial markets and the economic downturn that adversely
 impact the availability and cost of credit and customer purchasing and
 payment patterns.                                                                                     

20

---

Report of Management

Managements Report on the Financial
Statements

We are
responsible for the preparation, integrity and objectivity of the accompanying
financial statements. The financial statements were prepared in accordance with
accounting principles generally accepted in the United States and include
amounts which reflect managements best estimates based on its informed
judgment and consideration given to materiality. We are also responsible for
the accuracy of the related data in the annual report and its consistency with
the financial statements.

Audit Committee Oversight

The adequacy
of our internal accounting controls, the accounting principles employed in our
financial reporting and the scope of independent and internal audits are
reviewed by the Audit Committee of the Board of Directors, consisting solely of
independent directors. The independent registered public accounting firm meets
with, and has confidential access to, the Audit Committee to discuss the
results of its audit work.

Managements Report on Internal Control Over
Financial Reporting

Management is
responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f).
Under the supervision and with the participation of the Companys management,
including the CEO and the CFO, we conducted an evaluation of the effectiveness
of our internal control over financial reporting based on the framework in Internal Control  Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, the CEO and CFO concluded that our internal control
over financial reporting was effective as of January 3, 2009. Ernst & Young
LLP, our independent registered public accounting firm, has also audited the
effectiveness of the Companys internal controls over financial reporting as of
January 3, 2009 as stated in their report which is included herein.

|                                                                        
|------------------------------------------------------------------------
|/s/   Daniel
J. Starks                                                  
|                                                                        
|Daniel J.
Starks                                                        
|Chairman,
President and Chief Executive Officer                         
|                                                                        
|/s/   John
C. Heinmiller                                                
|                                                                        
|John C.
Heinmiller 
Executive Vice President and Chief Financial Officer

21

---

Report of Independent Registered Public
Accounting Firm

The Board of
Directors and Shareholders 
of St. Jude Medical, Inc.

We have
audited St. Jude Medical, Inc.s internal control over financial reporting as
of January 3, 2009, based on criteria established in Internal Control  Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). St. Jude Medical, Inc.s management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting included in the
accompanying report of management entitled Managements Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion
on St. Jude Medical, Inc.s internal control over financial reporting based on
our audit.

We conducted
our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.

A companys
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A companys internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.

Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

In our
opinion, St. Jude Medical, Inc. maintained, in all material respects, effective
internal control over financial reporting as of January 3, 2009, based on the
COSO criteria.

We also have
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of St. Jude
Medical, Inc. and subsidiaries as of January 3, 2009 and December 29, 2007,
and the related consolidated statements of earnings, shareholders equity, and
cash flows for each of the three fiscal years in the period ended January 3,
2009, and our report dated February 26, 2009, expressed an unqualified opinion
thereon.

/s/ Ernst
& Young LLP

Minneapolis,
Minnesota 
February 26, 2009

22

---

Report of Independent Registered Public
Accounting Firm

The Board of
Directors and Shareholders 
of St. Jude Medical, Inc.

We have
audited the accompanying consolidated balance sheets of St. Jude Medical, Inc.
and subsidiaries as of January 3, 2009 and December 29, 2007, and the related
consolidated statements of earnings, shareholders equity, and cash flows for
each of the three fiscal years in the period ended January 3, 2009. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted
our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of St. Jude Medical,
Inc. and subsidiaries at January 3, 2009 and December 29, 2007, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended January 3, 2009, in conformity with U.S.
generally accepted accounting principles.

We also have
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), St. Jude Medical Inc.s internal control over
financial reporting as of January 3, 2009, based on criteria established in Internal Control  Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission,
and our report dated February 26, 2009, expressed an unqualified opinion
thereon.

/s/ Ernst
& Young LLP

Minneapolis,
Minnesota 
February 26, 2009

23

---

CONSOLIDATED
STATEMENTS OF EARNINGS(in thousands, except per share amounts)

|                                                       |  |                 |           |                   |   |                   |   |   |           |  
|------------------------------------------------------ |  | --------------- | --------- | ----------------- | - | ----------------- | - | - | --------- | -
|Fiscal Year Ended                                      |  | January 3, 2009 |           | December 29, 2007 |   | December 30, 2006 |  
|Net sales                                              |  | $               | 4,363,251 |                   | $ | 3,779,277         |   | $ | 3,302,447 |  
|Cost of sales:                                         |  |                 |           |                   |   |                   |   |   |           |  
|Cost of sales before special charges                   |  |                 | 1,105,938 |                   |   | 1,003,302         |   |   | 898,405   |  
|Special charges                                        |  |                 | 64,603    |                   |   | 38,292            |   |   | 15,108    |  
|Total cost of sales                                    |  |                 | 1,170,541 |                   |   | 1,041,594         |   |   | 913,513   |  
|Gross profit                                           |  |                 | 3,192,710 |                   |   | 2,737,683         |   |   | 2,388,934 |  
|                                                       |  |                 |           |                   |   |                   |   |   |           |  
|Selling, general and administrative expense            |  |                 | 1,636,526 |                   |   | 1,382,466         |   |   | 1,195,030 |  
|Research and development expense                       |  |                 | 531,799   |                   |   | 476,332           |   |   | 431,102   |  
|Purchased in-process research and
 development charges |  |                 | 319,354   |                   |   |                  |   |   |          |  
|Special charges                                        |  |                 | 49,984    |                   |   | 85,382            |   |   | 19,719    |  
|Operating profit                                       |  |                 | 655,047   |                   |   | 793,503           |   |   | 743,083   |  
|                                                       |  |                 |           |                   |   |                   |   |   |           |  
|Other income (expense), net                            |  |                 | (24,306   | )                 |   | (49,198           | ) |   | (22,442   | )
|Earnings before income taxes                           |  |                 | 630,741   |                   |   | 744,305           |   |   | 720,641   |  
|                                                       |  |                 |           |                   |   |                   |   |   |           |  
|Income tax expense                                     |  |                 | 246,414   |                   |   | 185,267           |   |   | 172,390   |  
|                                                       |  |                 |           |                   |   |                   |   |   |           |  
|Net earnings                                           |  | $               | 384,327   |                   | $ | 559,038           |   | $ | 548,251   |  
|                                                       |  |                 |           |                   |   |                   |   |   |           |  
|Net earnings per share:                                |  |                 |           |                   |   |                   |   |   |           |  
|Basic                                                  |  | $               | 1.12      |                   | $ | 1.63              |   | $ | 1.53      |  
|Diluted                                                |  | $               | 1.10      |                   | $ | 1.59              |   | $ | 1.47      |  
|                                                       |  |                 |           |                   |   |                   |   |   |           |  
|Weighted average shares outstanding:                   |  |                 |           |                   |   |                   |   |   |           |  
|Basic                                                  |  |                 | 342,888   |                   |   | 342,103           |   |   | 359,252   |  
|Diluted                                                |  |                 | 349,722   |                   |   | 352,444           |   |   | 372,830   |  

See notes to the consolidated
financial statements.

24

---

|                                     
|-------------------------------------
|CONSOLIDATED BALANCE SHEETS          
|(in
 thousands, except share amounts)
|                                     

|                                                                                                                                 |  |                 |           |                   |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | --------- | ----------------- | - | --------- | -
|                                                                                                                                 |  | January 3, 2009 |           | December 29, 2007 |  
|ASSETS                                                                                                                           |  |                 |           |                   |   |           |  
|Current Assets                                                                                                                   |  |                 |           |                   |   |           |  
|Cash and cash equivalents                                                                                                        |  | $               | 136,443   |                   | $ | 389,094   |  
|Accounts receivable, less allowances for doubtful
accounts                                                                       |  |                 | 1,101,258 |                   |   | 1,023,952 |  
|Inventories                                                                                                                      |  |                 | 546,499   |                   |   | 457,734   |  
|Deferred income taxes, net                                                                                                       |  |                 | 137,042   |                   |   | 110,710   |  
|Other                                                                                                                            |  |                 | 158,821   |                   |   | 146,693   |  
|Total current assets                                                                                                             |  |                 | 2,080,063 |                   |   | 2,128,183 |  
|                                                                                                                                 |  |                 |           |                   |   |           |  
|Property, Plant and Equipment                                                                                                    |  |                 |           |                   |   |           |  
|Land, buildings and improvements                                                                                                 |  |                 | 386,519   |                   |   | 300,360   |  
|Machinery and equipment                                                                                                          |  |                 | 918,254   |                   |   | 760,061   |  
|Diagnostic equipment                                                                                                             |  |                 | 371,206   |                   |   | 338,983   |  
|Property, plant and equipment at cost                                                                                            |  |                 | 1,675,979 |                   |   | 1,399,404 |  
|Less accumulated depreciation                                                                                                    |  |                 | (695,803  | )                 |   | (622,609  | )
|Net property, plant and
equipment                                                                                                |  |                 | 980,176   |                   |   | 776,795   |  
|                                                                                                                                 |  |                 |           |                   |   |           |  
|Other Assets                                                                                                                     |  |                 |           |                   |   |           |  
|Goodwill                                                                                                                         |  |                 | 1,984,566 |                   |   | 1,657,313 |  
|Other intangible assets, net                                                                                                     |  |                 | 493,535   |                   |   | 498,700   |  
|Other                                                                                                                            |  |                 | 184,164   |                   |   | 268,413   |  
|Total other assets                                                                                                               |  |                 | 2,662,265 |                   |   | 2,424,426 |  
|TOTAL
 ASSETS                                                                                                                    |  | $               | 5,722,504 |                   | $ | 5,329,404 |  
|                                                                                                                                 |  |                 |           |                   |   |           |  
|LIABILITIES AND SHAREHOLDERS
EQUITY                                                                                             |  |                 |           |                   |   |           |  
|Current Liabilities                                                                                                              |  |                 |           |                   |   |           |  
|Current portion of long-term debt                                                                                                |  | $               | 75,518    |                   | $ | 1,205,498 |  
|Accounts payable                                                                                                                 |  |                 | 238,310   |                   |   | 188,210   |  
|Income taxes payable                                                                                                             |  |                 | 17,608    |                   |   | 16,458    |  
|Accrued expenses                                                                                                                 |  |                 |           |                   |   |           |  
|Employee compensation and
related benefits                                                                                       |  |                 | 297,287   |                   |   | 261,833   |  
|Other                                                                                                                            |  |                 | 399,801   |                   |   | 177,230   |  
|Total current
liabilities                                                                                                        |  |                 | 1,028,524 |                   |   | 1,849,229 |  
|                                                                                                                                 |  |                 |           |                   |   |           |  
|Long-term debt                                                                                                                   |  |                 | 1,126,084 |                   |   | 182,493   |  
|Deferred income taxes, net                                                                                                       |  |                 | 112,231   |                   |   | 107,011   |  
|Other liabilities                                                                                                                |  |                 | 219,759   |                   |   | 262,661   |  
|Total liabilities                                                                                                                |  |                 | 2,486,598 |                   |   | 2,401,394 |  
|                                                                                                                                 |  |                 |           |                   |   |           |  
|Commitments and Contingencies (Notes 2 and
5)                                                                                    |  |                 |          |                   |   |          |  
|                                                                                                                                 |  |                 |           |                   |   |           |  
|Shareholders Equity                                                                                                             |  |                 |           |                   |   |           |  
|Preferred stock                                                                                                                  |  |                 |          |                   |   |          |  
|Common stock (345,332,272 and 342,846,963 shares
issued and
 outstanding at January 3, 2009 and December 29, 2007, respectively) |  |                 | 34,533    |                   |   | 34,285    |  
|Additional paid-in capital                                                                                                       |  |                 | 219,041   |                   |   | 193,662   |  
|Retained earnings                                                                                                                |  |                 | 2,977,630 |                   |   | 2,600,905 |  
|Accumulated other comprehensive income
(loss):                                                                                   |  |                 |           |                   |   |           |  
|Cumulative translation
adjustment                                                                                                |  |                 | (1,023    | )                 |   | 86,754    |  
|Unrealized gain on
available-for-sale securities                                                                                 |  |                 | 6,136     |                   |   | 12,404    |  
|Unrealized loss on derivative
financial instruments                                                                              |  |                 | (411      | )                 |   |          |  
|Total shareholders
equity                                                                                                       |  |                 | 3,235,906 |                   |   | 2,928,010 |  
|TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY                                                                                       |  | $               | 5,722,504 |                   | $ | 5,329,404 |  

See notes to the consolidated financial statements.

25

---

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY(in thousands, except share amounts)

|                                                                                     |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   |                              |   |   |         |   |   |           |  
|------------------------------------------------------------------------------------ |  | ----------------- | - | ---------------------------- | ------ | - | ---------------------- | -------- | ------------------ | - | ------ | ------------------------------------------------ | - | ---------------------------- | - | - | ------- | - | - | --------- | -
|                                                                                     |  |                   |   | Additional
 Paid-In
 Capital |        |   |                        |          |                    |   |        | Accumulated
 Other
 Comprehensive
 Income (Loss) |   | Total
 Shareholders
 Equity |  
|                                                                                     |  | Common Stock      |   |                              |        |   |                        |          |                    |   |        |                                                 
|                                                                                     |  | Number of
 Shares |   | Amount                       |        |   | Unearned
 Compensation |          | Retained
 Earnings |   |        |                                                 
|Balance at December 31, 2005                                                         |  | 367,904,418       |   |                              | 36,790 |   |                        | 514,360  |                    |   | (5,641 | )                                                |   | 2,345,311                    |   |   | (7,775  | ) |   | 2,883,045 |  
|Comprehensive income:                                                                |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   |                              |   |   |         |   |   |           |  
|Net earnings                                                                         |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   | 548,251                      |   |   |         |   |   | 548,251   |  
|Other comprehensive income:                                                          |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   |                              |   |   |         |   |   |           |  
|Unrealized gain on available-for-sale securities,
net of taxes of $929               |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   |                              |   |   | 1,630   |   |   | 1,630     |  
|Foreign currency translation adjustment, net of
taxes of $(2,179)                    |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   |                              |   |   | 52,474  |   |   | 52,474    |  
|Other comprehensive income                                                           |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   |                              |   |   |         |   |   | 54,104    |  
|Comprehensive income                                                                 |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   |                              |   |   |         |   |   | 602,355   |  
|Repurchases of common stock                                                          |  | (18,579,390       | ) |                              | (1,858 | ) |                        | (591,672 | )                  |   |        |                                                  |   | (106,470                     | ) |   |         |   |   | (700,000  | )
|Stock-based compensation                                                             |  |                   |   |                              |        |   |                        | 70,402   |                    |   |        |                                                  |   |                              |   |   |         |   |   | 70,402    |  
|Reclassification upon adoption of SFAS
123(R)                                        |  |                   |   |                              |        |   |                        | (5,641   | )                  |   | 5,641  |                                                  |   |                              |   |   |         |   |   |          |  
|Common stock issued under stock plans and other,
net                                 |  | 4,606,972         |   |                              | 461    |   |                        | 76,901   |                    |   |        |                                                  |   |                              |   |   |         |   |   | 77,362    |  
|Tax benefit from stock plans                                                         |  |                   |   |                              |        |   |                        | 35,823   |                    |   |        |                                                  |   |                              |   |   |         |   |   | 35,823    |  
|Balance at December 30, 2006                                                         |  | 353,932,000       |   |                              | 35,393 |   |                        | 100,173  |                    |   |       |                                                  |   | 2,787,092                    |   |   | 46,329  |   |   | 2,968,987 |  
|Comprehensive income:                                                                |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   |                              |   |   |         |   |   |           |  
|Net earnings                                                                         |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   | 559,038                      |   |   |         |   |   | 559,038   |  
|Other comprehensive income (loss):                                                   |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   |                              |   |   |         |   |   |           |  
|Unrealized loss on available-for-sale securities,
net of taxes of
 $(3,343)          |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   |                              |   |   | (5,766  | ) |   | (5,766    | )
|Reclassification of realized gain to net
earnings, net of taxes of
 $3,013           |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   |                              |   |   | (4,916  | ) |   | (4,916    | )
|Foreign currency translation adjustment, net of
taxes of $(4,227)                    |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   |                              |   |   | 63,511  |   |   | 63,511    |  
|Other comprehensive income                                                           |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   |                              |   |   |         |   |   | 52,829    |  
|Comprehensive income                                                                 |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   |                              |   |   |         |   |   | 611,867   |  
|Repurchases of common stock                                                          |  | (23,619,400       | ) |                              | (2,361 | ) |                        | (243,739 | )                  |   |        |                                                  |   | (753,767                     | ) |   |         |   |   | (999,867  | )
|Stock-based compensation                                                             |  |                   |   |                              |        |   |                        | 54,540   |                    |   |        |                                                  |   |                              |   |   |         |   |   | 54,540    |  
|Common stock issued under stock plans and other,
net                                 |  | 12,534,363        |   |                              | 1,253  |   |                        | 185,564  |                    |   |        |                                                  |   |                              |   |   |         |   |   | 186,817   |  
|Tax benefit from stock plans                                                         |  |                   |   |                              |        |   |                        | 125,234  |                    |   |        |                                                  |   |                              |   |   |         |   |   | 125,234   |  
|Cumulative effect adjustment to retained earnings
related to the
 adoption of FIN 48 |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   | 8,542                        |   |   |         |   |   | 8,542     |  
|Purchase of call options, net of taxes of
$(37,890)                                  |  |                   |   |                              |        |   |                        | (63,150  | )                  |   |        |                                                  |   |                              |   |   |         |   |   | (63,150   | )
|Proceeds from the sale of warrants                                                   |  |                   |   |                              |        |   |                        | 35,040   |                    |   |        |                                                  |   |                              |   |   |         |   |   | 35,040    |  
|Balance at December 29, 2007                                                         |  | 342,846,963       |   |                              | 34,285 |   |                        | 193,662  |                    |   |       |                                                  |   | 2,600,905                    |   |   | 99,158  |   |   | 2,928,010 |  
|Comprehensive income:                                                                |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   |                              |   |   |         |   |   |           |  
|Net earnings                                                                         |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   | 384,327                      |   |   |         |   |   | 384,327   |  
|Other comprehensive loss:                                                            |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   |                              |   |   |         |   |   |           |  
|Unrealized loss on available-for-sale securities,
net of taxes of
 $(3,696)          |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   |                              |   |   | (6,268  | ) |   | (6,268    | )
|Unrealized loss on derivative financial
instruments, net of taxes of
 $(247)         |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   |                              |   |   | (411    | ) |   | (411      | )
|Foreign currency translation adjustment, net of
taxes of $(4,281)                    |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   |                              |   |   | (87,777 | ) |   | (87,777   | )
|Other comprehensive loss                                                             |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   |                              |   |   |         |   |   | (94,456   | )
|Comprehensive income                                                                 |  |                   |   |                              |        |   |                        |          |                    |   |        |                                                  |   |                              |   |   |         |   |   | 289,871   |  
|Repurchases of common stock                                                          |  | (6,736,888        | ) |                              | (674   | ) |                        | (291,724 | )                  |   |        |                                                  |   | (7,602                       | ) |   |         |   |   | (300,000  | )
|Stock-based compensation                                                             |  |                   |   |                              |        |   |                        | 52,935   |                    |   |        |                                                  |   |                              |   |   |         |   |   | 52,935    |  
|Common stock issued under stock plans and other,
net                                 |  | 8,319,532         |   |                              | 832    |   |                        | 165,182  |                    |   |        |                                                  |   |                              |   |   |         |   |   | 166,014   |  
|Common stock issued in connection with
acquisition                                   |  | 902,665           |   |                              | 90     |   |                        | 36,621   |                    |   |        |                                                  |   |                              |   |   |         |   |   | 36,711    |  
|Tax benefit from stock plans                                                         |  |                   |   |                              |        |   |                        | 62,365   |                    |   |        |                                                  |   |                              |   |   |         |   |   | 62,365    |  
|Balance at January 3, 2009                                                           |  | 345,332,272       |   | $                            | 34,533 |   | $                      | 219,041  |                    | $ |       |                                                  | $ | 2,977,630                    |   | $ | 4,702   |   | $ | 3,235,906 |  

See notes to the consolidated financial statements.

26

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CONSOLIDATED
STATEMENTS OF CASH FLOWS(in thousands)

|                                                                              |  |                 |            |                   |   |                   |   |   |            |  
|----------------------------------------------------------------------------- |  | --------------- | ---------- | ----------------- | - | ----------------- | - | - | ---------- | -
|Fiscal Year
 Ended                                                            |  | January 3, 2009 |            | December 29, 2007 |   | December 30, 2006 |  
|OPERATING
 ACTIVITIES                                                         |  |                 |            |                   |   |                   |   |   |            |  
|Net earnings                                                                  |  | $               | 384,327    |                   | $ | 559,038           |   | $ | 548,251    |  
|Adjustments to reconcile net earnings to net cash
from operating
 activities: |  |                 |            |                   |   |                   |   |   |            |  
|Depreciation                                                                  |  |                 | 132,308    |                   |   | 121,688           |   |   | 94,002     |  
|Amortization                                                                  |  |                 | 70,120     |                   |   | 75,977            |   |   | 72,810     |  
|Gain on sale of investment                                                    |  |                 |           |                   |   | (7,929            | ) |   |           |  
|Stock-based compensation                                                      |  |                 | 52,935     |                   |   | 54,540            |   |   | 70,402     |  
|Excess tax benefits from stock-based
compensation                             |  |                 | (48,995    | )                 |   | (97,921           | ) |   | (28,577    | )
|Investment impairment charges                                                 |  |                 | 12,902     |                   |   | 25,094            |   |   |           |  
|Purchased in-process research and development
charges                         |  |                 | 319,354    |                   |   |                  |   |   |           |  
|Special charges                                                               |  |                 | 114,587    |                   |   | 88,674            |   |   | 34,827     |  
|Deferred income taxes                                                         |  |                 | (31,698    | )                 |   | (6,229            | ) |   | (10,927    | )
|Changes in operating assets and liabilities, net
of business
 acquisitions:   |  |                 |            |                   |   |                   |   |   |            |  
|Accounts receivable                                                           |  |                 | (92,301    | )                 |   | (91,964           | ) |   | (54,945    | )
|Inventories                                                                   |  |                 | (87,533    | )                 |   | (13,660           | ) |   | (77,444    | )
|Other current assets                                                          |  |                 | (20,032    | )                 |   | (5,301            | ) |   | (18,329    | )
|Accounts payable and accrued expenses                                         |  |                 | 55,418     |                   |   | 20,815            |   |   | (29,175    | )
|Income taxes payable                                                          |  |                 | 84,200     |                   |   | 142,747           |   |   | 47,916     |  
|Net cash provided by operating
activities                                     |  |                 | 945,592    |                   |   | 865,569           |   |   | 648,811    |  
|                                                                              |  |                 |            |                   |   |                   |   |   |            |  
|INVESTING ACTIVITIES                                                          |  |                 |            |                   |   |                   |   |   |            |  
|Purchases of property, plant and
equipment                                    |  |                 | (343,912   | )                 |   | (287,157          | ) |   | (267,896   | )
|Proceeds from the sale of investments                                         |  |                 |           |                   |   | 12,929            |   |   |           |  
|Business acquisition payments, net of cash
acquired                           |  |                 | (490,027   | )                 |   | (12,238           | ) |   | (38,797    | )
|Other investing activities, net                                               |  |                 | (37,134    | )                 |   | (19,849           | ) |   | (18,946    | )
|Net cash used in investing
activities                                         |  |                 | (871,073   | )                 |   | (306,315          | ) |   | (325,639   | )
|                                                                              |  |                 |            |                   |   |                   |   |   |            |  
|FINANCING ACTIVITIES                                                          |  |                 |            |                   |   |                   |   |   |            |  
|Proceeds from exercise of stock options and stock
issued                      |  |                 | 166,014    |                   |   | 186,817           |   |   | 77,362     |  
|Excess tax benefits from stock-based
compensation                             |  |                 | 48,995     |                   |   | 97,921            |   |   | 28,577     |  
|Common stock repurchased, including related
costs                             |  |                 | (300,000   | )                 |   | (999,867          | ) |   | (700,000   | )
|Borrowings under debt facilities                                              |  |                 | 967,622    |                   |   | 8,045,869         |   |   | 4,949,101  |  
|Payments under debt facilities                                                |  |                 |           |                   |   | (8,724,224        | ) |   | (4,486,779 | )
|Issuance (repayment) of convertible
debentures                                |  |                 | (1,205,124 | )                 |   | 1,200,000         |   |   | (654,502   | )
|Purchase of call options                                                      |  |                 |           |                   |   | (101,040          | ) |   |           |  
|Proceeds from the sale of warrants                                            |  |                 |           |                   |   | 35,040            |   |   |           |  
|Net cash used in financing
activities                                         |  |                 | (322,493   | )                 |   | (259,484          | ) |   | (786,241   | )
|                                                                              |  |                 |            |                   |   |                   |   |   |            |  
|Effect of currency exchange rate changes on cash
and cash equivalents         |  |                 | (4,677     | )                 |   | 9,436             |   |   | 8,389      |  
|Net increase (decrease) in cash and cash
equivalents                          |  |                 | (252,651   | )                 |   | 309,206           |   |   | (454,680   | )
|Cash and cash equivalents at beginning of
year                                |  |                 | 389,094    |                   |   | 79,888            |   |   | 534,568    |  
|Cash and cash equivalents at end of
year                                      |  | $               | 136,443    |                   | $ | 389,094           |   | $ | 79,888     |  
|                                                                              |  |                 |            |                   |   |                   |   |   |            |  
|Supplemental Cash Flow
Information                                            |  |                 |            |                   |   |                   |   |   |            |  
|Cash paid during the year for:                                                |  |                 |            |                   |   |                   |   |   |            |  
|Interest                                                                      |  | $               | 21,712     |                   | $ | 32,686            |   | $ | 39,746     |  
|Income taxes                                                                  |  | $               | 211,860    |                   | $ | 100,599           |   | $ | 140,799    |  
|Noncash investing activities:                                                 |  |                 |            |                   |   |                   |   |   |            |  
|Issuance of stock in connection with EP
MedSystms, Inc. acquisition           |  | $               | 36,711     |                   | $ |                  |   | $ |           |  

See notes to the consolidated financial statements.

27

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Notes to the Consolidated Financial
Statements

NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

Company Overview:
St. Jude Medical, Inc., together with its subsidiaries (St. Jude Medical or the
Company) develops, manufactures and distributes cardiovascular medical devices
for the global cardiac rhythm management, cardiology, cardiac surgery and
atrial fibrillation therapy areas and implantable neurostimulation devices for
the management of chronic pain. The Companys four operating segments are Cardiac
Rhythm Management (CRM), Cardiovascular (CV), Atrial Fibrillation (AF) and
Neuromodulation (Neuro). At the beginning of its 2007 fiscal year, the Company
combined its former Cardiac Surgery and Cardiology operating segments to form
the CV operating segment which focuses on both the cardiology and cardiac
surgery therapy areas. The Companys principal products in each operating
segment are as follows: CRM  tachycardia implantable cardioverter
defibrillator systems (ICDs) and bradycardia pacemaker systems (pacemakers); CV
 vascular closure devices, heart valve replacement and repair products and
pressure measurement guidewires; AF  electrophysiology (EP) introducers and
catheters, advanced cardiac mapping, navigation and recording systems and
ablation systems; and Neuro  neurostimulation devices. The Company markets and
sells its products primarily through a direct sales force. The principal
geographic markets for the Companys products are the United States, Europe,
Japan and Asia Pacific.

Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. Intercompany transactions and balances have been
eliminated in consolidation.

Fiscal Year: The
Company utilizes a 52/53-week fiscal year ending on the Saturday nearest
December 31st. Fiscal year 2008 consisted of 53 weeks and ended on
January 3, 2009, and fiscal years 2007 and 2006 consisted of 52 weeks and ended
on December 29, 2007 and December 30, 2006, respectively. The additional week
in fiscal year 2008 has been reflected in the Companys fourth quarter.

Use of Estimates:
Preparation of the Companys consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
in the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.

Cash Equivalents:
The Company considers highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents are stated at
cost, which approximates market value. The Companys cash equivalents include
bank certificates of deposit, money market funds and instruments and commercial
paper investments. The Company performs periodic evaluations of the relative
credit standing of the financial institutions and issuers of its cash
equivalents and limits the amount of credit exposure with any one issuer.

Marketable securities:
Marketable securities consist of publicly-traded equity securities that are
classified as available-for-sale securities and investments in mutual funds
that are classified as trading securities. On the balance sheet,
available-for-sale securities and trading securities are classified as other
current assets and other assets, respectively.

Available-for-sale
securities are recorded at fair value based upon quoted market prices.
Unrealized gains and losses, net of related incomes taxes, are recorded in
accumulated other comprehensive income in shareholders equity. The following
table summarizes the components of the balance of the Companys
available-for-sale securities (in thousands):

|                        |  |                 |        |                   |   |        |  
|----------------------- |  | --------------- | ------ | ----------------- | - | ------ | -
|                        |  | January 3, 2009 |        | December 29, 2007 |  
|Adjusted cost           |  | $               | 12,187 |                   | $ | 11,920 |  
|Gross unrealized gains  |  |                 | 9,944  |                   |   | 20,553 |  
|Gross unrealized losses |  |                 | (66    | )                 |   | (54    | )
|Fair value              |  | $               | 22,065 |                   | $ | 32,419 |  

Realized gains
(losses) from the sale of available-for-sale securities are recorded to other
income (expense) and are computed using the specific identification method.
Upon the sale of an available-for-sale security, the unrealized gain (loss) is
reclassified out of other accumulated comprehensive income and reflected as a
realized gain (loss) in net earnings. In 2007, the Company sold an
available-for-sale security, recognizing a realized after-tax gain of $4.9
million. The total pre-tax gain of $7.9 million was recognized as other income
(see Note 9). There were no realized gains (losses) from the sale of
available-for-sale securities in 2008 or 2006. When the fair value of an
available-for-sale security falls below its original cost and the Company
determines that the corresponding unrealized loss is other-than-temporary, the
Company recognizes an impairment loss to net earnings in the period the
determination is made. In 2008, the Company recognized a pre-tax impairment
charge of $0.7 million to other expense (see Note 9) related to a decline in
the fair value of an available-for-sale security that was deemed
other-than-temporary. No available-for-sale security impairment losses were
recognized during fiscal years 2007 or 2006.

28

---

The Companys
investments in mutual funds are recorded at fair market value based upon quoted
market prices and are held in a rabbi trust, which is not available for general
corporate purposes and is subject to creditor claims in the event of
insolvency. These investments are specifically designated as available to the
Company solely for the purpose of paying benefits under the Companys deferred
compensation plan (see Note 11). The fair value of these investments totaled
approximately $108 million at January 3, 2009 and approximately $139 million at
December 29, 2007.

Accounts Receivable:
The Company grants credit to customers in the normal course of business, but
generally does not require collateral or any other security to support its
receivables. The Company maintains an allowance for doubtful accounts for
potential credit losses. The allowance for doubtful accounts was $29.0 million
at January 3, 2009 and $26.7 million at December 29, 2007.

Inventories:
Inventories are stated at the lower of cost or market with cost determined
using the first-in, first-out method. Inventories consisted of the following
(in thousands):

|                |  |                 |         |                   |   |         | 
|--------------- |  | --------------- | ------- | ----------------- | - | ------- | 
|                |  | January 3, 2009 |         | December 29, 2007 |  
|Finished goods  |  | $               | 398,452 |                   | $ | 338,195 | 
|Work in process |  |                 | 39,143  |                   |   | 32,889  | 
|Raw materials   |  |                 | 108,904 |                   |   | 86,650  | 
|                |  | $               | 546,499 |                   | $ | 457,734 | 

Property, Plant and Equipment:
Property, plant and equipment are recorded at cost and are depreciated using
the straight-line method over their estimated useful lives, ranging from 15 to
39 years for buildings and improvements, three to seven years for machinery and
equipment and three to five years for diagnostic equipment. Diagnostic
equipment primarily consists of programmers that are used by physicians and
healthcare professionals to program and analyze data from ICDs and pacemakers.
The estimated useful lives of this equipment are based on anticipated usage by
physicians and healthcare professionals and the timing and impact of expected
new technology platforms and rollouts by the Company. To the extent the Company
experiences changes in the usage of this equipment or introductions of new
technologies to the market, the estimated useful lives of this equipment may
change in a future period. Diagnostic equipment had a net carrying value of
$205.3 million and $189.5 million at January 3, 2009 and December 29, 2007,
respectively. Property, plant and equipment are depreciated using accelerated
methods for income tax purposes.

Goodwill and Other Intangible Assets:
Goodwill represents the excess of cost over the fair value of identifiable net
assets of businesses acquired. Other intangible assets consist of purchased
technology and patents, customer lists and relationships, trademarks and
tradenames, licenses and distribution agreements, which are amortized on a
straight-line basis using lives ranging from 3 to 20 years.

Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill
and Other Intangible Assets (SFAS No. 142), requires that goodwill
for each reporting unit be reviewed for impairment at least annually. The
Company has four reporting units at January 3, 2009, consisting of its four
operating segments (see Note 13). The Company tests goodwill for impairment
using the two-step process prescribed in SFAS No. 142. In the first step, the
Company compares the fair value of each reporting unit, as computed primarily by
present value cash flow calculations, to its book carrying value, including
goodwill. If the fair value exceeds the carrying value, no further work is
required and no impairment loss is recognized. If the carrying value exceeds
the fair value, the goodwill of the reporting unit is potentially impaired and
the Company would complete step 2 in order to measure the impairment loss. In
step 2, the Company calculates the implied fair value of goodwill by deducting
the fair value of all tangible and intangible net assets (including
unrecognized intangible assets) of the reporting unit from the fair value of
the reporting unit (as determined in step 1). If the implied fair value of
goodwill is less than the carrying value of goodwill, the Company would
recognize an impairment loss equal to the difference. During the fourth
quarters of 2008, 2007 and 2006, the Company completed its annual goodwill
impairment review and identified no impairment associated with the carrying
values of goodwill.

29

---

The Company
also reviews other intangible assets for impairment at least annually to
determine if any adverse conditions exist that would indicate impairment. If
the carrying value of other intangible assets exceeds the undiscounted cash
flows, the carrying value is written down to fair value in the period
identified. In assessing fair value, the Company generally utilizes present
value cash flow calculations using an appropriate risk-adjusted discount rate.
In 2008, the Company recorded a $37.0 million impairment charge to write down
purchased technology intangible assets associated with its 2005 Velocimed LLC
(Velocimed) acquisition and a $1.7 million impairment charge to write off
Advanced Neuromodulation Systems, Inc. (ANS) tradename intangible assets. In
2007, the Company recorded a $23.7 million impairment charge to write down
intangible assets associated with a distribution agreement. Refer to Note 8 for
further detail regarding these impairment charges.

Product Warranties:
The Company offers a warranty on various products; the most significant of
which relate to pacemaker and ICD systems. The Company estimates the costs that
may be incurred under its warranties and records a liability in the amount of
such costs at the time the product is sold. Factors that affect the Companys
warranty liability include the number of units sold, historical and anticipated
rates of warranty claims and cost per claim. The Company periodically assesses
the adequacy of its recorded warranty liabilities and adjusts the amounts as
necessary.

Changes in the
Companys product warranty liability during fiscal years 2008 and 2007 were as
follows (in thousands):

|                             |  |      |        |      |   |        |  
|---------------------------- |  | ---- | ------ | ---- | - | ------ | -
|                             |  | 2008 |        | 2007 |  
|Balance at beginning of year |  | $    | 16,691 |      | $ | 12,835 |  
|Warranty expense recognized  |  |      | 1,515  |      |   | 6,412  |  
|Warranty credits issued      |  |      | (2,482 | )    |   | (2,556 | )
|Balance at end of year       |  | $    | 15,724 |      | $ | 16,691 |  

Litigation: The
Company accrues a liability for costs related to claims, including future legal
costs, settlements and judgments where it has assessed that a loss is probable
and an amount can be reasonably estimated. The Company records a receivable
from its product liability insurance carriers for amounts expected to be
recovered.

Revenue Recognition:
The Company sells its products to hospitals primarily through a direct sales
force. In certain international markets, the Company sells its products through
independent distributors. The Company recognizes revenue when persuasive
evidence of a sales arrangement exists, delivery of goods occurs through the
transfer of title and risks and rewards of ownership, the selling price is
fixed or determinable and collectability is reasonably assured. A portion of
the Companys inventory is held by field sales representatives or consigned at
hospitals. Revenue is recognized at the time the Company is notified that the
inventory has been implanted or used by the customer. For products that are not
consigned, revenue recognition occurs upon shipment to the hospital or, in the
case of distributors, when title transfers under the contract. The Company
offers sales rebates and discounts to certain customers. The Company records
such rebates and discounts as a reduction of net sales in the same period
revenue is recognized. The Company estimates rebates based on sales terms and
historical experience.

Research and Development:
Research and development costs are expensed as incurred.

Purchased In-Process Research and Development
(IPR&D): When the Company acquires another entity,
the purchase price is allocated, as applicable, between IPR&D, other
identifiable intangible assets, tangible assets and goodwill. Determining the
portion of the purchase price allocated to IPR&D requires the Company to
make significant estimates.

The Companys
policy defines IPR&D as the value assigned to those projects for which the
related products have not yet reached technological feasibility and have no
future alternative use. The primary basis for determining the technological
feasibility of these projects is obtaining regulatory approval to market the
underlying products in an applicable geographic region. In accordance with
Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations (SFAS No. 141), the
value attributed to those projects is expensed in conjunction with the
acquisition. The Company recorded IPR&D charges of $319.4 million in 2008.
Any IPR&D acquired in a business acquisition in fiscal year 2009 and future
periods will be subject to SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141(R)).
Under these new accounting requirements, the fair value of IPR&D will be
capitalized as indefinite-lived intangible assets until completion of the
IPR&D project or abandonment. Upon completion of the development (generally
when regulatory approval to market the product is obtained), acquired IPR&D
assets would be amortized over their useful life. If the IPR&D projects are
abandoned, the related IPR&D assets would likely be impaired and written
down to their remaining fair value, if any. See the New Accounting
Pronouncements section that follows for details on the adoption and new
accounting provisions of SFAS No. 141(R).

30

---

The Company
uses the income approach to establish the fair value of IPR&D as of the
acquisition date. This approach establishes fair value by estimating the
after-tax cash flows attributable to a project over its useful life and then
discounting these after-tax cash flows back to a present value. The Company
bases its revenue assumptions on estimates of relevant market sizes, expected
market growth, and trends in technology as well as anticipated product
introductions by competitors. In arriving at the value of the projects, the
Company considers, among other factors, the stage of completion, the complexity
of the work completed, the costs incurred, the projected cost of completion,
the contribution of core technologies and other acquired assets, the expected
introduction date and the estimated useful life of the technology. The discount
rate used is determined at the time of acquisition and includes consideration
of the assessed risk of the project not being developed to commercial
feasibility. The Company believes that the IPR&D amounts recorded represent
the fair value at the date of acquisition and do not exceed the amount a third
party would pay for the projects.

Stock-Based Compensation:
Effective January 1, 2006, the Company adopted the provisions of, and accounts
for stock-based compensation in accordance with, SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123(R)). The
Company elected the modified-prospective method of adopting SFAS No. 123(R),
under which prior periods are not retroactively revised. Under the fair value
recognition provisions of SFAS No. 123(R), the Company measures stock-based
compensation cost at the grant date based on the fair value of the award and
recognizes the compensation expense over the requisite service period, which is
the vesting period. For the Company, the valuation provisions of SFAS No.
123(R) apply to awards granted after the January 1, 2006 effective date.
Stock-based compensation expense for awards granted prior to the effective date
but that remain unvested on the effective date is being recognized over the
remaining service period using the compensation cost estimated for the SFAS No.
123, Accounting for Stock-Based Compensation
(SFAS No. 123) pro forma disclosures.

Prior to
adopting SFAS No. 123(R) on January 1, 2006, the Company used a graded
attribution method, as described in Financial Accounting Standards Board (FASB)
Interpretation No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans,
to recognize its pro forma stock-based compensation expense. Unrecognized
stock-based compensation expense for awards granted prior to the adoption of
SFAS No. 123(R) is recognized under the graded attribution method. Stock-based
compensation expense for awards granted after the adoption of SFAS No. 123(R)
is recognized under a straight-line attribution method.

The amount of
stock-based compensation expense recognized during a period is based on the
portion of the awards that are ultimately expected to vest. The Company
estimates pre-vesting option forfeitures at the time of grant by analyzing
historical data and revises those estimates in subsequent periods if actual
forfeitures differ from those estimates. Ultimately, the total expense
recognized over the vesting period will only be for those awards that vest. The
Companys awards are not eligible to vest early in the event of retirement,
however, the majority of the Companys awards vest early in the event of a change in control.

As a result of
the adoption of SFAS No. 123(R), the Companys earnings before income taxes for
fiscal years 2008, 2007 and 2006 were reduced by $52.9 million, $54.5 million
and $70.4 million, respectively, and the Companys net earnings for the same
periods were reduced by $37.8 million, $38.4 million and $49.4 million,
respectively. Basic net earnings per share for fiscal years 2008, 2007 and 2006
were reduced by $0.11, $0.11 and $0.14, respectively, and the Companys diluted
net earnings per share for the same periods were reduced by $0.11, $0.11 and
$0.13, respectively.

The adoption
of SFAS No. 123(R) also had a material impact on the Companys presentation of
its consolidated statement of cash flows. Prior to the adoption of SFAS No.
123(R), stock option exercise tax benefits in excess of tax benefits from
recognized stock-based compensation expense were reported as operating cash
flows. Under SFAS No. 123(R), such excess tax benefits are reported as
financing cash flows. Although total cash flows under SFAS No. 123(R) remain
unchanged from what would have been reported under prior accounting standards,
net operating cash flows are reduced and net financing cash flows are increased
due to the adoption of SFAS No. 123(R). For fiscal years 2008, 2007 and 2006,
there were excess tax benefits of $49.0 million, $97.9 million and $28.6
million, respectively, which were required to be classified as operating cash
outflows and financing cash inflows.

Net Earnings Per Share:
Basic net earnings per share is computed by dividing net earnings by the
weighted average number of outstanding common shares during the period,
exclusive of restricted shares. Diluted net earnings per share is computed by
dividing net earnings by the weighted average number of outstanding common
shares and dilutive securities.

31

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The following
table sets forth the computation of basic and diluted net earnings per share
for fiscal years 2008, 2007 and 2006 (in thousands, except per share amounts):

|                                             |  |      |         |      |   |         |  |   |         | 
|-------------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | ------- | 
|                                             |  | 2008 |         | 2007 |   | 2006    | 
|Numerator:                                   |  |      |         |      |   |         |  |   |         | 
|Net earnings                                 |  | $    | 384,327 |      | $ | 559,038 |  | $ | 548,251 | 
|                                            
|Denominator:                                 |  |      |         |      |   |         |  |   |         | 
|Basic-weighted average shares outstanding    |  |      | 342,888 |      |   | 342,103 |  |   | 359,252 | 
|Effect of dilutive securities:               |  |      |         |      |   |         |  |   |         | 
|Employee stock options                       |  |      | 6,765   |      |   | 10,249  |  |   | 13,481  | 
|Restricted stock                             |  |      | 69      |      |   | 92      |  |   | 97      | 
|Diluted-weighted
 average shares outstanding |  |      | 349,722 |      |   | 352,444 |  |   | 372,830 | 
|Basic net
 earnings per share                |  | $    | 1.12    |      | $ | 1.63    |  | $ | 1.53    | 
|Diluted net earnings per share               |  | $    | 1.10    |      | $ | 1.59    |  | $ | 1.47    | 

Approximately
15.0 million, 12.0 million and 13.9 million shares of common stock subject to
employee stock options and restricted stock were excluded from the diluted net
earnings per share computation because they were not dilutive during fiscal
years 2008, 2007 and 2006, respectively.

Diluted
weighted average shares outstanding have also not been adjusted for the
warrants the Company sold in April 2007. The potentially dilutive common shares
to be issued under the warrants would only be included in diluted weighted
average shares outstanding if the Companys average stock price was greater
than the warrant exercise price of $60.73. The dilutive impact would be equal
to the number of shares needed to satisfy the intrinsic value of the warrants,
assuming exercise.

Foreign Currency Translation:
Sales and expenses denominated in foreign currencies are translated at average
exchange rates in effect throughout the year. Assets and liabilities of foreign
operations are translated at period-end exchange rates. Gains and losses from
translation of net assets of foreign operations, net of related income taxes,
are recorded in accumulated other comprehensive income. Foreign currency
transaction gains and losses are included in other income (expense).

Derivative Financial Instruments:
The Company follows the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
(SFAS No. 133), as amended, in accounting for derivative instruments and
hedging activities. SFAS No. 133 requires all derivative financial instruments
to be recognized on the balance sheet at fair value. Changes in the fair value
of derivatives are recognized in net earnings or other comprehensive income
depending on whether the derivative is designated as part of a qualifying
hedging transaction under SFAS No. 133.

The Company
uses forward exchange contracts to manage foreign currency exposures related to
intercompany receivables and payables arising from intercompany purchases of
manufactured products. These forward contracts are not designated as hedges and
therefore, the changes in the fair values of these derivatives are recognized
in net earnings and classified in other income (expense). The gains and losses
on these contracts largely offset the losses or gains on the foreign currency
exposures being managed. The amount of forward exchange contracts outstanding
at January 3, 2009 and the related fair value was not material.

In 2008, the
Company entered into an interest rate swap contract to convert the $400.0
million of variable-rate borrowings under the Companys long-term committed
credit facility into fixed-rate borrowings. The Company designated this
interest rate swap as a cash flow hedge under SFAS No. 133. At January 3, 2009,
the Company recognized an unrealized after-tax loss of $0.4 million in other
comprehensive income to recognize the fair value of this interest rate swap.
Payments made or received under this interest rate swap contract are recorded
to interest expense. The related net payments made in 2008 were not material.

New Accounting Pronouncements:
The Company adopted the required provisions of SFAS No. 157, Fair Value Measurements (SFAS
No. 157) at the beginning of fiscal year 2008 (see Note 12), resulting in no
impact to the Companys consolidated financial statements. SFAS No. 157
establishes a framework for measuring fair value, clarifies the definition of
fair value and expands disclosures about fair-value measurements. In general,
SFAS No. 157 applies to fair value measurements that are already required or
permitted by other accounting standards and is expected to increase the consistency
of those measurements. SFAS No. 157, as issued, was effective for fiscal years
beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff
Position (FSP) SFAS No. 157-2, Effective
Date of FASB Statement No. 157 (FSP SFAS No.
157-2) which deferred the effective date of SFAS No. 157 for one year for
certain nonfinancial assets and nonfinancial liabilities. The Company adopted
the remaining provisions of SFAS No. 157 at the beginning of fiscal year 2009,
which did not result in a material impact to the Companys financial
statements.

32

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In December
2007, the FASB issued SFAS No. 141(R), which amends SFAS No. 141and provides revised guidance for
recognizing and measuring identifiable assets and goodwill acquired,
liabilities assumed and any noncontrolling interest in the acquiree. Some of
the revised guidance of SFAS No. 141(R) includes initial capitalization of
acquired IPR&D, expensing transaction costs, expensing acquired
restructuring costs and recording contingent consideration payments at fair
value with subsequent adjustments recorded to net earnings. It also provides
expanded disclosure requirements to enable users of the financial statements to
evaluate the nature and financial statement effects of the business combination.
SFAS No. 141(R) is effective for fiscal years beginning on or after December
15, 2008 and will be applied prospectively to business combinations that are
consummated after adoption of SFAS No. 141(R). The Company adopted SFAS No.
141(R) at the beginning of fiscal year 2009, and any acquisitions made by the
Company in 2009 and future periods will be subject to this new accounting
guidance.

In March 2008,
the FASB issued SFAS No. 161, Disclosures
about Derivative Instruments and Hedging Activities (SFAS No. 161).
SFAS No. 161 expands disclosures about derivative instruments and hedging
activities to provide a better understanding of a companys use of derivatives
and their effect on the financial statements. SFAS No. 161 is effective for
fiscal years beginning on or after December 15, 2008. The Companys adoption of
this standard at the beginning of fiscal year 2009 did not result in a material
impact to the Companys consolidated financial statements.

In May 2008,
the FASB issued FSP Accounting Principles Board (APB) Opinion No. 14-1, Accounting for Convertible Debt Instruments That May
Be Settled in Cash upon Conversion (Including Partial Cash Settlement)
(FSP APB No. 14-1). The FSP requires the proceeds from the issuance of such
convertible debt instruments to be allocated between a liability and an equity
component in a manner that reflects the entitys nonconvertible debt borrowing
rate when interest expense is recognized in subsequent periods. The resulting
debt discount is amortized over the period the convertible debt is expected to
be outstanding as additional non-cash interest expense. FSP APB No. 14-1 is
effective in fiscal years beginning after December 15, 2008 and requires
retrospective application to all prior periods presented. The Companys 2009
adoption will require historical financial statements for fiscal year 2005
through fiscal year 2008 to be adjusted to conform to the FSPs new accounting
treatment for both the 1.22% Convertible Senior Debentures due 2008 (1.22%
Convertible Debentures) and 2.80% Convertible Senior Debentures due 2035 (2.80%
Convertible Debentures), which were issued in April 2007 and December 2005,
respectively (see Note 4). The retrospective application of this new accounting
treatment will primarily result in a non-cash increase to interest expense
reported in the Companys historical financial statements. The Company
currently estimates the retrospective annual increase to its 2008, 2007 and
2006 interest expense to be approximately $50 million, $34 million and $15 million,
respectively. The exact impact on the Companys historical financial statements
will be reflected in the comparative financial information that will be
included in the Companys fiscal year 2009 financial statements.

NOTE 2  ACQUISITIONS

The results of
operations of businesses acquired have been included in the Companys
consolidated results of operations since the dates of acquisition. Pro forma
results of operations have not been presented for these acquisitions since the
effects of these business acquisitions were not material to the Company either
individually or in aggregate.

Fiscal Year 2008

EP MedSystems, Inc.:
On July 3, 2008, the Company completed the acquisition of EP MedSystems, Inc.
(EP MedSystems) for $95.7 million (consisting of $59.0 million in net cash
consideration and direct acquisition costs and 0.9 million shares of St. Jude
Medical common stock). EP MedSystems had been publicly traded on the NASDAQ
Capital Market under the ticker symbol EPMD. EP MedSystems is based in West Berlin,
New Jersey and develops, manufactures and markets medical devices for the
electrophysiology market which are used for visualization, diagnosis and
treatment of heart rhythm disorders. The Company acquired EP MedSystems to
strengthen its portfolio of products used to treat heart rhythm disorders.

The goodwill
recorded as a result of the EP MedSystems acquisition is not deductible for
income tax purposes and was allocated entirely to the Companys Atrial
Fibrillation operating segment. The goodwill represents the strategic benefits
of growing our Atrial Fibrillation product portfolio and the expected revenue
growth from increased market penetration from future product and customers. In
connection with the acquisition of EP MedSystems, the Company recorded $17.0
million of developed and core technology intangible assets that have estimated
useful lives of 7 to 10 years and $3.3 million of customer relationship
intangible assets that have estimated useful lives of 7 to 10 years. The
aggregate EP MedSystems purchase price was allocated on a preliminary basis to
the assets acquired and liabilities assumed based on their estimated fair
values at the date of acquisition.

33

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Radi Medical Systems AB:
On December 19, 2008, the Company completed the acquisition of Radi Medical
Systems AB (Radi Medical Systems) for $248.9 million in net cash consideration,
including direct acquisition costs. Radi Medical Systems is based in Uppsala,
Sweden and develops, manufactures and markets products that provide precise
measurements of intravascular pressure during a cardiovascular procedure and
compression systems that arrest bleeding of the femoral and radial arteries
following an intravascular medical device procedure. The Company acquired Radi
Medical Systems to accelerate its cardiovascular growth platform in these two
segments of the cardiovascular medical device market in which the Company
previously had not participated.

The goodwill
recognized as a result of the Radi Medical Systems acquisition is not
deductible for income tax purposes and was allocated entirely to the Companys
Cardiovascular operating segment. The goodwill represents the strategic
benefits of growing our Cardiovascular product portfolio and the expected
revenue growth from increased market penetration from future products and
customers. In connection with the acquisition of Radi Medical Systems, the
Company recorded $46.0 million of developed and core technology intangible
assets that have estimated useful lives of 8 to 10 years. The aggregate Radi
Medical Systems purchase price was allocated on a preliminary basis to the
assets acquired and liabilities assumed based on their estimated fair values at
the date of acquisition.

MediGuide, Inc.: On
December 22, 2008, the Company completed the acquisition of MediGuide, Inc.
(MediGuide) for $285.2 million in net consideration, which includes future
estimated cash consideration payments of approximately $145 million and direct acquisition
costs. The additional cash consideration payments consist of an estimated $111
million payment in November 2009 and an estimated $34 million payment in April
2010, which is being held as security for potential indemnification obligations
of MediGuide. MediGuide was a development-stage company based in Haifa, Israel
and has been focused on developing a Medical Positioning System (gMPSTM)
technology that provides localization and tracking capability for
interventional medical devices. As MediGuide was a development-stage company,
the excess of the purchase price over the fair value of the net assets acquired
was allocated to IPR&D, the principal asset acquired.

The following
table summarizes the estimated fair values of the assets acquired and
liabilities assumed as a result of the significant acquisitions made by the
Company in fiscal year 2008 (in thousands):

|                                     |  |               |         |                       |   |           |  |       |         |  |   |         | 
|------------------------------------ |  | ------------- | ------- | --------------------- | - | --------- |  | ----- | ------- |  | - | ------- | 
|(in thousands)                       |  | EP MedSystems |         | Radi
 Medical Systems |   | MediGuide |  | Total |        
|Current assets                       |  | $             | 8,506   |                       | $ | 21,224    |  | $     | 132     |  | $ | 29,862  | 
|Goodwill                             |  |               | 69,719  |                       |   | 219,428   |  |       |        |  |   | 289,147 | 
|Other intangible assets              |  |               | 20,250  |                       |   | 46,000    |  |       |        |  |   | 66,250  | 
|IPR&D                                |  |               |        |                       |   |          |  |       | 306,202 |  |   | 306,202 | 
|Deferred income taxes, net           |  |               | 17,213  |                       |   |          |  |       |        |  |   | 17,213  | 
|Other long-term assets               |  |               | 1,101   |                       |   | 6,629     |  |       | 408     |  |   | 8,138   | 
|Total assets acquired                |  | $             | 116,789 |                       | $ | 293,281   |  | $     | 306,742 |  | $ | 716,812 | 
|                                     |  |               |         |                       |   |           |  |       |         |  |   |         | 
|Current liabilities                  |  |               | 21,084  |                       | $ | 31,405    |  |       | 21,580  |  |   | 74,069  | 
|Deferred income taxes, net           |  |               |        |                       |   | 12,930    |  |       |        |  |   | 12,930  | 
|Net assets acquired                  |  | $             | 95,705  |                       | $ | 248,946   |  | $     | 285,162 |  | $ | 629,813 | 
|                                     |  |               |         |                       |   |           |  |       |         |  |   |         | 
|Cash paid, net of cash
 acquired     |  | $             | 58,994  |                       | $ | 248,946   |  | $     | 140,104 |  |   | 448,044 | 
|Non-cash (SJM shares at
 fair value) |  |               | 36,711  |                       |   |          |  |       |        |  |   | 36,711  | 
|Future cash consideration            |  |               |        |                       |   |          |  |       | 145,058 |  |   | 145,058 | 
|Net assets acquired                  |  | $             | 95,705  |                       | $ | 248,946   |  | $     | 285,162 |  | $ | 629,813 | 

The Company
also completed other acquisitions during 2008. On August 7, 2008, the Companys
CVs segment acquired Datascope Corporations (Datascope) vascular closure
business and collagen operations for $21.8 million in cash consideration and
direct acquisition costs. The Company is holding an additional $3.0 million as
security for potential indemnification obligations of Datascope, which may
become payable under the applicable asset purchase agreement entered into
between Datascope and the Company. This holdback amount, less any amounts
offset against it, will be paid to Datascope 18 months following the closing
date of the transaction. During 2008, the Company made other acquisitions,
primarily acquiring businesses involved in the distribution of the Companys
products for aggregate cash consideration of $20.2 million, which was recorded
within other intangible assets.

34

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Fiscal Year 2007

During 2007,
the Company acquired businesses involved in the distribution of the Companys
products for aggregate cash consideration of $12.2 million, which was recorded
within other intangible assets.

Fiscal Year 2006

Advanced
Neuromodulation Systems, Inc.: During 2006, the Company finalized the purchase
price allocation relating to the acquisition of ANS. The impacts of finalizing
the purchase price allocation, individually and in the aggregate, were not
material. Overall, the Company recorded a $2.9 million net increase to goodwill
upon finalization of the purchase accounting.

During 2006,
the Company also acquired businesses involved in the distribution of the
Companys products for aggregate cash consideration of $38.8 million, which was
recorded within other intangible assets.

NOTE 3  GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in
the carrying amount of goodwill for each of the Companys reportable segments
for the fiscal years ended January 3, 2009 and December 29, 2007 were as
follows (in thousands):

|                              |  |           |           |       |   |         |   |   |           | 
|----------------------------- |  | --------- | --------- | ----- | - | ------- | - | - | --------- | 
|                              |  | CRM/Neuro |           | CV/AF |   | Total   |  
|Balance at December 30,
 2006 |  | $         | 1,189,893 |       | $ | 459,688 |   | $ | 1,649,581 | 
|Foreign currency
 translation |  |           | 7,079     |       |   | 653     |   |   | 7,732     | 
|Balance at December 29,
 2007 |  |           | 1,196,972 |       |   | 460,341 |   |   | 1,657,313 | 
|Foreign currency
 translation |  |           | 10,679    |       |   | (641    | ) |   | 10,038    | 
|EP Medsystems                 |  |           |          |       |   | 69,719  |   |   | 69,719    | 
|Radi Medical Systems          |  |           |          |       |   | 219,428 |   |   | 219,428   | 
|Other                         |  |           | 3,887     |       |   | 24,181  |   |   | 28,068    | 
|Balance at January 3, 2009    |  | $         | 1,211,538 |       | $ | 773,028 |   | $ | 1,984,566 | 

The following
table provides the gross carrying amount of other intangible assets and related
accumulated amortization (in thousands):

|                                             |  |                         |         |                           |   |                         |  |                           |         |  |   |         | 
|-------------------------------------------- |  | ----------------------- | ------- | ------------------------- | - | ----------------------- |  | ------------------------- | ------- |  | - | ------- | 
|                                             |  | January 3, 2009         |         | December 29, 2007         |  
|                                             |  | Gross
 carrying
 amount |         | Accumulated
 amortization |   | Gross
 carrying
 amount |  | Accumulated
 amortization |        
|                                            
|Purchased technology and
 patents            |  | $                       | 494,796 |                           | $ | 124,749                 |  | $                         | 473,430 |  | $ | 102,119 | 
|Customer lists and
 relationships            |  |                         | 166,637 |                           |   | 63,385                  |  |                           | 153,388 |  |   | 51,055  | 
|Trademarks and tradenames                    |  |                         | 22,651  |                           |   | 4,789                   |  |                           | 23,300  |  |   | 3,236   | 
|Licenses, distribution
 agreements and other |  |                         | 5,529   |                           |   | 3,155                   |  |                           | 6,749   |  |   | 1,757   | 
|                                             |  | $                       | 689,613 |                           | $ | 196,078                 |  | $                         | 656,867 |  | $ | 158,167 | 

Amortization
expense of other intangible assets was $53.4 million, $53.9 million and $50.1
million for fiscal years 2008, 2007 and 2006, respectively. In 2008, the
Company recorded a $37.0 million impairment charge to write down purchased technology
intangible assets associated with its 2005 Velocimed acquisition and a $1.7
million impairment charge to write off ANS tradename intangible assets (see
Note 8). In 2007, the Company recorded impairment charges of $23.7 million
related to acquired intangible assets associated with a terminated distribution
agreement (see Note 8). The gross carrying values and related accumulated
amortization amounts for these impairment charges were written off in the
respective periods.

The following
table presents expected future amortization expense for amortizable intangible
assets. Actual amounts of amortization expense may differ due to additional
intangible assets acquired and foreign currency translation impacts.

35

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Expected
future amortization expense for amortizable intangible assets is as follows (in
thousands):

|                     |  |      |        |      |   |        |  |      |        |      |   |             |  |   |        |  |   |         | 
|-------------------- |  | ---- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ----------- |  | - | ------ |  | - | ------- | 
|                     |  | 2009 |        | 2010 |   | 2011   |  | 2012 |        | 2013 |   | After
 2013 | 
|                    
|Amortization expense |  | $    | 56,083 |      | $ | 55,892 |  | $    | 55,479 |      | $ | 53,081      |  | $ | 51,806 |  | $ | 221,194 | 

NOTE 4  DEBT

The Companys
long-term debt consisted of the following (in thousands):

|                                         |  |                 |           |                   |   |           | 
|---------------------------------------- |  | --------------- | --------- | ----------------- | - | --------- | 
|                                         |  | January 3, 2009 |           | December 29, 2007 |  
|Credit facility borrowings               |  | $               | 500,000   |                   | $ |          | 
|Commercial paper borrowings              |  |                 | 19,400    |                   |   |          | 
|Term loan due 2011                       |  |                 | 360,000   |                   |   |          | 
|1.02% Yen-denominated notes
 due 2010    |  |                 | 230,088   |                   |   | 182,493   | 
|Yen-denominated term loan
 due 2011      |  |                 | 88,222    |                   |   |          | 
|1.22% Convertible senior
 debentures     |  |                 |          |                   |   | 1,200,000 | 
|2.80% Convertible senior
 debentures     |  |                 | 374       |                   |   | 5,498     | 
|Other                                    |  |                 | 3,518     |                   |   |          | 
|Total long-term debt                     |  |                 | 1,201,602 |                   |   | 1,387,991 | 
|Less: current portion of
 long-term debt |  |                 | 75,518    |                   |   | 1,205,498 | 
|Long-term debt                           |  | $               | 1,126,084 |                   | $ | 182,493   | 

Credit facility borrowings:
In December 2006, the Company entered into a 5-year, $1.0 billion committed
credit facility that it may draw on for general corporate purposes and to
support its commercial paper program. Borrowings under this facility bear
interest at the United States Prime Rate (Prime Rate) or United States Dollar London
InterBank Offered Rate (LIBOR) plus 0.235%, at the election of the Company. In
the event over half of the facility is drawn upon, an additional five basis
points is added to the elected Prime Rate or LIBOR rate. Additionally, the
interest rate is subject to adjustment in the event of a change in the
Companys credit ratings. In October
2008, the Company borrowed $500.0 million under this credit facility to fund
the retirement of the Companys 1.22% Convertible Debentures in December 2008. There
were no outstanding borrowings under this credit facility during fiscal years
2007 or 2006.

During the
first quarter of 2007, the Company borrowed $350.0 million under an interim
liquidity facility to finance a portion of common stock repurchases made during
the first half of 2007. Borrowings under this liquidity facility bore interest
at a weighted average effective interest rate of 5.7%. On April 25, 2007, this
facility expired and the Company repaid the related outstanding borrowings using
a portion of the proceeds from the issuance of the 1.22% Convertible
Debentures.

Commercial paper borrowings:
The Companys commercial paper program provides for the issuance of short-term,
unsecured commercial paper with maturities up to 270 days. The Company had
outstanding commercial paper borrowings of $19.4 million at January 3, 2009 and
no outstanding commercial paper borrowings at December 29, 2007. During 2008
and 2007 the Company issued commercial paper at weighted average effective
interest rates of 1.0% and 5.4%, respectively. Any future commercial paper
borrowings would bear interest at the applicable then-current market rates. The
Company classifies all of its commercial paper borrowings as long-term debt as
the Company has the ability to repay any short-term maturity with available
cash from its existing long-term, committed credit facility.

Term loan due 2011:
On December 18, 2008, the Company entered into a 3-year, unsecured term loan
totaling $360.0 million, which can be used for general corporate purposes or to
refinance certain other outstanding borrowings of the Company. These borrowings
bear interest at LIBOR plus 2.0%, although the Company may elect the Prime Rate
plus 1.0%. The interest rates are subject to adjustment in the event of a
change in the Companys credit ratings. The Company is required to make
quarterly principal payments in the amount of 5% of the original outstanding
borrowings. The Company had the option to make additional borrowings under this
term loan, and in January 2009, the Company elected to borrow an additional
$180.0 million resulting in total borrowings of $540.0 million under this
3-year term loan.

1.02% Yen-denominated notes due 2010:
In May 2003, the Company issued 7-year, 1.02% unsecured notes totaling 20.9
billion Yen (the equivalent of $230.1 million at January 3, 2009 and $182.5
million at December 29, 2007). Interest payments are required on a semi-annual
basis and the entire principal balance is due in May 2010. The principal amount
recorded on the balance sheet fluctuates based on the effects of foreign
currency translation. As of January 3, 2009, the fair value of this term loan
approximated its carrying value.

36

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Yen-denominated term loan due 2011:
On December 9, 2008, the Company entered into a 3-year, Yen-denominated
unsecured term loan in Japan (Yen Term Loan) totaling 8.0 billion Japanese Yen
(the equivalent of $88.2 million at January 3, 2009). The borrowings bear
interest at the Yen LIBOR plus 2.0%. Interest payments are required on a semi-annual
basis and the entire principal balance is due in December 2011. The principal
amount recorded on the balance sheet fluctuates based on the effects of foreign
currency translation.

1.22% Convertible Senior Debentures:
In April 2007, the Company issued $1.2 billion aggregate principal amount of
1.22% Convertible Debentures that matured on December 15, 2008. Interest on the
1.22% Convertible Debentures was payable on June 15 and December 15 of each
year. Under certain circumstances, holders had the right to convert their 1.22%
Convertible Debentures at an initial conversion rate of 19.2101 shares per
$1,000 principal amount (equivalent to an initial conversion price of
approximately $52.06 per share). Upon conversion, the Company was required to
satisfy 100% of the principal amount of the 1.22% Convertible Debentures solely
in cash, with any amounts above the principal amount to be satisfied in shares
of the Companys common stock, cash or a combination of common stock and cash,
at the Companys election. On December 15, 2008, the Company retired the 1.22%
Convertible Debentures for cash, which was primarily funded by borrowings and
cash from operations.

In connection
with the issuance of the 1.22% Convertible Debentures, the Company had
purchased a $101.0 million call option in a private transaction to receive
shares of its common stock. The purchase of the call option was intended to
offset potential dilution to the Companys common stock upon potential future
conversion of the 1.22% Convertible Debentures. The call option was exercisable
at approximately $52.06 per share and allowed the Company to receive the same
number of shares and/or amount of cash from the counterparty as the Company
would be required to deliver upon potential future conversion of the 1.22%
Convertible Debentures. The call option was not exercised, and expired on
December 15, 2008.

Separately,
the Company also sold warrants for approximately 23.1 million shares of its
common stock in a private transaction. Over a two-month period beginning in
April 2009, the Company may be required to issue shares of its common stock to
the counterparty if the average price of the Companys common stock during a
defined period exceeds the warrant exercise price of approximately $60.73 per
share. The Company received proceeds of $35.0 million from the sale of these
warrants, which were recorded as an increase to shareholders equity.

2.80% Convertible Senior Debentures:
In December 2005, the Company issued $660.0 million aggregate principal amount
of 30-year 2.80% Convertible Debentures. The Company has the right to redeem
some or all of the 2.80% Convertible Debentures for cash at any time. Interest
on the 2.80% Convertible Debentures is payable on June 15 and December 15 of
each year. Holders of the 2.80% Convertible Debentures can require the Company
to repurchase for cash some or all of the 2.80% Convertible Debentures on
December 15 in the years 2006, 2008, 2010, 2015, 2020, 2025 and 2030. In
December 2006 and December 2008, holders required the Company to repurchase
$654.5 million and $5.1 million, respectively, of the 2.80% Convertible
Debentures for cash. As of January 3, 2009, $0.4 million aggregate principal
amount of the 2.80% Convertible Debentures remained outstanding. The remaining
holders may convert each of the $1,000 principal amounts of the 2.80%
Convertible Debentures into 15.5009 shares of the Companys common stock (an
initial conversion price of approximately $64.51) under certain circumstances.
The total number of contingently issuable shares that could be issued to
satisfy conversion of the remaining $0.4 million aggregate principal amount of
the 2.80% Convertible Debentures is not material.

NOTE 5  COMMITMENTS AND CONTINGENCIES

Leases

The Company
leases various facilities and equipment under noncancelable operating lease
arrangements. Future minimum lease payments under these leases are as follows:
$26.4 million in 2009; $20.5 million in 2010; $15.2 million in 2011; $12.0
million in 2012; $10.2 million in 2013; and $11.3 million in years thereafter.
Rent expense under all operating leases was $28.6 million, $27.4 million and
$24.6 million in fiscal years 2008, 2007 and 2006, respectively.

37

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Litigation

The Company
accrues a liability for costs related to claims, including future legal costs,
settlements and judgments, where it has assessed that a loss is probable and an
amount can be reasonably estimated. The Company also records a receivable from
its product liability insurance carriers for amounts expected to be recovered.

Silzone® Litigation and Insurance Receivables:
In July 1997, the Company began marketing mechanical heart valves which
incorporated Silzone® coating. The Company later began marketing heart valve
repair products incorporating Silzone® coating. Silzone® coating was intended
to reduce the risk of endocarditis, a bacterial infection affecting heart
tissue, which is associated with replacement heart valve surgery. In January
2000, the Company initiated a voluntary field action for products incorporating
Silzone® coating after receiving information from a clinical study that
patients with a Silzone®-coated heart valve had a small, but statistically
significant, increased incidence of explant due to paravalvular leak compared
to patients in that clinical study with heart valves that did not incorporate
Silzone® coating.

Subsequent to
the Companys voluntary field action, the Company has been sued in various
jurisdictions beginning in March 2000 by some patients who received a product
with Silzone® coating and, as of February 18, 2009, such cases are pending in
the United States and Canada. Some of these claimants allege bodily
injuries as a result of an explant or other complications, which they attribute
to Silzone®-coated products. Others, who have not had their Silzone®-coated
heart valve explanted, seek compensation for past and future costs of special
monitoring they allege they need over and above the medical monitoring all
other replacement heart valve patients receive. Some of the lawsuits seeking
the cost of monitoring have been initiated by patients who are asymptomatic and
who have no apparent clinical injury to date. The Company has vigorously
defended against the claims that have been asserted and expects to continue to
do so with respect to any remaining claims.

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

In October
2001, eight class-action complaints were consolidated into one class action
case by the District Court. The Company requested the Eighth Circuit Court of
Appeals (the Eighth Circuit) to review the District Courts initial class
certification orders and, in October 2005, the Eighth Circuit issued a decision
reversing the District Courts class certification rulings and directed the
District Court to undertake further proceedings. In October 2006, the District
Court granted plaintiffs renewed motion to certify a nationwide consumer
protection class under Minnesotas consumer protection statutes and Private
Attorney General Act. The Company again requested the Eighth Circuit to review
the District Courts class certification orders and, in April 2008, the Eighth
Circuit again issued a decision reversing the District Courts October 2006
class certification rulings. The order by the Eighth Circuit returned the case
to the District Court for continued proceedings. Plaintiffs have recently
requested the District Court to certify a new class. The Company is vigorously
defending against such certification.

On February 12, 2009, the District Court signed an order allowing two individuals to withdraw as representatives in the purported class action. Thus, as of February
18, 2009, there are three individual Silzone® cases pending in federal court. The
plaintiffs in these cases are requesting damages in excess of $75 thousand. The complaint
in the case that was most recently transferred to the MDL court was served upon the Company
in December 2008.

There are eight individual state court suits concerning Silzone®-coated products pending as of
February 18, 2009, involving eight patients. These cases are venued in Minnesota,
Nevada and Texas. The complaints in these state court cases are requesting
damages ranging from $10 thousand to $100 thousand and, in some cases, seek an
unspecified amount. The most recent individual state court complaint was served
upon the Company in February 2008. These state court cases are proceeding in
accordance with the orders issued by the judges in those matters.

In addition, a
lawsuit seeking a class action for all persons residing in the European
Economic Union member jurisdictions who have had a heart valve replacement
and/or repair procedure using a product with Silzone® coating was filed in
Minnesota state court and served upon the Company in February 2004 by two
European citizens who now reside in Canada. The complaint seeks damages in an
unspecified amount for the class, and in excess of $50 thousand for each
plaintiff. The complaint also seeks injunctive relief in the form of
medical monitoring. The Company opposed the plaintiffs pursuit of this case on
jurisdictional, procedural and substantive grounds, and in April 2008, the
Minnesota state court denied the plaintiffs request for class certification.
The time for appeal has expired. The class representatives in this matter have not dismissed their individual claims, and that case is one of the eight pending individual state court actions mentioned above.

38

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In Canada,
there are also four class-action cases and one individual case pending against
the Company. In one such case in Ontario, the court certified that a class
action involving Silzone® patients may proceed, and the trial of the initial
phase of this matter may occur as early as April 2009. A second case seeking
class action status in Ontario has been stayed pending resolution of the other
Ontario class action. A case filed as a class action in British Columbia remains
pending. A court in Quebec has certified a class action, and that matter is
proceeding in accordance with that court's orders. Additionally, the Company has
been served with lawsuits by the British Columbia Provincial health insurer and
the Quebec Provincial health insurer to recover the cost of insured services
furnished or to be furnished to class members in the class actions pending in
British Columbia and Quebec, respectively. The complaints in the Canadian cases
request damages ranging from 1.5 million to 2.0 billion Canadian Dollars (the
equivalent to $1.2 million to $1.6 billion at January 3, 2009).

In France, one
case involving one plaintiff was pending as of February 18, 2009. In November
2004, an Injunctive Summons to Appear was served, requesting damages in excess
of 3 million Euros (the equivalent to $4.2 million at January 3, 2009).

The Company is
not aware of any unasserted claims related to Silzone®-coated products. Company
management believes that the final resolution of the Silzone® cases will take a
number of years.

The Company
has recorded an accrual for probable legal costs that it will incur to defend
the various cases involving Silzone®-coated products, and the Company has
recorded a receivable from its product liability insurance carriers for amounts
expected to be recovered. The Company has not accrued for any amounts
associated with settlements or judgments because potential losses cannot be
reasonably estimated. Based on the Companys experience in these types of
individual cases, the amount ultimately paid, if any, often does not bear any
relationship to the amount claimed by the plaintiffs and is often significantly
less than the amount claimed. Management expects that any costs (the material
components of which are settlements, judgments, legal fees and other related
defense costs) not covered by the Companys product liability insurance
policies or existing reserves will not have a material adverse effect on the
Companys consolidated financial position, although such costs may be material
to the Companys consolidated earnings and cash flows of a future period. As of
January 3, 2009, the Companys Silzone® litigation reserve was $22.3 million
and its receivable from insurance carriers was $25.5 million.

A summary of
the activity relating to the Silzone® litigation reserve for the fiscal years
ended January 3, 2009 and December 29, 2007 is as follows (in thousands):

|                              |  |   |        |  
|----------------------------- |  | - | ------ | -
|                              |  |   |        |  
|Balance at
 December 30, 2006 |  | $ | 39,494 |  
|                              |  |   |        |  
|Accrued
 costs adjustment     |  |   | (9,000 | )
|Cash
 payments                |  |   | (3,591 | )
|Balance at
 December 29, 2007 |  |   | 26,903 |  
|                             
|Cash
 payments                |  |   | (4,595 | )
|Balance at
 January 3, 2009   |  | $ | 22,308 |  

The Companys
remaining product liability insurance for Silzone® claims consists of two $50
million layers, each of which is covered by one or more insurance companies.
The current $50 million layer of insurance is covered by American Insurance
Company (AIC). In December 2007, AIC initiated a lawsuit in Minnesota Federal
District Court seeking a court order declaring that it is not required to
provide coverage for a portion of the Silzone® litigation defense and indemnity
expenses that the Company may incur in the future. The Company believes the
claims of AIC are without merit and plans to vigorously defend against the
claims AIC has asserted. The insurance broker that assisted the Company in
procuring the insurance with AIC has recently been added as a party to the
case. For all Silzone® legal costs incurred, the Company records insurance
receivables for the amounts that it expects to recover.

Part of the
Companys final layer of insurance ($20.0 million of the final $50.0 million
layer) is covered by Lumbermans Mutual Casualty Insurance, a unit of the
Kemper Insurance Companies (collectively referred to as Kemper). Prior to being
no longer rated by A.M. Best, Kempers financial strength rating was downgraded
to a D (poor). Kemper is currently in run off, which means it is no longer
issuing new policies, and therefore, is not generating any new revenue that
could be used to cover claims made under previously-issued policies. In the
event Kemper is unable to pay claims directed to it, the Company believes the
other insurance carriers in the final layer of insurance will take the position
that the Company will be directly liable for any claims and costs that Kemper
is unable to pay. It is possible that Silzone® costs and expenses will reach
the limit of the final Kemper layer of insurance coverage, and it is possible
that Kemper will be unable to meet its full obligations to the Company.
Therefore, the Company could incur an expense up to $20.0 million for which it
would have otherwise been covered. While potential losses are possible, the
Company has not accrued for any such losses as they are not reasonably
estimable at this time.

39

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Guidant 1996 Patent Litigation:
In November 1996, Guidant Corporation (Guidant), which became a subsidiary of
Boston Scientific Corporation in 2006, sued the Company in federal district
court for the Southern District of Indiana alleging that the Company did not
have a license to certain patents controlled by Guidant covering ICDs and
alleging that the Company was infringing those patents.

Guidants
original suit alleged infringement of four patents by the Company. Guidant
later dismissed its claim on the first patent and the district court ruled that
the second patent was invalid, and this ruling was later upheld by the Court of
Appeals for the Federal Circuit (CAFC). The third patent was found to be
invalid by the district court. The fourth patent (the 288 patent) was
initially found to be invalid by the district court judge, but the CAFC
reversed this decision in August 2004. The case was returned to the district
court in November 2004. The district court issued rulings on claims
construction and a response to motions for summary judgment in March 2006.
Guidants special request to appeal certain aspects of these rulings was
rejected by the CAFC. In March 2007, the district court judge responsible for
the case granted summary judgment in favor of the Company, ruling that the only
remaining patent claim (the 288 patent) asserted against the Company in the
case was invalid. In April 2007, Guidant appealed the district courts March
2007 and March 2006 rulings. In December 2008, the CAFC upheld the March 2006
rulings of the district court but also reversed the district courts March 2007
ruling that the 288 patent was invalid. As such, based on that ruling,
although the invalidity of the patent has now been overturned, the damages in
the case going forward are limited to those relatively few instances prior to
the expiration of the patent in 2003 when the cardioversion therapy method
described in the only remaining claim of the 288 patent is actually practiced.

While the
parties have filed requests with the CAFC requesting that the entire CAFC
rehear some of the issues addressed in the December 2008 decision, the CAFC has
not yet ruled on these requests.

The 288
patent expired in December 2003. Accordingly, the final outcome of the
litigation involving the 288 patent cannot result in an injunction precluding
the Company from selling ICD products in the future. Sales of the Companys ICD
products in which Guidant asserts infringement of the 288 patent were
approximately 18% and 16% of the Companys consolidated net sales during fiscal
years 2003 and 2002, respectively. Additionally, based on a July 2006
agreement, in exchange for the Companys agreement not to pursue the recovery
of attorneys fees or assert certain claims and defenses, Guidant agreed it would
not seek recovery of lost profits, prejudgment interest or a royalty rate in
excess of 3% of net sales for any patents found to be infringed upon by the
Company. This agreement had the effect of limiting the Companys financial
exposure. However, any potential losses arising from any legal settlements or
judgments could be material to the Companys consolidated earnings, financial
position and cash flows. The Company has not accrued any amounts for legal
settlements or judgments related to the Guidant 1996 patent litigation.
Although the Company believes that the assertions and claims in the Guidant
1996 patent litigation are without merit, potential losses arising from any
legal settlements or judgments are possible, but not reasonably estimable at this
time.

Ohio OIG Investigation:
In July 2007, the Company received a civil subpoena from the U.S. Department of
Health and Human Services, Office of the Inspector General (OIG), requesting
documents regarding the Companys relationships with ten Ohio hospitals during
the period from 2003 through 2006. The Company has received follow-up requests from the U.S. Department
of Justice and the U.S. Attorneys Office in Cleveland regarding this matter. The Company is cooperating with the
investigation and is continuing to work with the OIG in responding to the
subpoena.

Boston U.S. Attorney Investigation:
In October 2005, the U.S. Department of Justice, acting through the U.S.
Attorneys office in Boston, commenced an industry-wide investigation into
whether the provision of payments and/or services by makers of ICDs and
pacemakers to doctors or other persons constitutes improper inducements under
the federal health care program anti-kickback law. As part of this
investigation, the Company received a civil subpoena from the U.S. Attorneys
office in Boston requesting documents created since January 2000 regarding the
Companys practices related to ICDs, pacemakers, lead systems and related
products marketed by the Companys Cardiac Rhythm Management segment. The
Company understands that its principal competitors in the cardiac rhythm
management therapy areas received similar civil subpoenas. The Company received
an additional subpoena from the U.S. Attorneys office in Boston in September
2006, requesting documents created since January 2002 related to certain
employee expense reports and certain ICD and pacemaker purchasing arrangements.
The Company is cooperating with the investigation and has been producing
documents and witnesses as requested. In December 2008, the U.S. Attorneys
Office in Boston delivered a third subpoena issued by the Department of Health
& Human Services Office of Inspector General requesting the production of
documents relating to implantable cardiac rhythm device and pacemaker warranty
claims.

40

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In October
2008, the Company received a letter from the Civil Division of the U.S.
Department of Justice stating that it was investigating the Company for
potential False Claims Act and common law violations relating to the sale of
the Companys Epicor surgical ablation devices. The Department of Justice is
investigating whether companies marketed surgical ablation devices for
off-label treatment of atrial fibrillation. Other manufacturers of medical
devices used in the treatment of atrial fibrillation have reported receiving
similar letters. The letter requests that we provide documents from January 1,
2005, to present relating to FDA approval and marketing of Epicor ablation
devices.

French Competition Investigation:
In January 2007, the French Council of Competition issued a Statement of
Objections alleging that the Companys subsidiary, St. Jude Medical France, had
agreed with other suppliers of certain medical devices in France to
collectively refrain from responding to a 2001 tender conducted by a group of
hospital centers in France. In December 2007, the French Council of Competition
issued a finding that assessed a fine against the Company, the amount of which
was not material to the Companys consolidated earnings, financial position and
cash flows. The Company has paid the fine. Several of the parties to this
proceeding have filed appeals.

Securities Class Action Litigation:
In April and May 2006, five shareholders, each purporting to act on behalf of a
class of purchasers during the period January 25 through April 4, 2006 (the
Class Period), separately sued the Company and certain of its officers in
federal district court in Minnesota alleging that the Company made materially
false and misleading statements during the Class Period relating to financial
performance, projected earnings guidance and projected sales of ICDs. The
complaints, all of which seek unspecified damages and other relief, as well as
attorneys fees, have been consolidated. The Company filed a motion to dismiss,
which was denied by the district court in March 2007. The discovery process
concluded in September, and the Company has filed a motion for summary judgment
which was argued before the Court on January 23, 2009. The Company expects the
Court will issue a decision in 2009. The Company intends to vigorously defend
against the claims asserted in these actions. The Companys directors and
officers liability insurance provides $75 million of insurance coverage for the
Company, the officers and the directors, after a $15 million self-insured
retention level has been reached.

Derivative Action:
In February 2007, a derivative action was filed in state court in Minnesota
which purported to bring claims belonging to the Company against the Companys
Board of Directors and various officers and former officers for alleged
malfeasance in the management of the Company. The claims were based on
substantially the same allegations as those underlying the securities class
action litigation described above. The defendants (consisting of the Companys
Board of Directors and various officers and former officers) filed a motion to
dismiss, and in June 2007 the state court granted the motion, thus dismissing
the derivative case for failure of the complainant to make a demand on the
Board. In September 2007, the plaintiff sent a shareholder demand letter
to the Board. The Board considered the letter at its October 25, 2007
Board meeting and requested that the complainant provide it with details to
substantiate the allegations. In June 2008, the complainant filed
a derivative action against the defendants again. The court denied the
defendants motion to dismiss concerning that complaint. To date, the complainant has not provided any
material facts to support the allegations. The plaintiff has
indicated that he plans to file an amended complaint, but has not done so as of
February 18, 2009. The defendants intend to continue to vigorously defend
against the claims raised in this action.

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

NOTE 6  SHAREHOLDERS EQUITY

Capital Stock: The
Companys authorized capital consists of 25 million shares of $1.00 per share
par value preferred stock and 500 million shares of $0.10 per share par value
common stock. There were no shares of preferred stock issued or outstanding
during 2008, 2007, or 2006.

Share Repurchases:
On February 22, 2008, the Companys Board of Directors authorized a share
repurchase program of up to $250.0 million of the Companys outstanding common
stock. On April 8, 2008, the Companys Board of Directors authorized an
additional $50.0 million of share repurchases as part of this share repurchase
program. The Company completed the repurchases under the program on May 1,
2008. In total, the Company repurchased 6.7 million shares for
$300.0 million at an average repurchase price of $44.51 per share.

In January
2007, the Companys Board of Directors authorized a share repurchase program of
up to $1.0 billion of the Companys outstanding common stock. In the first
quarter of 2007, the Company repurchased $700.0 million of its outstanding
common stock. The Company completed the repurchases under the program on May 8,
2007. In total, the Company repurchased 23.6 million shares for $1.0 billion at
an average repurchase price of $42.34 per share.

41

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In April 2006,
the Companys Board of Directors authorized a share repurchase program of up to
$700.0 million of the Companys outstanding common stock. The $700.0 million
share repurchase program replaced an earlier share repurchase program, under
which the Company was authorized to repurchase up to $300.0 million of its
outstanding common stock. No stock had been repurchased under the earlier
program. In the second quarter of 2006, the Company repurchased 18.6 million
shares for $700.0 million at an average repurchase price of $37.68 per share,
which was recorded as a $593.5 million aggregate reduction of common stock and
additional paid-in capital and a $106.5 million reduction in retained earnings.

NOTE 7  STOCK-BASED COMPENSATION

Stock Compensation Plans

The Companys
stock compensation plans provide for the issuance of stock-based awards, such
as restricted stock or stock options, to directors, officers, employees and
consultants. Stock option awards under these plans have an exercise price equal
to the fair market value on the date of grant, and generally, an eight-year
contractual life and four-year vesting term. Since 2000, all stock option
awards have been granted with an eight-year contractual term regardless of the
maximum allowable under the plan. Restricted
stock awards under these plans generally vest over a four-year period. During
the vesting period, ownership of the shares cannot be transferred. Restricted
stock is considered issued and outstanding at the grant date and has the same
dividend and voting rights as other common stock. Directors can elect to
receive half or their entire annual retainer in the form of a restricted stock
grant with a six-month vesting term. At January 3, 2009, the Company had
16.8 million shares of common stock available for stock option grants under
these plans. The Company has the ability to grant a portion of the remaining
shares in the form of restricted stock. Specifically, in lieu of granting up to
15.8 million stock options under these plans, the Company may grant up to 7.0
million restricted stock awards (for certain grants of restricted stock awards,
the number of shares available are reduced by 2.25 shares). Additionally, in
lieu of granting up to 0.1 million stock options under these plans, the Company
may grant up to 0.1 million restricted stock awards (for certain grants of
restricted stock awards, the number of shares available are reduced by one
share). The remaining 0.9 million shares of common stock are available for
stock option grants.

The Company also has an Employee Stock Purchase Plan (ESPP) that allows
participating employees to purchase newly issued shares of the Companys common
stock at a discount through payroll deductions. The ESPP consists of a 12-month
offering period whereby employees can purchase shares at 85% of the market
value at either the beginning of the offering period or the end of the offering
period, whichever price is lower. Employees purchased 0.7
million, 0.7 million and 0.5 million shares in 2008, 2007 and 2006,
respectively. At January 3, 2009, 4.3
million shares of common stock were available for future purchases under the
ESPP.

Valuation Assumptions

The Company uses the Black-Scholes standard option pricing model
(Black-Scholes model) to determine the fair value of stock options and ESPP
purchase rights. The determination of the fair value of the awards on the date
of grant using the Black-Scholes model is affected by the Companys stock price
as well as assumptions of other variables, including projected employee stock
option exercise behaviors, risk-free interest rate, expected volatility of the
Companys stock price in future periods and expected dividend yield. The
weighted average fair values of ESPP purchase rights granted to employees
during fiscal years 2008, 2007 and 2006 were $13.12, $12.07 and $10.12,
respectively. The fair value of restricted stock is based on the Companys
closing stock price on the date of grant. The weighted average fair values of
restricted stock granted during fiscal years 2008, 2007 and 2006 were $40.52,
$41.42 and $34.04, respectively.

The following table provides the weighted average fair value of stock
options granted to employees during fiscal years 2008, 2007 and 2006 and the
related weighted average assumptions used in the Black-Scholes model:

|                              |  |      |      |      |   |       |   |   |       |  
|----------------------------- |  | ---- | ---- | ---- | - | ----- | - | - | ----- | -
|                              |  | 2008 |      | 2007 |   | 2006  |  
|Fair value of options granted |  | $    | 9.99 |      | $ | 13.13 |   | $ | 11.23 |  
|                              |  |      |      |      |   |       |   |   |       |  
|Assumptions used:             |  |      |      |      |   |       |   |   |       |  
|Expected life (years)         |  |      | 4.2  |      |   | 4.2   |   |   | 4.1   |  
|Risk-free interest rate       |  |      | 1.8  | %    |   | 3.6   | % |   | 4.5   | %
|Volatility                    |  |      | 37.3 | %    |   | 33.4  | % |   | 27.8  | %
|Dividend yield                |  |      | 0    | %    |   | 0     | % |   | 0     | %

42

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Expected life: The Company analyzes historical employee
exercise and termination data to estimate the expected life assumption. For determining
the fair value of stock options under SFAS No. 123(R), the Company uses
different expected lives for the general employee population and officers and
directors. In preparing to adopt SFAS No. 123(R), the Company examined its
historical pattern of stock option exercises to determine if there was a
discernable pattern as to how different classes of employees exercised their
stock options. The Companys analysis showed that officers and directors held
their stock options for a longer period of time before exercising compared to
the rest of the employee population. Prior to adopting SFAS No. 123(R), the
Company used the entire employee population for estimating the expected life
assumptions.

Risk-free interest rate: The rate is based on the U.S. Treasury
zero-coupon yield curve on the grant date for a maturity equal to or
approximating the expected life of the options.

Volatility: Beginning in the fourth quarter of 2008,
the Company calculated its expected volatility assumption by blending the
historical and implied volatility. The historical volatility is based on the
daily closing prices of the Companys common stock over a period equal to the
expected term of the option. Market-based implied volatility is based on
utilizing market data of actively traded options on the Companys stock, from
options at- or near-the-money, at a point in time as close to the grant date of
the employee options as reasonably practical and with similar terms to the
employee share option, or a remaining maturity of at least six months if no
similar terms are available. The historical volatility of the Companys common
stock price over the expected term of the option is a strong indicator of the
expected future volatility. In addition, implied volatility takes into consideration
market expectations of how future volatility will differ from historical
volatility. The Company does not believe that one estimate is more reliable
than the other, and as a result, the Company uses an equal weighting of
historical volatility and market-based implied volatility. Prior to the fourth
quarter of 2008, the Company calculated the expected volatility assumption
exclusively on market-based implied volatility. The impact of changing the
method of determining expected volatility was not material to fiscal year 2008
stock compensation expense. The Company changed the method of determining
expected volatility to take into consideration how future volatility experience
over the expected life of the option may differ from short-term volatility experience
and thus provide a better estimate of expected volatility over the expected
life of employee stock options.

Dividend yield: The Company does not anticipate paying any
cash dividends in the foreseeable future and therefore a dividend yield of zero
is assumed.

Stock Option and
Restricted Stock Activity

The following
table summarizes stock option activity under all stock compensation plans,
including options assumed in connection with acquisitions, during the fiscal
year ended January 3, 2009:

|                                 |  |                        |        |                              |   |                                         |  |                                         |     |  |   |         | 
|-------------------------------- |  | ---------------------- | ------ | ---------------------------- | - | --------------------------------------- |  | --------------------------------------- | --- |  | - | ------- | 
|                                 |  | Options(in
 thousands) |        | WeightedAverageExercisePrice |   | WeightedAverageContractualTerm
 (years) |  | AggregateInstrinsicValue(in
 thousands) |    
|Outstanding at December 29, 2007 |  |                        | 38,325 |                              | $ | 30.63                                   |  |                                         |     |  |   |         | 
|Granted                          |  |                        | 8,067  |                              |   | 30.82                                   |  |                                         |     |  |   |         | 
|Canceled                         |  |                        | (1,413 | )                            |   | 41.77                                   |  |                                         |     |  |   |         | 
|Exercised                        |  |                        | (7,658 | )                            |   | 18.42                                   |  |                                         |     |  |   |         | 
|Outstanding at January 3, 2009   |  |                        | 37,321 |                              | $ | 32.76                                   |  |                                         | 4.8 |  | $ | 187,662 | 
|Vested or expected to vest       |  |                        | 28,454 |                              | $ | 33.08                                   |  |                                         | 3.9 |  | $ | 159,208 | 
|Exercisable at January 3, 2009   |  |                        | 22,735 |                              | $ | 31.08                                   |  |                                         | 3.3 |  | $ | 158,875 | 

The aggregate
intrinsic value of options outstanding and options exercisable is based on the
Companys closing stock price on the last trading day of the fiscal year for
in-the-money options. The total intrinsic value of options exercised during
fiscal years 2008, 2007 and 2006 was $182.6 million, $335.5 million and $105.6
million, respectively.

43

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The following
table summarizes restricted stock activity under all stock compensation plans,
including restricted stock assumed in connection with acquisitions, during the
year ended January 3, 2009:

|                                      |  |                                  |     |                               |   |       | 
|------------------------------------- |  | -------------------------------- | --- | ----------------------------- | - | ----- | 
|                                      |  | Restricted Stock
 (in thousands) |     | Weighted Average
 Grant Price |  
|Unvested balance at December 29, 2007 |  |                                  | 142 |                               | $ | 47.13 | 
|Granted                               |  |                                  | 10  |                               |   | 40.52 | 
|Vested                                |  |                                  | (74 | )                             |   | 46.51 | 
|Canceled                              |  |                                  | (11 | )                             |   | 47.94 | 
|Unvested balance at
 January 3, 2009  |  |                                  | 67  |                               | $ | 46.61 | 

In connection
with the acquisition of ANS in November 2005, the Company issued 209,364 shares
of replacement St. Jude Medical restricted stock at a weighted average grant
price of $48.17, which vest over a four year period. The total fair value of
restricted stock vested during fiscal years 2008, 2007 and 2006 was $3.1
million, $3.3 million and $0.6 million, respectively.

At January 3,
2009, there was $127.6 million of total unrecognized stock-based compensation
expense, adjusted for estimated forfeitures, which is expected to be recognized
over a weighted average period of 3.1 years and will be adjusted for any future
changes in estimated forfeitures.

NOTE 8  PURCHASED IN-PROCESS RESEARCH AND
DEVELOPMENT (IPR&D) AND SPECIAL CHARGES

IPR&D Charges

IPR&D is
defined as the value assigned to those projects for which the related products
have not yet reached technological feasibility and have no future alternative
use. The primary basis for determining the technological feasibility of these
projects at the time of acquisition is obtaining regulatory approval to market
the underlying products in an applicable geographic region. The Company expenses
the value attributed to these projects in conjunction with the related business
acquisition or asset purchase.

MediGuide, Inc.: In
December 2008, the Company acquired privately-held MediGuide, a
development-stage company that has been focused on developing its Medical
Positioning System (gMPSTM) technology for localization and tracking
capability for interventional medical devices. The acquisition will provide the
Company with exclusive rights to use and develop MediGuides gMPSTM
technology. As MediGuide was a development-stage company, the excess of the
purchase price over the fair value of the net assets acquired was allocated on
a pro-rata basis to the net assets acquired. Accordingly, the excess purchase
price was allocated to IPR&D, the principal asset acquired. At the date of
acquisition, $306.2 million of the purchase price was expensed as IPR&D
since technological feasibility of the underlying projects had not yet been
reached and such technology had no future alternative use. The Company expects to
incur up to approximately $30 million to bring the technology to commercial
viability on a worldwide basis within two to three years.

Other: In December 2008, the Company also made
an additional minority investment in a developmental-stage company and, in
accordance with step-acquisition accounting treatment under the equity method
of accounting, allocated the excess purchase price over the fair value of the
investees net assets to IPR&D, the principal asset acquired. At the
December 2008 investment date, $11.6 million of IPR&D was expensed since
technological feasibility of the underlying projects had not yet been reached
and such technology had no future alternative use. Additionally, the Company
recognized $1.6 million of IPR&D charges in 2008 related to the purchase of
intellectual property in its CRM and CV segments since the related
technological feasibility had not yet been reached and such technology had no
future alternative use.

Savacor, Inc.: In
December 2005, the Company acquired privately-held Savacor, Inc. (Savacor) to
complement the Companys development efforts in heart failure diagnostic and
therapy guidance products. As Savacor was a development-stage company, the
excess of the purchase price over the fair value of the net assets acquired was
allocated on a pro-rata basis to the net assets acquired. Accordingly, the
majority of the excess purchase price was allocated to IPR&D, the principal
asset acquired. At the date of acquisition, $45.7 million of the purchase price
was expensed as IPR&D since technological feasibility of the underlying
projects had not yet been reached and such technology had no future alternative
use. Through January 3, 2009, the Company has incurred costs of approximately
$16 million related to these projects. The Company expects to incur
approximately $30 million to bring the device to commercial viability on a
worldwide basis within four years.

44

---

Advanced Neuromodulation Systems, Inc.:
In November 2005, the Company acquired ANS to expand the Companys implantable
microelectronics technology programs and provide the Company a presence in the
neuromodulation segment of the medical device industry. At the date of
acquisition, $107.4 million of the purchase price was expensed as IPR&D
related to projects that had not yet reached technological feasibility and had
no future alternative use. The majority of the IPR&D acquired relates to
in-process projects for next-generation implantable pulse generator (IPG)
devices as well as next-generation leads that deliver electrical impulses to
targeted nerves that are causing pain. Through January 3, 2009, the Company has
incurred costs of approximately $13 million related to these projects. The
Company expects to incur approximately $6 million within the next three years
to bring these devices to commercial viability on a worldwide basis.

Special Charges

Fiscal Year 2008

Impairment Charges:In
September 2004, the Company completed making payments under a technology
license agreement and was granted a fully paid-up license that provided access
to patents covering technology used in its CRM devices. In accordance with
SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, whenever events or changes in
circumstances indicate that a long-lived assets carrying amount may not be
recoverable, the Company tests the asset for impairment. In 2008, the Company
determined that a large portion of the technology under the license agreement
was no longer fully utilized in the Companys products and that certain of the
patents under the license were no longer valid based upon recent patent law
developments. Based upon these developments and changes in circumstances, the
Company recognized an impairment charge of $43.5 million to cost of sales to
write the technology license agreement down to its fair value.

In 2008, the
Company experienced lower than forecasted sales of certain products in the
Cardiovascular division associated with its 2005 acquisition of Velocimed. Based upon the recent unfavorable sales performance
as well as termination of a clinical trial, the Company reduced the future
revenue and cash flow projections relating to these products. Accordingly, the
Company tested the related purchased technology intangible assets for
impairment in the fourth quarter of 2008 and recognized a $37.0 million
impairment charge to write down the related intangible assets to their
remaining fair value. The Company also recognized other impairment charges of
$5.8 million in 2008 primarily related to assets in the Cardiovascular division
that will no longer be utilized.

In December
2008, the Company discontinued the use of the ANS tradename. The Company had
acquired ANS in November 2005 and used the related tradename through its
discontinuance in December 2008. Accordingly, the Company wrote off the ANS
tradename intangible assets and recognized a $1.7 million impairment charge.

Inventory-related Charges:In
2008, the Company entered into purchase contracts in the normal course of
business for certain raw material commodities that are used in the manufacture
of its products. Favorable decreases in commodity prices in the fourth quarter
of 2008 resulted in the Companys electing to terminate and exit the contracts,
paying $10.7 million in termination costs, which was recorded as a special
charge in cost of sales.

The Company
also recognized inventory obsolescence charges related to inventory that is not
expected to be sold due to the termination of a distribution agreement in
Japan. When the Company elected to terminate the distribution agreement in
December 2007, the Company recorded a $4.0 million special charge in 2007
related to inventory that it estimated would not be sold. The Company increased
this estimate in 2008 and recorded an additional $3.0 million special charge in
cost of sales.

Other Charges:In
2008, the Company launched its MerlinTM@home wireless patient
monitoring system and committed to provide this system without charge to
existing St. Jude Medical CRM patients. In connection with the completion of
this roll-out in the fourth quarter of 2008, the Company recorded a $7.4
million special charge in cost of sales to accrue for the related costs. The
Company also recognized $5.5 million of other unrelated costs.

In order to
enhance segment comparability and reflect managements focus on the ongoing
operations of the Company, the 2008 special charges have not been recorded in
the individual reportable segments.

45

---

Fiscal Year 2007

Patent Litigation:
In June 2007, the Company settled a patent litigation matter with Guidant (a
subsidiary of Boston Scientific) and Mirowski Family Ventures, L.L.C. and
recorded a special charge of $35.0 million.

Restructuring Activities:
In December 2007, Company management continued its efforts to streamline its
operations and implemented additional restructuring actions primarily focused
at international locations. As a result, the Company recorded special charges
totaling $29.1 million in 2007 consisting of employee termination costs ($17.9
million) and other costs ($11.2 million). Of the total $29.1 million charge,
$5.9 million was recorded in cost of sales. Employee termination costs related
to severance and benefit costs for approximately 200 individuals identified for
employment termination. These costs were recorded after management determined
that such severance and benefits were probable and estimable, in accordance
with SFAS No. 112, Employers Accounting for
Postemployment Benefits. Other costs primarily represented contract
termination costs. The majority of actions and related payments for these
restructuring activities were completed by January 3, 2009; the remaining
accrual balance is immaterial.

Impairment Charges:
In 2007, the Company recognized impairment charges of $23.7 million related to
acquired intangible assets associated with a distribution agreement with a
supplier of medical products to the Companys Japanese distribution subsidiary.
In December 2007, the Company provided notice to the supplier that it was
terminating the distribution agreement, effective in June 2008. As a result,
the Company recognized an impairment charge to state the related intangible
assets at their remaining fair value. The Company had acquired these intangible
assets as part of its acquisition of Getz Bros. Co., Ltd. (Getz Japan) in April
2003. The distribution agreement was terminated in June 2008.

Additionally,
in connection with the Company completing its United States roll-out of the
Merlin programmer platform for its ICDs and pacemakers, the Company recorded
an $11.8 million special charge in cost of sales to write off the remaining
carrying value of older model programmer diagnostic equipment. The Company also
recognized $6.0 million of asset write-offs relating to the carrying value of
assets that will no longer be utilized, of which $2.5 million was recorded in
cost of sales.

Discontinued Inventory:
In 2007, the Company recorded a $14.1 million special charge in cost of sales
relating to inventory that would be scrapped in connection with the Companys
decision to terminate certain product lines in its CV and AF divisions that
were redundant with other existing products lines. Additionally, in connection
with the Companys decision to terminate a distribution agreement in Japan (see
Impairment Charges discussed
previously), the Company recorded a $4.0 million special charge in cost of
sales to write off the related inventory that will not be sold.

In order to
enhance segment comparability and reflect managements focus on the ongoing
operations of the Company, the 2007 special charges have not been recorded in
the individual reportable segments.

Fiscal Year 2006

Restructuring Activities:
During the third quarter of 2006, Company management performed a review of the
organizational structure of the Companys former Cardiac Surgery and Cardiology
divisions and its international selling organization. In August 2006, Company
management approved restructuring plans to streamline operations within its
former Cardiac Surgery and Cardiology divisions, combining them into one new
Cardiovascular division and also implemented changes in its international
selling organization to enhance the efficiency and effectiveness of sales and customer
service operations in certain international geographies.

As a result of
these restructuring plans, the Company recorded special charges totaling $34.8
million in 2006 consisting of employee termination costs ($14.7 million),
inventory write-downs ($8.7 million), asset write-downs ($7.3 million) and
other exit costs ($4.1 million). Of the total $34.8 million special charge,
$15.1 million was recorded in cost of sales. The employee termination costs
consisted of severance and benefit costs for approximately 140 individuals. The
charges for employee termination costs were recorded after management
determined that such severance and benefits were probable and estimable, in
accordance with SFAS No. 112, Employers
Accounting for Postemployment Benefits. Inventory write-downs
represented the net carrying value of inventory related to product lines
discontinued in connection with the reorganization. Asset write-downs
represented the net book value of assets that will no longer be utilized as a
result of the reorganization and restructuring, including $4.2 million of
trademarks acquired in connection with the Companys 2003 acquisition of Getz
Japan as well as other assets related to product lines discontinued in
connection with the reorganization. Other exit costs primarily represented
contract termination costs. All actions related to these restructuring
activities were completed in 2006 and 2007.

46

---

In order to
enhance segment comparability and reflect managements focus on the ongoing
operations of the Company, the 2006 special charges have not been recorded in the
individual reportable segments.

NOTE 9  OTHER INCOME (EXPENSE), NET

The Companys
other income (expense) consisted of the following (in thousands):

|                            |  |      |         |      |   |         |   |   |         |  
|--------------------------- |  | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                            |  | 2008 |         | 2007 |   | 2006    |  
|                           
|Interest income             |  | $    | 16,315  |      | $ | 4,374   |   | $ | 9,266   |  
|Interest expense            |  |      | (22,581 | )    |   | (38,229 | ) |   | (33,883 | )
|Other                       |  |      | (18,040 | )    |   | (15,343 | ) |   | 2,175   |  
|Other income (expense), net |  | $    | (24,306 | )    | $ | (49,198 | ) | $ | (22,442 | )

In the fourth
quarter of 2008, the Company recognized $12.9 million of investment impairment
charges as other expense. The Company evaluated the fair values of the related
investments and determined that the impairments were other-than-temporary based
upon the magnitude and length of time that the investments fair values had
declined in 2008.

In 2007, the
Company determined that its cost method equity investment in ProRhythm, Inc.
(ProRhythm) was impaired and that this impairment was other-than-temporary. The
Company had previously invested an aggregate total of $25.1 million in 2005 and
2006 with a total ownership interest of 18%. The Company also had the exclusive
right, but not the obligation, to acquire the remaining capital stock of
ProRhythm for $125.0 million in cash. ProRhythm filed for Chapter 11 Bankruptcy
protection in December 2007. Prior to declaring bankruptcy, based on its
understanding of ProRhythms efforts to raise additional capital, the Company
expected that the carrying amount of its investment would be recoverable upon a
liquidation or sale of ProRhythm. As a result of the bankruptcy proceedings,
the Companys exclusive right to acquire ProRhythm, in addition to other
rights, were rejected. The resulting changes in the Companys shareholder
rights in ProRhythm changed the Companys expectations that the carrying amount
of its investment in ProRhythm would be recoverable. Given these events, the
Company evaluated the fair value of its investment and concluded that it was
impaired. The total impairment charge of $25.1 million was recognized as other
expense. The Company also recognized a realized gain of $7.9 million as other
income related to the sale of the Companys Conor Medical, Inc. common stock
investment.

NOTE 10  INCOME TAXES

The Companys
earnings before income taxes were generated from its U.S. and international
operations as follows (in thousands):

|                                                               |  |      |         |      |   |         |   |   |         |  
|-------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                               |  | 2008 |         | 2007 |   | 2006    |  
|U.S.                                                           |  | $    | 580,816 |      | $ | 550,522 |   | $ | 554,581 |  
|International                                                  |  |      | 49,925  |      |   | 193,783 |   |   | 166,060 |  
|Earnings before income
 taxes                                  |  | $    | 630,741 |      | $ | 744,305 |   | $ | 720,641 |  
|                                                               |  |      |         |      |   |         |   |   |         |  
|Income tax
 expense consisted of the following (in thousands): |  |      |         |      |   |         |   |   |         |  
|                                                               |  |      |         |      |   |         |   |   |         |  
|                                                               |  | 2008 |         | 2007 |   | 2006    |  
|Current:                                                       |  |      |         |      |   |         |   |   |         |  
|U.S. federal                                                   |  | $    | 198,179 |      | $ | 141,997 |   | $ | 144,115 |  
|U.S. state and other                                           |  |      | 26,863  |      |   | 12,421  |   |   | 12,121  |  
|International                                                  |  |      | 53,070  |      |   | 37,078  |   |   | 27,081  |  
|Total current                                                  |  |      | 278,112 |      |   | 191,496 |   |   | 183,317 |  
|                                                               |  |      |         |      |   |         |   |   |         |  
|Deferred                                                       |  |      | (31,698 | )    |   | (6,229  | ) |   | (10,927 | )
|Income tax expense                                             |  | $    | 246,414 |      | $ | 185,267 |   | $ | 172,390 |  

47

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The tax
effects of the cumulative temporary differences between the tax bases of assets
and liabilities and their respective carrying amounts for financial statement
purposes were as follows (in thousands):

|                                                 |  |      |          |      |   |          |  
|------------------------------------------------ |  | ---- | -------- | ---- | - | -------- | -
|                                                 |  | 2008 |          | 2007 |  
|Deferred income tax
 assets:                     |  |      |          |      |   |          |  
|Net operating loss carryforwards                 |  | $    | 26,411   |      | $ | 9,524    |  
|Tax credit carryforwards                         |  |      | 53,412   |      |   | 45,584   |  
|Inventories                                      |  |      | 106,055  |      |   | 97,930   |  
|Stock-based compensation                         |  |      | 45,556   |      |   | 35,232   |  
|Accrued liabilities and other                    |  |      | 119,052  |      |   | 109,047  |  
|Deferred income tax assets                       |  |      | 350,486  |      |   | 297,317  |  
|Deferred income tax
 liabilities:                |  |      |          |      |   |          |  
|Unrealized gain on available-for-sale
securities |  |      | (2,792   | )    |   | (8,095   | )
|Property, plant and equipment                    |  |      | (132,470 | )    |   | (92,731  | )
|Intangible assets                                |  |      | (190,413 | )    |   | (192,792 | )
|Deferred income tax liabilities                  |  |      | (325,675 | )    |   | (293,618 | )
|Net deferred income tax
 assets                  |  | $    | 24,811   |      | $ | 3,699    |  

The Company
has not recorded any valuation allowance for its deferred tax assets as of
January 3, 2009 or December 29, 2007 as the Company believes that its deferred
tax assets, including the net operating and capital loss carryforwards, will be
fully realized based upon its estimates of future taxable income.

A
reconciliation of the U.S. federal statutory income tax rate to the Companys
effective income tax rate is as follows:

|                                                     |  |      |   |      |   |      |  
|---------------------------------------------------- |  | ---- | - | ---- | - | ---- | -
|                                                     |  | 2008 |   | 2007 |   | 2006 |  
|U.S. Federal
 statutory tax rate                     |  | 35.0 | % | 35.0 | % | 35.0 | %
|Increase
 (decrease) in tax rate resulting from:     |  |      |   |      |   |      |  
|U.S. state
 income taxes, net of federal tax benefit |  | 3.0  |   | 2.0  |   | 2.0  |  
|International
 taxes at lower rates                  |  | (9.1 | ) | (7.9 | ) | (6.4 | )
|Tax benefits
 from extraterritorial income exclusion |  |     |   |     |   | (1.3 | )
|Tax benefits
 from domestic manufacturers deduction |  | (1.6 | ) | (0.7 | ) | (0.7 | )
|Research and
 development credits                    |  | (5.5 | ) | (3.8 | ) | (3.5 | )
|Non-deductible
 IPR&D charges                        |  | 17.7 |   |     |   |     |  
|Other                                                |  | (0.4 | ) | 0.3  |   | (1.0 | )
|Effective
 income tax rate                           |  | 39.1 | % | 24.9 | % | 23.9 | %

The Companys
2008 effective tax rate compared to 2007 and 2006 was unfavorably impacted by
17.7 percentage points relating to non-deductible IPR&D charges. The
Companys effective income tax rate is favorably impacted by Puerto Rican tax
exemption grants, which result in Puerto Rico earnings being partially tax
exempt through the year 2018.

At January 3,
2009, the Company had $67.7 million of U.S. federal net operating and capital
loss carryforwards and $1.1 million of U.S. tax credit carryforwards that will
expire from 2012 through 2027 if not utilized. The Company also has state net
operating loss carryforwards of $26.1 million that will expire from 2012
through 2015 and tax credit carryforwards of $80.4 million that have an
unlimited carryforward period. These amounts are subject to annual usage
limitations. The Companys net operating loss carryforwards arose primarily
from acquisitions.

The Company
has not recorded U.S. deferred income taxes on $1,025.2 million of its non-U.S.
subsidiaries undistributed earnings because such amounts are intended to be reinvested
outside the United States indefinitely.

The Company
records all income tax accruals in accordance with FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes,
and SFAS No. 109, Accounting for Income
Taxes. At January 3, 2009, the liability for unrecognized tax
benefits was $82.7 million, and the accrual for interest and penalties was
$21.7 million. The Company recognizes interest and penalties related to income
tax matters in income tax expense. The Company does not expect its unrecognized
tax benefits to change significantly over the next 12 months.

48

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The following
table summarizes the activity related to the Companys unrecognized tax
benefits (in thousands):

|                                                                      |  |      |         |      |   |        |  
|--------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------ | -
|                                                                      |  | 2008 |         | 2007 |  
|Balance at beginning of
 year                                         |  | $    | 95,260  |      | $ | 83,082 |  
|Increases related to
 current year tax positions                      |  |      | 5,136   |      |   | 10,236 |  
|Increases related to prior
 year tax positions                        |  |      | 5,043   |      |   | 7,571  |  
|Reductions related to
 prior year tax positions                       |  |      | (22,667 | )    |   | (409   | )
|Reductions related to
 settlements / payments                         |  |      |        |      |   | (1,130 | )
|Expiration of the statute
 of limitations for the assessment of taxes |  |      | (80     | )    |   | (4,090 | )
|Balance at end of year                                                |  | $    | 82,692  |      | $ | 95,260 |  

The Company is
subject to U.S. federal income tax as well as income tax of multiple state and
foreign jurisdictions. The Company has substantially concluded all U.S. federal
income tax matters for all tax years through 2001. Additionally, substantially
all material foreign, state, and local income tax matters have been concluded
for all tax years through 1999. The U.S. Internal Revenue Service (IRS)
completed an audit of the Companys 2002-2005 tax returns, and proposed
adjustments in its audit report issued in November 2008. The Company intends to
vigorously defend its positions and initiated defense of these adjustments at
the IRS appellate level in January 2009. An unfavorable outcome could have a
material negative impact on the Companys effective income tax rate in future
periods.

NOTE 11  RETIREMENT PLANS

Defined Contribution Plans:
The Company has a 401(k) profit sharing plan that provides retirement benefits
to substantially all full-time U.S. employees. Eligible employees may
contribute a percentage of their annual compensation, subject to IRS
limitations, with the Company matching a portion of the employees
contributions. The Company also contributes a portion of its earnings to the
plan based upon Company performance. The Companys matching and profit sharing
contributions are at the discretion of the Companys Board of Directors. In
addition, the Company has defined contribution programs for employees in
certain countries outside the United States. Company contributions under all
defined contribution plans totaled $63.2 million, $54.9 million and $47.1
million in 2008, 2007 and 2006, respectively.

The Company
has a non-qualified deferred compensation plan that provides certain officers
and employees the ability to defer a portion of their compensation until a
later date. The deferred amounts and earnings thereon are payable to
participants, or designated beneficiaries, at specified future dates upon
retirement, death or termination from the Company. The deferred compensation
liability, which is classified as other liabilities, was approximately $108
million and $139 million at January 3, 2008 and December 29, 2007,
respectively.

Defined Benefit Plans:
The Company has funded and unfunded defined benefit plans for employees in
certain countries outside the United States. The Company had an accrued
liability totaling $25.5 million and $26.8 million at January 3, 2009 and
December 29, 2007, respectively, which approximated the actuarially calculated
unfunded liability. The related pension expense was not material.

NOTE 12  FAIR VALUE MEASUREMENTS

As discussed
in Note 1, the Company adopted the provisions of SFAS No. 157 at the beginning
of fiscal year 2008. The adopted provisions of SFAS No. 157 apply to all
financial assets and liabilities that are being measured at fair value on a
recurring basis. The Company will adopt the remaining provisions of SFAS No.
157 in fiscal year 2009, which apply to all non-financial assets and
liabilities that are being measured at fair value on a non-recurring basis.

SFAS No. 157
establishes a framework for measuring fair value, clarifies the definition of
fair value and expands disclosures about fair-value measurements. SFAS No. 157
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability. Fair value is a market-based measurement that should
be determined using assumptions that market participants would use in pricing
an asset or liability. SFAS No. 157 establishes a valuation hierarchy for
disclosure of fair value measurements. The categorization within the valuation
hierarchy is based on the lowest level of input that is significant to the fair
value measurement. The categories within the valuation hierarchy are described
below:

| |   |                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Level 1 
 Financial instruments with quoted prices in active markets for identical
 assets or liabilities. The Companys Leve1 1 financial instruments consist of
 publicly-traded equity securities that are classified as available-for-sale
 securities and investments in mutual funds that are classified as trading
 securities.

49

---

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Level 2 
 Financial instruments with quoted prices in active markets for similar assets
 or liabilities. Level 2 fair value measurements are determined using either
 prices for similar instruments or inputs that are either directly or
 indirectly observable, such as interest rates. The Companys Level 2
 financial instruments include foreign currency exchange contracts and
 interest rate swap contracts.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Level 3 
 Inputs to the fair value measurement are unobservable inputs or valuation
 techniques. The Company does not have any financial assets or liabilities
 being measured at fair value that are classified as level 3 financial
 instruments.                                                                                                                                                                   

A summary of
financial assets and liabilities measured at fair value on a recurring basis is
as follows (in thousands):

|                                         |  |                           |         |                                              |   |                                                   |  |                                              |     |  |   |   | 
|---------------------------------------- |  | ------------------------- | ------- | -------------------------------------------- | - | ------------------------------------------------- |  | -------------------------------------------- | --- |  | - | - | 
|                                         |  | Total at
 January 3, 2009 |         | Quoted Prices
 In Active
 Markets
 (Level 1) |   | Significant
 Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |    
|Assets                                   |  |                           |         |                                              |   |                                                   |  |                                              |     |  |   |   | 
|Trading marketable securities            |  | $                         | 107,913 |                                              | $ | 107,913                                           |  | $                                            |    |  | $ |  | 
|Available-for-sale marketable securities |  |                           | 22,065  |                                              |   | 22,065                                            |  |                                              |    |  |   |  | 
|Foreign currency exchange contracts      |  |                           | 418     |                                              |   |                                                  |  |                                              | 418 |  |   |  | 
|Total                                    |  | $                         | 130,396 |                                              | $ | 129,978                                           |  | $                                            | 418 |  | $ |  | 
|                                         |  |                           |         |                                              |   |                                                   |  |                                              |     |  |   |   | 
|Liabilities                              |  |                           |         |                                              |   |                                                   |  |                                              |     |  |   |   | 
|Interest rate swap contracts             |  |                           | 658     |                                              |   |                                                  |  |                                              | 658 |  |   |  | 
|Total                                    |  | $                         | 658     |                                              | $ |                                                  |  | $                                            | 658 |  | $ |  | 

NOTE 13  SEGMENT AND GEOGRAPHIC INFORMATION

Segment Information:
The Companys four operating segments are Cardiac Rhythm Management (CRM),
Cardiovascular (CV), Atrial Fibrillation (AF), and Neuromodulation (Neuro). The
primary products produced by each operating segment are: CRM  ICDs and
pacemakers; CV  vascular closure devices, heart valve replacement and repair
products and pressure measurement guidewires; AF  EP introducers and
catheters, advanced cardiac mapping, navigation and recording systems and
ablation systems; and Neuro  neurostimulation devices.

The Company has aggregated the
four operating segments into two reportable segments based upon their similar
operational and economic characteristics: CRM/Neuro and CV/AF. Net sales of the
Companys reportable segments include end-customer revenues from the sale of
products they each develop and manufacture or distribute. The costs included in
each of the reportable segments operating results include the direct costs of
the products sold to end-customers and operating expenses managed by each of
the reportable segments. Certain operating expenses managed by the Companys
selling and corporate functions, including all stock-based compensation
expense, impairment charges and special charges have not been recorded in the
individual reportable segments. As a result, reportable segment operating
profit is not representative of the operating profit of the products in these
reportable segments. Additionally, certain assets are managed by the Companys
selling and corporate functions, principally including end-customer
receivables, inventory, corporate cash and cash equivalents and deferred income
taxes. For management reporting purposes, the Company does not compile capital
expenditures by reportable segment; therefore, this information has not been
presented as it is impracticable to do so.

50

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The following
table presents certain financial information by reportable segment (in
thousands):

|                                      |  |           |           |       |   |           |  |       |            |   |   |           | 
|------------------------------------- |  | --------- | --------- | ----- | - | --------- |  | ----- | ---------- | - | - | --------- | 
|                                      |  | CRM/Neuro |           | CV/AF |   | Other     |  | Total |           
|Fiscal
 Year 2008                     |  |           |           |       |   |           |  |       |            |   |   |           | 
|Net sales                             |  | $         | 2,955,603 |       | $ | 1,407,648 |  | $     |           |   | $ | 4,363,251 | 
|Operating profit                      |  |           | 1,824,023 |       |   | 736,979   |  |       | (1,905,955 | ) |   | 655,047   | 
|Depreciation and amortization expense |  |           | 93,397    |       |   | 38,743    |  |       | 70,288     |   |   | 202,428   | 
|Total assets                          |  |           | 2,018,478 |       |   | 1,267,290 |  |       | 2,436,736  |   |   | 5,722,504 | 
|Fiscal
 Year 2007                     |  |           |           |       |   |           |  |       |            |   |   |           | 
|Net sales                             |  | $         | 2,577,975 |       | $ | 1,201,302 |  | $     |           |   | $ | 3,779,277 | 
|Operating profit                      |  |           | 1,576,439 |       |   | 579,325   |  |       | (1,362,261 | ) |   | 793,503   | 
|Depreciation and amortization expense |  |           | 96,764    |       |   | 35,731    |  |       | 65,170     |   |   | 197,665   | 
|Total assets                          |  |           | 1,977,174 |       |   | 769,194   |  |       | 2,583,036  |   |   | 5,329,404 | 
|Fiscal Year 2006                      |  |           |           |       |   |           |  |       |            |   |   |           | 
|Net sales                             |  | $         | 2,235,128 |       | $ | 1,067,319 |  | $     |           |   | $ | 3,302,447 | 
|Operating profit                      |  |           | 1,337,479 |       |   | 502,244   |  |       | (1,096,640 | ) |   | 743,083   | 
|Depreciation and amortization expense |  |           | 86,563    |       |   | 33,232    |  |       | 47,017     |   |   | 166,812   | 
|Total assets                          |  |           | 1,893,200 |       |   | 800,907   |  |       | 2,095,687  |   |   | 4,789,794 | 

Net sales by
class of similar products for the respective fiscal years were as follows (in
thousands):

|                          |  |      |           |      |   |           |  |   |           | 
|------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | --------- | 
|Net Sales                 |  | 2008 |           | 2007 |   | 2006      | 
|Cardiac rhythm management |  | $    | 2,701,463 |      | $ | 2,368,081 |  | $ | 2,055,765 | 
|Cardiovascular            |  |      | 862,136   |      |   | 790,630   |  |   | 741,612   | 
|Atrial fibrillation       |  |      | 545,512   |      |   | 410,672   |  |   | 325,707   | 
|Neuromodulation           |  |      | 254,140   |      |   | 209,894   |  |   | 179,363   | 
|                          |  | $    | 4,363,251 |      | $ | 3,779,277 |  | $ | 3,302,447 | 

Geographic Information:
The Company markets and sells its products primarily through a direct sales
force. The principal geographic markets for the Companys products are the
United States, Europe, Japan and Asia Pacific. The Company attributes net sales
to geographic markets based on the location of the customer. Other than the
United States, Europe, Japan and Asia Pacific no one geographic market is
greater than 5% of consolidated net sales.

Net sales by significant
geographic market based on customer location for the respective fiscal years
were as follows (in thousands):

|              |  |      |           |      |   |           |  |   |           | 
|------------- |  | ---- | --------- | ---- | - | --------- |  | - | --------- | 
|Net Sales     |  | 2008 |           | 2007 |   | 2006      | 
|United States |  | $    | 2,319,645 |      | $ | 2,107,015 |  | $ | 1,920,623 | 
|International |  |      |           |      |   |           |  |   |           | 
|Europe        |  |      | 1,152,601 |      |   | 936,526   |  |   | 763,526   | 
|Japan         |  |      | 387,648   |      |   | 321,826   |  |   | 289,716   | 
|Asia Pacific  |  |      | 234,073   |      |   | 192,793   |  |   | 148,953   | 
|Other         |  |      | 269,284   |      |   | 221,117   |  |   | 179,629   | 
|              |  |      | 2,043,606 |      |   | 1,672,262 |  |   | 1,381,824 | 
|              |  | $    | 4,363,251 |      | $ | 3,779,277 |  | $ | 3,302,447 | 

51

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The amounts
for long-lived assets by significant geographic market include net property,
plant and equipment by physical location of the asset. Prior periods have been
reclassified to conform to the current year presentation. Long-lived assets by
significant geographic market were as follows (in thousands):

|                   |  |                 |         |                   |   |                   |  |   |         | 
|------------------ |  | --------------- | ------- | ----------------- | - | ----------------- |  | - | ------- | 
|Long-Lived
 Assets |  | January 3, 2009 |         | December 29, 2007 |   | December 30, 2006 | 
|United States      |  | $               | 775,205 |                   | $ | 602,352           |  | $ | 492,277 | 
|International      |  |                 |         |                   |   |                   |  |   |         | 
|Europe             |  |                 | 84,266  |                   |   | 84,892            |  |   | 75,267  | 
|Japan              |  |                 | 16,001  |                   |   | 1,774             |  |   | 10,059  | 
|Asia Pacific       |  |                 | 17,087  |                   |   | 7,183             |  |   | 5,157   | 
|Other              |  |                 | 87,617  |                   |   | 80,594            |  |   | 35,091  | 
|                   |  |                 | 204,971 |                   |   | 174,443           |  |   | 125,574 | 
|                   |  | $               | 980,176 |                   | $ | 776,795           |  | $ | 617,851 | 

NOTE 14  QUARTERLY FINANCIAL DATA
(UNAUDITED)

Quarterly
financial data for 2008 and 2007 were as follows (in thousands, except per
share amounts):

|                               |  |                |           |                 |   |                |     |                 |           |  |   |           |     
|------------------------------ |  | -------------- | --------- | --------------- | - | -------------- | --- | --------------- | --------- |  | - | --------- | ----
|                               |  | First
 Quarter |           | Second
 Quarter |   | Third
 Quarter |     | Fourth
 Quarter |          
|                              
|Fiscal
 Year 2008:             |  |                |           |                 |   |                |     |                 |           |  |   |           |     
|Net sales                      |  | $              | 1,010,738 |                 | $ | 1,135,760      |     | $               | 1,084,136 |  | $ | 1,132,617 |     
|Gross profit                   |  |                | 750,251   |                 |   | 848,069        |     |                 | 810,210   |  |   | 784,180   | (a) 
|Net earnings                   |  |                | 184,781   |                 |   | 201,059        |     |                 | 192,943   |  |   | (194,456  | )(b)
|Basic net earnings per share   |  | $              | 0.54      |                 | $ | 0.59           |     | $               | 0.56      |  | $ | (0.56     | )   
|Diluted net earnings per share |  | $              | 0.53      |                 | $ | 0.58           |     | $               | 0.55      |  | $ | (0.56     | )   
|                               |  |                |           |                 |   |                |     |                 |           |  |   |           |     
|Fiscal
 Year 2007:             |  |                |           |                 |   |                |     |                 |           |  |   |           |     
|Net sales                      |  | $              | 886,978   |                 | $ | 947,336        |     | $               | 926,840   |  | $ | 1,018,123 |     
|Gross profit                   |  |                | 648,001   |                 |   | 694,313        |     |                 | 681,981   |  |   | 713,388   |     
|Net earnings                   |  |                | 145,725   |                 |   | 134,800        | (c) |                 | 160,239   |  |   | 118,274   | (d) 
|Basic net earnings per share   |  | $              | 0.42      |                 | $ | 0.40           |     | $               | 0.47      |  | $ | 0.35      |     
|Diluted net earnings per share |  | $              | 0.41      |                 | $ | 0.39           |     | $               | 0.46      |  | $ | 0.34      |     

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Includes
 pre-tax special charges of $43.5 million associated with the impairment of a
 license agreement relating to technology no longer fully utilized in the
 Companys products; $13.7 million of inventory charges related to the termination
 of a supply agreement and inventory obsolescence charges associated with a
 terminated distribution agreement; and $7.4 million related to the Company
 providing its remote patient monitoring system without charge to existing St.
 Jude Medical CRM patients.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (b) | Includes
 $319.4 million of IPR&D charges primarily associated with the acquisition
 of MediGuide; after-tax special charges of $72.7 million, which consist of
 the following: $59.3 million primarily associated with the impairment of a
 technology license agreement and the impairment of purchased technology
 intangible assets related to the Companys 2005 Velocimed acquisition; $8.7
 million of inventory-related charges; and $4.7 million related to the Company
 providing its remote patient monitoring system without charge to existing St.
 Jude Medical CRM patients. Additionally, the Company recorded $22.2 million
 of after-tax contribution expenses to non-profit organizations including the
 St. Jude Medical Foundation, and $8.0 million of after-tax investment
 impairment charges. Partially offsetting these charges to net earnings, the
 Company recorded an $18.1 million income tax benefit related to the federal
 research and development tax credit extended in the fourth quarter of 2008
 retroactive to the beginning of the year.
| | (c) | Includes an
 after-tax special charge of $21.9 million related to the settlement of a
 patent litigation matter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (d) | Includes
 after-tax special charges of $21.4 million related to initiatives to
 streamline the Companys operations, primarily internationally; $14.9 million
 of impairment charges related to acquired intangible assets associated with a
 terminated distribution agreement; $11.5 million of inventory write-offs for
 discontinued products; and $7.5 million associated with the write-off of the
 remaining carrying value of older model programmer diagnostic equipment. The
 Company also recorded an after-tax impairment charge of $15.7 million
 associated with its investment in ProRhythm.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

52

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Five-Year Summary Financial Data(in thousands, except per share amounts)

|                                            |  |          |           |          |   |           |   |          |           |          |   |           |   |   |           |  
|------------------------------------------- |  | -------- | --------- | -------- | - | --------- | - | -------- | --------- | -------- | - | --------- | - | - | --------- | -
|                                            |  | 2008 (a) |           | 2007 (b) |   | 2006 (c)  |   | 2005 (d) |           | 2004 (e) |  
|SUMMARY OF OPERATIONS FOR THE FISCAL YEAR: 
|Net sales                                   |  | $        | 4,363,251 |          | $ | 3,779,277 |   | $        | 3,302,447 |          | $ | 2,915,280 |   | $ | 2,294,173 |  
|Gross profit                                |  | $        | 3,192,710 |          | $ | 2,737,683 |   | $        | 2,388,934 |          | $ | 2,118,519 |   | $ | 1,615,123 |  
|Percent of net sales                        |  |          | 73.2      | %        |   | 72.4      | % |          | 72.3      | %        |   | 72.7      | % |   | 70.4      | %
|Operating profit                            |  | $        | 655,047   |          | $ | 793,503   |   | $        | 743,083   |          | $ | 612,730   |   | $ | 535,958   |  
|Percent of net sales                        |  |          | 15.0      | %        |   | 21.0      | % |          | 22.5      | %        |   | 21.0      | % |   | 23.4      | %
|Net earnings                                |  | $        | 384,327   |          | $ | 559,038   |   | $        | 548,251   |          | $ | 393,490   |   | $ | 409,934   |  
|Percent of net sales                        |  |          | 8.8       | %        |   | 14.8      | % |          | 16.6      | %        |   | 13.5      | % |   | 17.9      | %
|Diluted net earnings per share              |  | $        | 1.10      |          | $ | 1.59      |   | $        | 1.47      |          | $ | 1.04      |   | $ | 1.10      |  
|                                            |  |          |           |          |   |           |   |          |           |          |   |           |   |   |           |  
|FINANCIAL POSITION AT YEAR END:            
|Cash and cash equivalents                   |  | $        | 136,443   |          | $ | 389,094   |   | $        | 79,888    |          | $ | 534,568   |   | $ | 688,040   |  
|Working capital (f)                         |  |          | 1,051,539 |          |   | 278,954   |   |          | 1,013,958 |          |   | 406,759   |   |   | 1,327,419 |  
|Total assets                                |  |          | 5,722,504 |          |   | 5,329,404 |   |          | 4,789,794 |          |   | 4,844,840 |   |   | 3,230,747 |  
|Long-term debt, including current
portion   |  |          | 1,201,602 |          |   | 1,387,991 |   |          | 859,376   |          |   | 1,052,970 |   |   | 234,865   |  
|Shareholders equity                        |  | $        | 3,235,906 |          | $ | 2,928,010 |   | $        | 2,968,987 |          | $ | 2,883,045 |   | $ | 2,333,928 |  
|                                            |  |          |           |          |   |           |   |          |           |          |   |           |   |   |           |  
|OTHER DATA:                                 |  |          |           |          |   |           |   |          |           |          |   |           |   |   |           |  
|Diluted weighted average shares
outstanding |  |          | 349,722   |          |   | 352,444   |   |          | 372,830   |          |   | 379,106   |   |   | 370,992   |  

Fiscal year
2008 consisted of 53 weeks. All other fiscal years noted above consisted of 52
weeks. The Company did not declare or pay any cash dividends during 2004
through 2008.

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Results for
 2008 include $319.4 million of IPR&D charges primarily associated with
 the acquisition of MediGuide, Inc.; after-tax special charges of $72.7
 million, which consist of the following: $59.3 million primarily associated
 with the impairment of a technology license agreement and the impairment of
 purchased technology intangible assets related to the Companys 2005
 Velocimed acquisition; $8.7 million of inventory-related charges; and $4.7
 million related to the Company providing its remote patient monitoring system
 without charge to existing St. Jude Medical CRM patients. Additionally, the
 Company recorded $22.2 million of after-tax contribution expenses to
 non-profit organizations including the St. Jude Medical Foundation, and $8.0
 million of after-tax investment impairment charges. The impact of all of
 these items on 2008 net earnings was $422.3 million, or $1.21 per diluted
 share.
| | (b) | Results for
 2007 include after-tax special charges of $21.9 million related to the
 settlement of a patent litigation matter; $21.4 million related to
 initiatives to streamline the Companys operations, primarily internationally;
 $14.9 million of impairment charges related to acquired intangible assets
 associated with a terminated distribution agreement; $11.5 million of
 inventory write-offs for discontinued products; and $7.5 million associated
 with the write-off of the remaining carrying value of older model programmer
 diagnostic equipment. The Company also recorded an after-tax impairment
 charge of $15.7 million associated with its investment in ProRhythm. The
 impact of all of these items on 2007 net earnings was $92.9 million, or $0.26
 per diluted share.                                                                                                                                          
| | (c) | Results for
 2006 include after-tax special charges of $22.0 million, or $0.06 per diluted
 share, related to restructuring activities in the Companys former Cardiac
 Surgery and Cardiology divisions and international selling organization.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | (d) | Results for
 2005 include $179.2 million of IPR&D charges relating to the acquisitions
 of ANS, Savacor, Velocimed and ESI. Additionally, the Company recorded an
 after-tax special credit of $7.2 million for the reversal of a portion of
 accrued Symmetry device legal costs, net of settlement costs. The Company
 also recorded an after-tax expense of $6.2 million as a result of a
 contribution to the St. Jude Medical Foundation. The Company also recorded
 the reversal of $13.7 million of previously recorded income tax expense due
 to the finalization of certain tax examinations, as well as $26.0 million of
 income tax expense on the repatriation of $500 million under the provisions
 of the American Jobs Creation Act of 2004. The impact of all of these
 items on 2005 net earnings was $190.5 million, or $0.50 per diluted share.                                                                                

53

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| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (e) | Results for
 2004 include after-tax special charges of $21.9 million relating to the
 discontinuance of the Symmetry device product line and product liability
 litigation, as well as an after-tax special charge of $3.4 million resulting
 from the settlement of certain patent infringement litigation. Additionally,
 the Company recorded $9.1 million of IPR&D in conjunction with the
 acquisition of Irvine Biomedical, Inc. Also, the Company recorded the
 reversal of $14.0 million of previously recorded income tax expense due to
 the finalization of certain tax examinations. The impact of all of these
 items on 2004 net earnings was $20.4 million, or $0.06 per diluted share.
| | (f) | Total
 current assets less total current liabilities. Working capital fluctuations
 can be significant based on the maturity dates of the Companys long-term
 debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

Cumulative Total Shareholder Returns(in dollars)

(LINE GRAPH)

The graph
compares the cumulative total shareholder returns for St. Jude Medical common
stock for the last five fiscal years with the Standard & Poors 500 Health
Care Equipment Index and the Standard & Poors 500 Index weighted by market
value at each measurement point. The comparison assumes that $100 was invested
on December 31, 2003 in St. Jude Medical common stock and in each of these
Standard & Poors indexes and assumes the reinvestment of any dividends.

54

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CertificationsThe Company has filed as exhibits to its Annual Report
on Form 10-K for the year ended January 3, 2009, the Chief Executive Officer
and Chief Financial Officer certifications required by section 302 of the
Sarbanes-Oxley Act. The Company has also submitted the required annual Chief
Executive Officer certifications to the New York Stock Exchange.

Transfer AgentRequests concerning the transfer or exchange of shares,
lost stock certificates, duplicate mailings, or change of address should be
directed to the Companys Transfer Agent at:

Wells Fargo
Shareowner Services
P.O. Box 64874
St. Paul, MN 55164-0874
1.800.468.9716
www.wellsfargo.com/shareownerservices

Annual Meeting of ShareholdersThe annual meeting of shareholders will be held at
8:30 a.m. on Friday, May 8, 2009, at the Minnesota History Center, 345 Kellogg
Boulevard West, St. Paul, Minnesota, 55102.

Investor ContactTo obtain information about the Company call
1.800.328.9634, visit our website at www.sjm.comor write to:

Investor
Relations
St. Jude Medical, Inc.
One St. Jude Medical Drive
St. Paul, Minnesota 55117-9983

The Investor
Relations (IR) section on St. Jude Medicals website includes all SEC filings,
a list of analyst coverage, webcasts and presentations, financial information
and a calendar of upcoming earnings announcements and IR events. St. Jude
Medicals Newsroom features press releases, company background information,
fact sheets, executive bios, a product photo portfolio, and other media
resources. Patient profiles can be found on our website, including the patients
featured in this years annual report.

Company Stock Splits2:1 on 4/27/79, 1/25/80, 9/30/86, 3/15/89, 4/30/90,
6/10/02 and 11/1/04.
3:2 on 11/16/95

Stock Exchange ListingsNew York Stock Exchange
Symbol: STJ

The daily
range of high and low prices per share for the Companys common stock for
fiscal years 2008 and 2007 is set forth below. As of February 18, 2009, the
Company had 2,690 shareholders of record.

|        |  |      |       |      |   |       |  |     |       |  |   |       | 
|------- |  | ---- | ----- | ---- | - | ----- |  | --- | ----- |  | - | ----- | 
|        |  | 2008 |       | 2007 |  
|Quarter |  | High |       | Low  |   | High  |  | Low |      
|First   |  | $    | 44.65 |      | $ | 38.51 |  | $   | 43.46 |  | $ | 34.90 | 
|Second  |  | $    | 45.77 |      | $ | 39.58 |  | $   | 44.91 |  | $ | 37.26 | 
|Third   |  | $    | 48.49 |      | $ | 40.06 |  | $   | 48.10 |  | $ | 40.50 | 
|Fourth  |  | $    | 44.04 |      | $ | 24.98 |  | $   | 47.02 |  | $ | 36.90 | 

TrademarksAll product names appearing in this document are
trademarks owned by, or licensed to, St. Jude Medical Inc.

---