Exhibit 13

TABLE OF CONTENTS

|                                                                                       |  |   
|-------------------------------------------------------------------------------------- |  | --
|Managements Discussion and Analysis of Financial Condition and
 Results of Operations |  | 1 
|Reports of Management                                                                  |  | 28
|Report of Independent Registered Public Accounting Firm                                |  | 29
|Consolidated Statements of Earnings                                                    |  | 30
|Consolidated Balance Sheets                                                            |  | 31
|Consolidated Statements of Shareholders Equity                                        |  | 32
|Consolidated Statements of Cash Flows                                                  |  | 33
|Notes to Consolidated Financial Statements                                             |  | 34
|Selected Financial Data                                                                |  | 80
|Price Range of Medtronic Stock                                                         |  | 80

---

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

Understanding Our Financial Information

The
following discussion and analysis provides information management believes to
be relevant to understanding the financial condition and results of operations
of Medtronic, Inc. (Medtronic or the Company). You should read this discussion
and analysis along with our consolidated financial statements and related Notes
thereto as of April 24, 2009 and April 25, 2008 and for each of the three
fiscal years ended April 24, 2009, April 25, 2008 and April 27, 2007.

Organization of Financial
Information Managements
discussion and analysis, presented on pages 1 to 27 of this report,
provides material historical and prospective disclosures designed to enable
investors and other users to assess our financial condition and results of
operations.

The
consolidated financial statements are presented on pages 30 to 79 of this
report, and include the consolidated statements of earnings, consolidated
balance sheets, consolidated statements of shareholders equity, consolidated
statements of cash flows and the related Notes, which are an integral part of
the consolidated financial statements.

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

Our
fiscal year-end is the last Friday in April, and, therefore, the total weeks in
a fiscal year can fluctuate between fifty-two and fifty-three weeks. Fiscal
years 2009, 2008 and 2007 consisted of fifty-two weeks. Fiscal year 2010 will
be a fifty-three week year.

Executive Level Overview

We
are the global leader in medical technology - alleviating pain, restoring
health and extending life for millions of people around the world. We function
in seven operating segments, consisting of Cardiac Rhythm Disease Management
(CRDM), Spinal, CardioVascular, Neuromodulation, Diabetes, Surgical
Technologies and Physio-Control.

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

Net
earnings for the fiscal year ended April 24, 2009 were $2.169 billion, a 3
percent decrease from net earnings of $2.231 billion for the fiscal year ended
April 25, 2008. Diluted earnings per share were $1.93 and $1.95 for the fiscal
years ended April 24, 2009 and April 25, 2008, respectively. Fiscal year 2009
net earnings included after-tax special, restructuring, certain litigation and
IPR&D charges and certain tax adjustments that decreased net earnings by
$1.114 billion and had a $0.99 impact on diluted earnings per share. Fiscal
year 2008 net earnings included after-tax special, restructuring, certain
litigation and IPR&D charges that decreased net earnings by $742 million
and had a $0.65 impact on diluted earnings per share. See further discussion of
these charges/benefits in the Special, Restructuring, Certain Litigation and
IPR&D Charges and Certain Tax Adjustments section of this managements
discussion and analysis.

|                                   |  |             |        |      |   |          |  |  |    |  
|---------------------------------- |  | ----------- | ------ | ---- | - | -------- |  |  | -- | -
|                                   |  | Net Sales   |        |      |   |         
|                                   |  | Fiscal Year |        |      |   |         
|(dollars
 in millions)             |  | 2009        |        | 2008 |   | % Change | 
|Cardiac
 Rhythm Disease Management |  | $           | 5,014  |      | $ | 4,963    |  |  | 1  | %
|Spinal                             |  |             | 3,400  |      |   | 2,982    |  |  | 14 |  
|CardioVascular                     |  |             | 2,437  |      |   | 2,131    |  |  | 14 |  
|Neuromodulation                    |  |             | 1,434  |      |   | 1,311    |  |  | 9  |  
|Diabetes                           |  |             | 1,114  |      |   | 1,019    |  |  | 9  |  
|Surgical
 Technologies             |  |             | 857    |      |   | 780      |  |  | 10 |  
|Physio-Control                     |  |             | 343    |      |   | 329      |  |  | 4  |  
|Total Net Sales                    |  | $           | 14,599 |      | $ | 13,515   |  |  | 8  | %

1

---

Net
sales in fiscal year 2009 were $14.599 billion, an increase of 8 percent from
the prior fiscal year. Foreign currency translation had an unfavorable impact
of $100 million on net sales when compared to the prior fiscal year. The net
sales increase in the current fiscal year was driven by the addition of Kyphon
to our Spinal business in the third quarter of fiscal year 2008 and double
digit sales growth in the CardioVascular and Surgical Technologies businesses.
Sales outside the United States (U.S.) were $5.602 billion compared to $5.179
billion for the prior fiscal year. Growth outside the U.S. continued to be
positive, where three of our operating segments had strong double digit growth
rates. See our discussion in the Net Sales section of this managements
discussion and analysis for more information on the results of our significant
operating segments.

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

Certain Litigation Charges Recorded  Subsequent Event

On June 1, 2009, the U.S. Court of Appeals for the Federal Circuit affirmed a
December 2007 ruling of infringement stemming from the Vertex line of multiaxial
screws in our litigation with DePuy Spine (formerly DePuy/AcroMed), a subsidiary
of Johnson & Johnson (J&J) , and Biedermann Motech GMbH (collectively, DePuy). As a result of the
U.S. Court of Appeals decision, we recorded a reserve of $178 million
which is expected to cover the revised damages award and pre- and post-judgment
interest. Since the ruling provided additional evidence about conditions that
existed at the balance sheet date, the charge was included in the consolidated
financial statements for the fiscal year ended April 24, 2009. See the
Special, Restructuring, Certain Litigation and IPR&D Charges and
Certain Tax Adjustments section of this managements discussion and
analysis and Note 16 to the consolidated financial statements for additional
information.

Other Matters

In
January 2007, we announced a voluntary suspension of U.S. shipments of
Physio-Control products manufactured at our facility in Redmond, Washington in
order to address quality system issues. In the months following the suspension
of U.S. shipments, we worked diligently with the U.S. Food and Drug
Administration (FDA) to address the quality system issues and resumed limited
shipments to critical need customers. On May 9, 2008, the U.S. District Court
for the Western District of Washington approved the consent decree that was
signed with the FDA regarding quality system improvements for our external
defibrillator products. The agreement addresses issues raised by the FDA during
inspections regarding Physio-Controls quality system processes and outlines
the actions Physio-Control must take in order to resume unrestricted
distribution of our external defibrillators. We continue to work diligently to
implement the required actions necessary to resolve the quality issues
addressed by the FDA.

Critical Accounting Estimates

We
have adopted various accounting policies to prepare the consolidated financial
statements in accordance with accounting principles generally accepted in the
U.S. (U.S. GAAP). Our most significant accounting policies are disclosed in
Note 1 to the consolidated financial statements.

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

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

Legal Proceedings We are involved in a number of
legal actions
involving both product liability and intellectual property disputes. The
outcomes of these legal actions are not within our complete control and may not
be known for prolonged periods of time. In some actions, the claimants seek
damages as well as other relief, including injunctions barring the sale of
products that are the subject of the lawsuit, that could require significant
expenditures or result in lost revenues. In accordance with Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 5, Accounting for Contingencies, (SFAS No. 5) we record a
liability in our consolidated financial statements for these actions when a
loss is known or considered probable and the amount can be reasonably
estimated. If the reasonable estimate of a known or probable loss is a range,
and no amount within the range is a better estimate than any other, the minimum
amount of the range is accrued. If a loss is possible, but not known or
probable, and can be reasonably estimated, the estimated loss or range of loss
is disclosed in the notes to the consolidated financial statements. In most
cases, significant judgment is required to estimate the amount and timing of a
loss to be recorded. Our significant legal proceedings are discussed in Note 16
to the consolidated financial statements. While it is not possible to predict
the outcome for most of the matters discussed in Note 16 to the consolidated
financial statements, we believe it is possible that costs associated with them
could have a material adverse impact on our consolidated earnings, financial
position or cash flows.

2

---

Tax Strategies Our effective
tax rate is based on income, statutory tax rates and tax planning opportunities
available to us in the various jurisdictions in which we operate. We establish
reserves when, despite our belief that our tax return positions are fully
supportable, we believe that certain positions are likely to be challenged and that
we may or may not prevail. These reserves are established and adjusted in
accordance with the principles of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN No. 48). Under FIN No. 48, if we determine
that a tax position is more likely than not of being sustained upon audit,
based solely on the technical merits of the position, we recognize the benefit.
We measure the benefit by determining the amount that is greater than 50
percent likely of being realized upon settlement. We presume that all tax
positions will be examined by a taxing authority with full knowledge of all
relevant information. We regularly monitor our tax positions and FIN No. 48 tax
liabilities. We reevaluate the technical merits of our tax positions and recognize
an uncertain tax benefit, or derecognize a previously recorded tax benefit,
when (i) there is a completion of a tax audit, (ii) there is a change in
applicable tax law including a tax case or legislative guidance, or (iii) there
is an expiration of the statute of limitations. Significant judgment is
required in accounting for tax reserves. Although we believe that we have
adequately provided for liabilities resulting from tax assessments by taxing
authorities, positions taken by these tax authorities could have a material
impact on our effective tax rate in future periods.

In
the event there is a special, restructuring, certain litigation and/or
IPR&D charge recognized in our operating results, the tax cost or benefit
attributable to that item is separately calculated and recorded. Because the
effective rate can be significantly impacted by these discrete items that take
place in the period, we often refer to our tax rate using both the effective
rate and the non-GAAP nominal tax rate. The non-GAAP nominal tax rate is
defined as the income tax provision as a percentage of earnings before income
taxes, excluding special, restructuring, certain litigation and IPR&D
charges and certain tax adjustments. We believe that this resulting non-GAAP
financial measure provides useful information to investors because it excludes
the effect of these discrete items so that investors can compare our recurring
results over multiple periods.

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

The
Companys overall tax rate including the tax impact of special, restructuring,
certain litigation and IPR&D charges and certain tax adjustments has
resulted in an effective tax rate of 16.4 percent for fiscal year 2009.
Excluding the impact of the special, restructuring, certain litigation and
IPR&D charges and certain tax adjustments, our operational and tax
strategies have resulted in a non-GAAP nominal tax rate of 20.9 percent versus
the U.S. Federal statutory rate of 35.0 percent. An increase in our nominal tax
rate of 1.0 percent would have resulted in an additional income tax provision
for the fiscal year ended April 24, 2009 of approximately $42 million. See the
discussion of our tax rate and tax adjustments in the Income Taxes section of
this managements discussion and analysis.

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

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

The
test for impairment requires us to make numerous estimates about fair value,
most of which are based on projected future cash flows. Our estimates
associated with the goodwill impairment test are considered critical due to the
amount of goodwill recorded on our consolidated balance sheets and the judgment
required in determining assumptions necessary to estimate fair value, including
projected future cash flows. Goodwill was $8.195 billion and $7.519 billion as
of April 24, 2009 and April 25, 2008, respectively.

3

---

Other
intangible assets consist primarily of purchased technology, patents and
trademarks which are amortized using the straight-line or accelerated basis, as
appropriate, over their estimated useful lives, ranging from 3 to 20 years. As
of April 24, 2009, all of our intangible assets have definite lives and are
amortized on a straight-line basis. We review these intangible assets for
impairment annually or as changes in circumstance or the occurrence of events
suggest the remaining value may not be recoverable. Other intangible assets,
net of accumulated amortization, were $2.477 billion and $2.193 billion as of
April 24, 2009 and April 25, 2008, respectively.

Net Sales

The table
below illustrates net sales by product line and operating segment for fiscal
years 2009, 2008 and 2007:

|                                          |  |              |        |      |   |        |              |      |     |      |   |        |  |   |        |  |  |     |   
|----------------------------------------- |  | ------------ | ------ | ---- | - | ------ | ------------ | ---- | --- | ---- | - | ------ |  | - | ------ |  |  | --- | --
|                                          |  | Net Sales    |        |      |   |        | Net Sales    |      |     |      |  
|                                          |  | Fiscal
 Year |        |      |   |        | Fiscal
 Year |      |     |      |  
|(dollars in millions)                     |  | 2009         |        | 2008 |   | Change |              | 2008 |     | 2007 |   | Change | 
|Defibrillation
 Systems                   |  | $            | 2,962  |      | $ | 2,897  |              |      | 2   | %    | $ | 2,897  |  | $ | 2,917  |  |  | (1  | )%
|Pacing
 Systems                           |  |              | 1,984  |      |   | 2,008  |              |      | (1  | )    |   | 2,008  |  |   | 1,895  |  |  | 6   |   
|Other                                     |  |              | 68     |      |   | 58     |              |      | 17  |      |   | 58     |  |   | 64     |  |  | (9  | ) 
|CARDIAC RHYTHM DISEASE MANAGEMENT         |  |              | 5,014  |      |   | 4,963  |              |      | 1   |      |   | 4,963  |  |   | 4,876  |  |  | 2   |   
|Core Spinal                               |  |              | 1,951  |      |   | 1,869  |              |      | 4   |      |   | 1,869  |  |   | 1,713  |  |  | 9   |   
|Biologics                                 |  |              | 840    |      |   | 815    |              |      | 3   |      |   | 815    |  |   | 704    |  |  | 16  |   
|Kyphon                                    |  |              | 609    |      |   | 298    |              |      | 104 |      |   | 298    |  |   |       |  |  | N/A |   
|SPINAL                                    |  |              | 3,400  |      |   | 2,982  |              |      | 14  |      |   | 2,982  |  |   | 2,417  |  |  | 23  |   
|Coronary
 Stents                          |  |              | 844    |      |   | 710    |              |      | 19  |      |   | 710    |  |   | 560    |  |  | 27  |   
|Other
 Coronary/Peripheral                |  |              | 448    |      |   | 408    |              |      | 10  |      |   | 408    |  |   | 386    |  |  | 6   |   
|Endovascular                              |  |              | 398    |      |   | 285    |              |      | 40  |      |   | 285    |  |   | 259    |  |  | 10  |   
|Revascularization
 and Surgical Therapies |  |              | 447    |      |   | 431    |              |      | 4   |      |   | 431    |  |   | 417    |  |  | 3   |   
|Structural
 Heart Disease                 |  |              | 300    |      |   | 297    |              |      | 1   |      |   | 297    |  |   | 287    |  |  | 3   |   
|CARDIOVASCULAR                            |  |              | 2,437  |      |   | 2,131  |              |      | 14  |      |   | 2,131  |  |   | 1,909  |  |  | 12  |   
|Neuro
 Implantables                       |  |              | 1,145  |      |   | 1,069  |              |      | 7   |      |   | 1,069  |  |   | 962    |  |  | 11  |   
|Gastroenterology and Urology              |  |              | 289    |      |   | 242    |              |      | 19  |      |   | 242    |  |   | 221    |  |  | 10  |   
|NEUROMODULATION                           |  |              | 1,434  |      |   | 1,311  |              |      | 9   |      |   | 1,311  |  |   | 1,183  |  |  | 11  |   
|DIABETES                                  |  |              | 1,114  |      |   | 1,019  |              |      | 9   |      |   | 1,019  |  |   | 863    |  |  | 18  |   
|Core Ear, Nose and Throat (ENT)           |  |              | 352    |      |   | 323    |              |      | 9   |      |   | 323    |  |   | 278    |  |  | 16  |   
|Neurologic
 Technologies                  |  |              | 320    |      |   | 298    |              |      | 7   |      |   | 298    |  |   | 261    |  |  | 14  |   
|Navigation                                |  |              | 185    |      |   | 159    |              |      | 16  |      |   | 159    |  |   | 127    |  |  | 25  |   
|SURGICAL TECHNOLOGIES                     |  |              | 857    |      |   | 780    |              |      | 10  |      |   | 780    |  |   | 666    |  |  | 17  |   
|PHYSIO-CONTROL                            |  |              | 343    |      |   | 329    |              |      | 4   |      |   | 329    |  |   | 385    |  |  | (15 | ) 
|TOTAL                                     |  | $            | 14,599 |      | $ | 13,515 |              |      | 8   | %    | $ | 13,515 |  | $ | 12,299 |  |  | 10  | % 

In
fiscal years 2009 and 2008, net sales were (unfavorably)/favorably impacted by
foreign currency translation of $(100) million and $400 million, respectively.
The primary exchange rate movements that impact our consolidated net sales
growth are the U.S. dollar as compared to the Euro and the Japanese Yen. The
impact of foreign currency fluctuations on net sales is not indicative of the
impact on net earnings due to the offsetting foreign currency impact on
operating costs and expenses and our hedging activities. See the Market Risk
section of this managements discussion and analysis and Note 9 to the
consolidated financial statements for further details on foreign currency
instruments and our related risk management strategies.

Forward-looking
statements are subject to risk factors (see Risk Factors set forth in our
Form 10-K).

Cardiac Rhythm Disease Management CRDM
products consist primarily of pacemakers, implantable defibrillators, leads,
ablation products, electrophysiology catheters, products for the treatment of
atrial fibrillation and information systems for the management of patients with
our devices. CRDM fiscal year 2009 net sales were $5.014 billion, an increase
of 1 percent over the prior fiscal year. Foreign currency translation had an
unfavorable impact on net sales of approximately $25 million when compared to
the prior fiscal year.

4

---

Worldwide
net sales of Defibrillation Systems, our largest product line, for fiscal year
2009 were $2.962 billion, an increase of 2 percent when compared to the prior
fiscal year. Foreign currency had an unfavorable impact on net sales of $18
million when compared to the prior fiscal year. Net sales growth was primarily
a result of worldwide net sales of Secura implantable cardioverter
defibrillators (ICDs) and Consulta cardiac resynchronization
therapy-defibrillators (CRT-Ds), both of which are included within our Vision
3D portfolio. Both the Secura ICDs and Consulta CRT-Ds feature Conexus wireless
technology which allows for remote transfer of patient data and enables easier
communication between the implanted device and programmer at the time of
implant, during follow-up in a clinicians office, or remotely using a patient
home monitor. In addition, net sales for the comparative period were
negatively impacted by our voluntary suspension of worldwide distribution of
Sprint Fidelis (Fidelis) leads in the second quarter of fiscal year 2008.

Pacing
Systems net sales for fiscal year 2009 were $1.984 billion, a decrease of 1
percent when compared to the prior fiscal year. The decrease in net sales was
primarily a result of a decrease in net sales in the U.S. due to significant
competition, partially offset by sales growth outside the U.S. Net sales growth
outside the U.S. for fiscal year 2009 was led by the acceptance of the Adapta
family of pacemakers, including the Adapta and Sensia models. The Adapta family
of pacemakers incorporates an array of automatic features to help physicians
improve pacing therapy and streamline the patient follow-up process,
potentially minimizing the amount of time spent in a physicians office. Adapta
offers Managed Ventricular Pacing, or MVP, which is an atrial-based pacing
mode that significantly reduces unnecessary pacing in the right ventricle
while providing the safety of a dual chamber backup if necessary. Clinical
studies have suggested that reducing this unnecessary pacing in the right
ventricle may decrease the risk of developing heart failure and atrial
fibrillation, a potentially life-threatening irregular heartbeat.

Fiscal
year 2009 Defibrillation and Pacing Systems sales benefited from the continued
acceptance of the Medtronic CareLink Service. The Medtronic CareLink Service
enables clinicians to review data about implanted cardiac devices in real time
and access stored patient and device diagnostics through a secure Internet
website. The data, which is comparable to information provided during an
in-clinic device follow-up, provides the patients medical team with a
comprehensive view of how the device and patients heart are operating. Today,
over 360,000 patients are being monitored through Medtronics CareLink Service
worldwide, up from approximately 250,000 patients being monitored a year ago.

CRDM
fiscal year 2008 net sales grew by 2 percent from the prior fiscal year to
$4.963 billion. Foreign currency translation had a favorable impact on net
sales of approximately $160 million when compared to the prior fiscal year.

Defibrillation
Systems net sales of $2.897 billion for fiscal year 2008 decreased 1 percent
when compared to fiscal year 2007. The decrease in net sales was the result of
sales declines in the U.S., offset by sales growth outside the U.S. Global
sales were driven by the Virtuoso ICD and the Concerto CRT-D. Both of these
devices feature Conexus wireless technology. Net sales from Defibrillation
Systems in the U.S. were $1.955 billion, a decrease of 6 percent in comparison
to the prior year. The decrease in U.S. Defibrillation Systems net sales in
fiscal year 2008 was primarily the result of the suspension of worldwide
distribution of the Fidelis lead in the second quarter of fiscal year 2008. The
distribution of the Fidelis lead was suspended because of the potential for
lead fractures at higher than anticipated rates. Leads are sophisticated
wires that connect an electronic pulse generator to the heart and are the
pathway for therapy delivery between the device and heart. The Fidelis leads
are applicable to therapy delivery in defibrillators only, including ICDs and
CRT-Ds. Although the U.S. Defibrillation Systems market appeared to have
stabilized from the impact of the Fidelis lead issue in the fourth quarter of
fiscal year 2008, the rebound was not enough to offset the negative impact that
the Fidelis lead issue had in the second and third quarters of fiscal year
2008. Outside the U.S., net sales from Defibrillation Systems were $942
million, an increase of 13 percent over the prior fiscal year. This growth was
partially driven by favorable foreign currency translation as compared to the
prior year, but was principally the result of strong market acceptance of the
Virtuoso ICD and Concerto CRT-D. Outside the U.S., net sales were also impacted
by the Fidelis lead issue. In particular, for most of the third quarter of
fiscal year 2008, we did not have an approved high power lead on the market in
Japan, and, as of the close of the fourth quarter of fiscal year 2008, we still
did not have an approved single coil lead, which is a more popular lead design
in certain Western European markets. However, in November 2008, we launched our
Sprint Quattro Secure S single coil lead in markets outside the U.S.

Pacing
Systems net sales for fiscal year 2008 increased by 6 percent over the prior
fiscal year to $2.008 billion. This increase was attributable primarily to
continued worldwide acceptance of the Adapta family of pacemakers, including
the Adapta, Versa and Sensia models, which were launched in the U.S. in the
second quarter of fiscal year 2007 and have been available outside the U.S.
since late fiscal year 2006. Net sales from Pacing Systems in the U.S. were
$940 million, an increase of 1 percent. The revenue growth in the U.S. was
slowed in the second and third quarters of fiscal year 2008 by the suspension
of worldwide distribution of the Fidelis lead, as our field organization
focused their efforts on serving Fidelis customers and patients. Outside the
U.S., net sales from Pacing Systems were $1.068 billion, an increase of 11
percent over the prior fiscal year due primarily to foreign currency
translation which had an $86 million favorable impact on net sales outside the
U.S.

Looking
ahead, we expect our CRDM operating segment should be impacted by the
following:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The further
 launch and acceptance of our Vision 3D portfolio, which represents a common
 technology platform comprised of a full line of ICDs, CRT-Ds, pacemakers and
 cardiac resynchronization therapy-pacemakers (CRT-Ps) to address the needs of
 patients with arrhythmias, heart failure and those at risk of sudden cardiac
 arrest. The Secura ICD and the Consulta CRT-D, the portfolios first ICD and
 CRT-D devices, became commercially available in the U.S. in the second
 quarter of fiscal year 2009. The Secura ICD and Consulta CRT-D were
 commercially available in Western Europe beginning in the first quarter of
 fiscal year 2009 and we successfully launched the Secura ICD and the Consulta
 CRT-D in Japan in the fourth quarter of fiscal year 2009. The devices within
 the Vision 3D portfolio provide enhanced follow-up and automaticity features
 and create meaningful manufacturing synergies.

5

---

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increased
 use in the U.S. of devices with OptiVol Fluid Status Monitoring as a result of recently published
 clinical evidence and reimbursement, which became effective January 1, 2009.
 OptiVol Fluid Status Monitoring is found on certain Medtronic CRT-Ds and ICDs
 and uses low electrical pulses that travel across the thoracic cavity to
 measure the level of resistance, indicating fluid in the chest which is a
 common symptom of heart failure. OptiVols ability to measure fluid status
 trends over time can provide important insights that are used in conjunction
 with ongoing monitoring of other patient symptoms.                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | The launch
 and acceptance of Magnetic Resonance Imaging (MRI) safe pacing systems. In
 November 2008, we launched the EnRhythm MRI SureScan pacing system (EnRhythm
 MRI) in certain European countries and in June 2009 we received CE Mark
 approval for the Advisa DR MRI, which is part of our Vision 3D portfolio.
 EnRhythm MRI was the first pacemaker system to be developed and tested specifically
 for safe use in MRI machines under specified scanning conditions. Both
 EnRhythm MRI and Advisa DR MRI are designed to address and mitigate
 interactions between the pacing system and the magnetic resonance
 environment. EnRhythm MRI is expected to launch in the U.S. in fiscal year
 2010. Advisa DR MRI is expected to launch in Europe during the first half of fiscal
 year 2010.                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | The recent
 U.S. launch of the Reveal XT Insertable Cardiac Monitor (ICM), which offers
 comprehensive remote monitoring capabilities via the Medtronic CareLink
 Service and allows physicians to confirm or rule out an abnormal heart
 rhythm. The Reveal XT ICM became commercially available in the U.S. in
 February 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | The recent
 U.S. launch of the Attain Ability left-heart lead, which offers a thin lead
 body, providing physicians a tool to deliver therapy to hard-to-reach areas
 of the heart in heart failure patients. The Attain Ability left-heart lead
 became commercially available in the U.S. in May 2009. Following the launch in
 the U.S., the Attain Ability left-heart lead is commercially available in
 every major market in the world.                                                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Our recent
 investments in two breakthrough atrial fibrillation therapy systems. In
 November 2008, we acquired CryoCath Technologies Inc. (CryoCath), a medical
 technology company that develops cryotherapy products to treat cardiac
 arrhythmias. CryoCaths Arctic Front product is a minimally invasive
 cryo-balloon catheter designed specifically to treat atrial fibrillation and
 is currently approved in certain markets outside the U.S. In addition, in
 February 2009, we acquired Ablation Frontiers, Inc. (Ablation Frontiers), a
 company that develops RF ablation solutions for treatment of atrial
 fibrillation. Ablation Frontiers system of ablation catheters and RF
 generator is currently approved in certain markets outside the U.S. See Note
 4 to the consolidated financial statements for additional information.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Our ability
 to grow consistently with the market. Our growth in CRDM has been and will
 continue to be contingent upon continued market growth and our ability to
 increase our market position. The CRDM market is characterized by
 significant competition, and in fiscal year 2009, we believe that Medtronics
 growth has been slightly slower than that of the overall market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                

Spinal Spinal products include
thoracolumbar, cervical, interbody devices, bone graft substitutes and biologic
products. Spinal net sales for fiscal year 2009 were $3.400 billion, an
increase of 14 percent over the same period of the prior fiscal year. Foreign
currency translation had an unfavorable impact on net sales of approximately
$11 million when compared to the prior fiscal year. The growth in fiscal year
2009 was partially driven by the third quarter fiscal year 2008 acquisition of
Kyphon Inc. (Kyphon), which generated revenue of $609 million and $298 million
in fiscal years 2009 and 2008, respectively. See below and Note 4 to the
consolidated financial statements for further discussion about the acquisition
of Kyphon.

Core
Spinal net sales for fiscal year 2009 were $1.951 billion, an increase of 4
percent when compared to the prior fiscal year. Growth in the period was
primarily driven by continued acceptance of our products for the thoracolumbar
region of the spine. Thoracolumbar net sales growth for fiscal year 2009 was
driven by net sales of the CD HORIZON LEGACY family of products (CD HORIZON)
outside the U.S., and net sales growth in the U.S. was augmented by demand for
our CD HORIZON LEGACY PEEK Rod System, which allows for a less rigid implant as
compared to traditional metal rod systems. CD HORIZON is designed to provide
procedural solutions for degenerative, deformity or trauma applications using
color coded implants, unique minimally invasive instruments and ergonomic
designs. Net sales growth in the U.S. was also driven by our MAST family of
products, which includes a comprehensive offering of minimal-access procedural
solutions. Our market share in the Core Spinal business continues to experience
pressure from the proliferation of smaller, public and privately held companies
competing in this market. In addition, Core Spinal net sales growth for the
fiscal year was positively impacted from our joint venture with Shandong Weigao
Group Medical Polymer Company Limited (Weigao). The joint venture entity, which
distributes Medtronics spinal products and Weigaos orthopedic products in
China, commenced operations in September 2008.

6

---

Biologics
 net sales for fiscal year 2009 were $840 million, an increase of 3
percent when compared to the prior fiscal year. This increase was primarily
driven by worldwide net sales growth of INFUSE Bone Graft in the first quarter
of fiscal year 2009. Net sales of INFUSE Bone Graft during the remainder of
fiscal year 2009 were flat because of the negative impact of several external
factors including: a public health notice from the FDA regarding off-label use
of recombinant human bone morphogenic protein in the cervical spine that was
issued in July 2008, a previously disclosed government investigation, negative
newspaper stories and a whistleblower lawsuit filed against a number of spine
surgeons and distributors of INFUSE Bone Graft. INFUSE Bone Graft contains a
recombinant human bone morphogenetic protein, or rhBMP-2, that induces the body
to grow its own bone, eliminating the need for a painful second surgery to
harvest bone from elsewhere in the body.

Kyphon
net sales for fiscal year 2009 were $609 million, an increase of 104 percent
when compared to the prior fiscal year. Kyphon was acquired in the third
quarter of fiscal year 2008 and therefore net sales for the prior period only
included six months of net sales. Kyphon net sales were driven primarily by
continued worldwide acceptance of balloon kyphoplasty procedures for treating
vertebral compression fractures. Balloon kyphoplasty, using Kyphon instruments,
is presently used primarily by spine specialists, including orthopedic
surgeons and neurosurgeons, interventional radiologists and interventional
neuroradiologists, who repair compression fractures of the spine caused by
osteoporosis, cancer, benign lesions or trauma, through minimally invasive
spine surgeries.

Spinal
net sales for fiscal year 2008 increased by 23 percent from the prior fiscal
year to $2.982 billion. Foreign currency translation had a favorable impact on
net sales of $44 million when compared to the prior fiscal year. The growth in
fiscal year 2008 was primarily driven by the November 2007 close of the
acquisition of Kyphon, which generated revenue of $298 million during the
fiscal year.

Core
Spinal net sales for fiscal year 2008 were $1.869 billion, an increase of 9
percent from the prior fiscal year. Growth in the period was primarily based on
continued acceptance of our products for the thoracolumbar and cervical regions
of the spine. Net sales in fiscal year 2008 were hampered by the trend of small
companies increasing their presence and placing pressure on the Core Spinal
market. Thoracolumbar net sales growth for fiscal year 2008 was driven by net
sales of the CD HORIZON and the CAPSTONE Vertebral Body Spacer (CAPSTONE)
outside the U.S., net sales of the VERTE-STACK CRESCENT Vertebral Body Spacer
(CRESCENT) for thoracolumbar stabilization in the U.S. and worldwide net sales
growth of lumbar products. The CAPSTONE and CRESCENT are minimal access devices
and techniques designed to replace and restore vertebral height in the
thoracolumbar spine. The growth in net sales
in our cervical products during the fiscal year was led by the continued
acceptance of the VERTEX Max Reconstruction System for cervical stabilization
outside the U.S.

Biologics
net sales for fiscal year 2008 increased 16 percent from the prior
fiscal year to $815 million. This increase was primarily driven by continued
strong acceptance of INFUSE Bone Graft in the U.S. In addition to FDA approval
for use of INFUSE Bone Graft for lumbar spinal fusion, we received FDA approval
to use INFUSE Bone Graft for the treatment of certain types of acute, open
fractures of the tibial shaft in fiscal year 2005, and for certain oral
maxillofacial and dental regenerative bone grafting procedures late in fiscal
year 2007. Additionally, although on a smaller base, we experienced strong
fiscal year 2008 growth in the sales of InductOs Bone Graft, the outside the
U.S. equivalent of INFUSE Bone Graft.

Kyphon,
which was acquired in November 2007, had net sales of $298 million for fiscal
year 2008 that were driven by continued acceptance of balloon kyphoplasty
procedures for treating vertebral compression fractures and acceptance of
Kyphons interspinous products for treating lumbar spinal stenosis. Kyphons
interspinous products for treating lumbar spinal stenosis include the
commercially available X-STOP IPD technology available in both the U.S. and
outside the U.S. and Aperius PercLID available outside the U.S.

Looking
ahead, we expect our Spinal operating segment should be impacted by the
following:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Continued
 acceptance of our products for stabilization of the thoracolumbar region of
 the spine, including the CD HORIZON LEGACY 5.5 and PEEK Rod Systems.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Increased
 presence in China as a result of our joint venture with Weigao to distribute
 Medtronics spinal products and Weigaos orthopedic products in China.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | The recent
 U.S. launch of the PEEK Prevail Cervical Interbody Device and the VERTEX
 SELECT Reconstruction System Occipitocervical Module. The PEEK Prevail
 Cervical Interbody Device offers stability during a spinal fusion for patients that
 are treated for a degenerative condition that affects the patients neck. The
 VERTEX SELECT Reconstruction System Occipitocervical Module offers
 adjustability through multiple plate designs, rods, screws and hooks that
 gives surgeons more options during surgery, enabling them to tailor the
 procedure to each patients needs. The PEEK Prevail Cervical Interbody Device
 and VERTEX SELECT Reconstruction System Occipitocervical Module became
 commercially available in the U.S. in May 2009.

7

---

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Continued
 regulatory scrutiny of off-label use in medical devices. During fiscal year
 2009, the FDA issued a public health notice regarding use of bone morphogenic
 protein in cervical procedures, which was received negatively by both
 physicians and payors. As a result, this negatively impacted the sales of our
 INFUSE Bone Graft in fiscal year 2009. It is uncertain if this trend will
 continue in subsequent periods.

CardioVascular CardioVascular products
consist of coronary and peripheral stents and related delivery systems,
endovascular stent graft systems, heart valve replacement technologies and
tissue ablation systems, and open heart and coronary bypass grafting surgical
products. CardioVascular net sales for fiscal year 2009 were $2.437 billion, an
increase of 14 percent over the prior fiscal year. Foreign currency translation
had an unfavorable impact of approximately $23 million when compared to the
prior fiscal year.

Coronary
Stent and Other Coronary/Peripheral net sales for fiscal year 2009 were $1.292
billion, an increase of 16 percent when compared to the prior fiscal year. The
increase in net sales was primarily the result of the launch of the Endeavor
drug-eluting stent (Endeavor) in the U.S. which began during the fourth quarter
of fiscal year 2008. We received regulatory approval in Japan during the fourth
quarter of fiscal year 2009 and commercially launched Endeavor in Japan in May
2009. Endeavor and the Endeavor Resolute drug-eluting stent (Endeavor Resolute)
generated worldwide revenue of $603 million for the fiscal year compared to
$418 million for the prior year.

Endovascular
net sales for fiscal year 2009 were $398 million, an increase of 40 percent
when compared to the prior fiscal year. Growth in the Endovascular business was
primarily driven by net sales in the U.S. of the Talent Abdominal Aortic
Aneurysm Stent Graft System (Talent AAA Stent Graft System) and Thoracic Stent
Graft System and by the launch of our Endurant Abdominal Stent Graft System
outside the U.S. in the first quarter of fiscal year 2009. The Endurant
Abdominal Stent System expands the applicability of endovascular aortic repair
to more patients with abdominal aortic aneurysms (AAA) by addressing those AAA
patients whose aortas are highly angulated or whose aneurysms have short necks.

Revascularization
and Surgical Therapies net sales for fiscal year 2009 were $447 million, an
increase of 4 percent when compared to the prior fiscal year. The increase was
primarily the result of positive growth outside the U.S. associated with our
cannulae and beating heart products.

Structural
Heart Disease net sales for fiscal year 2009 were $300 million, an increase of
1 percent when compared to the prior fiscal year. The increase was primarily
the result of net sales growth outside the U.S. which benefited from the return
of the Advantage Mechanical Valve to markets from which it had been suspended
for a portion of the prior fiscal year. Net sales of our atrial fibrillation
technologies outside the U.S. also contributed to the increase in net sales for
fiscal year 2009. Growth outside the U.S. was partially offset by a decrease in
net sales in the U.S. due to the entrance of three new competitive tissue valve
products into the market during the past twelve months.

CardioVascular
net sales for fiscal year 2008 increased 12 percent from the prior fiscal year
to $2.131 billion. Foreign currency translation had a favorable impact of
$101 million on net sales when compared to the prior fiscal year.

Coronary
Stent and Other Coronary/Peripheral net sales for fiscal year 2008 increased 18
percent in comparison to the prior fiscal year to $1.118 billion. The growth in
Coronary Stent and Other Coronary/Peripheral net sales was primarily a result
of the successful launch of Endeavor in the U.S., strong sales of Endeavor and Endeavor Resolute outside the U.S. and continued acceptance of the Driver
family of bare metal stents. Although the market for stents and drug-eluting
stents had declined, Endeavor and Endeavor Resolute continued to benefit from
favorable safety and efficacy data, along with their ease of delivery. In the U.S., Endeavor
generated net sales of $81 million in fiscal year 2008. Outside the U.S.,
Endeavor and Endeavor Resolute generated net sales of $337 million in fiscal
year 2008, an increase of 12 percent over the prior year. Endeavor Resolute
received CE Mark approval in October 2007 and is currently available in more
than 100 countries. We also recognized net sales of $292 million in fiscal year
2008 from the Driver family of bare metal stents, which experienced strong
growth in the U.S. as a result of reduced penetration of drug-eluting stents in
the U.S. marketplace. The Driver bare metal stent, which is also the base stent
used in Endeavor and Endeavor Resolute, is a cobalt-chromium coronary stent
which has thinner struts and provides greater maneuverability in placing the
stent.

Endovascular
net sales for fiscal year 2008 grew 10 percent when compared to the prior
fiscal year. Growth in the Endovascular business was driven in part by net
sales of the Talent AAA Stent Graft System and the Valiant Thoracic Stent Graft
System outside the U.S. The Valiant Thoracic Stent Graft System is a
next-generation stent graft used for the minimally invasive repair of the
thoracic aorta, the bodys largest artery, for several disease states including
aneurysms, penetrating ulcers, acute or chronic dissections and contained or
traumatic ruptures. Net sales in the U.S. decreased in fiscal year 2008 as
compared to the prior fiscal year as a result of a voluntary field action on
the AneuRx AAAdvantage Stent Graft System that required physician and patient
notification of a product packaging issue. As of the end of fiscal year 2008,
the issue had been corrected.

8

---

Revascularization
and Surgical Therapies net sales for fiscal year 2008 were $431 million, an
increase of 3 percent in comparison to the prior fiscal year. The increase is
the result of net sales growth outside the U.S., which increased 13 percent
primarily from sales of our cannulae and beating heart products. The strong
growth outside the U.S. was partially offset by a decrease in net sales in the
U.S.

Structural
Heart Disease net sales for fiscal year 2008 grew 3 percent in comparison to
the prior fiscal year to $297 million. The increase in net sales for the fiscal
year was driven by net sales outside the U.S., which offset slightly negative
growth in the U.S. Net sales growth outside the U.S. was driven by sales of our
Mosaic and Mosaic Ultra tissue values and our Melody Transcatheter Pulmonary
Valve and Ensemble Transcatheter Delivery System. The growth outside the U.S.
was tempered by the suspension of sales of the Advantage mechanical heart valve
in the first quarter of fiscal year 2008. The Advantage valve was reintroduced
to the market during the third quarter of fiscal year 2008. The Mosaic and
Mosaic Ultra tissue valves incorporate several design features to facilitate
implantation and improve durability. The Melody Transcatheter Pulmonary Valve
and Ensemble Transcatheter Delivery System provide a catheter-based approach to
pulmonic valve replacement for patients with congenital heart defects, with the
goal of reducing the invasiveness and risk associated with pulmonic valve
replacement.

Looking
ahead, we expect our CardioVascular operating segment should be impacted by the
following:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Future
 acceptance of Endeavor in the Japan market. Endeavor received approval by the
 Japanese Ministry of Health, Labor and Welfare in the fourth quarter of
 fiscal year 2009 and was launched in May 2009. Following the launch in Japan,
 Endeavor is commercially available for the treatment of coronary artery
 disease in every major market in the world.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Continued
 acceptance of Endeavor Resolute in markets outside the U.S. Endeavor Resolute
 combines the proven drug and stent components of Endeavor with Biolinx, a
 proprietary biocompatible polymer specifically engineered for drug-eluting
 stent use. Biolinx facilitates the slower absorption of Zotarolimus while
 providing excellent biocompatibility. The design goal of Endeavor Resolute is
 enhanced safety and efficacy in the most complex lesions and patients.                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Further
 acceptance in the U.S. of the Talent AAA Stent Graft System. The Talent AAA
 Stent Graft System received FDA approval in April 2008 and was launched in
 the first quarter of fiscal year 2009. Additionally, we anticipate further
 growth in the U.S. and in Japan from the Talent Thoracic Stent
 Graft System, which was initially released in the first quarter and fourth
 quarter of fiscal year 2009, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Sales growth
 outside the U.S. with continued acceptance of our next generation Endurant
 AAA stent graft and Valiant Thoracic Stent Graft System. The Endurant AAA
 stent graft received CE Mark approval and was commercially launched late in
 the first quarter of fiscal year 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | The
 integration of Ventor Technologies Ltd. (Ventor) and CoreValve, Inc.
 (CoreValve) into our CardioVascular business. In the fourth quarter of fiscal
 year 2009, we acquired Ventor and CoreValve. Both Ventor and CoreValve are medical
 technology companies that develop transcatheter heart valve technologies for
 replacement of the aortic valve. CoreValves Percutaneous Revalving System
 has received CE Mark approval and is currently available outside the U.S.,
 while Ventor is a development stage company and does not yet have a product
 commercially available. We expect these acquisitions will allow us to pursue
 opportunities that have natural synergies with our existing heart valve
 franchise and leverage our global footprint. See Note 4 to the consolidated
 financial statements for additional information.

Neuromodulation Neuromodulation products
consist of therapeutic and diagnostic devices, including implantable
neurostimulation systems, implantable drug delivery devices and urology and
gastroenterology products. Neuromodulation net sales for fiscal year 2009 were
$1.434 billion, an increase of 9 percent when compared to the prior fiscal
year. Foreign currency translation had an unfavorable impact on net sales of
approximately $10 million when compared to the prior fiscal year.

Neuro
Implantables is comprised of two product lines: Pain Management and Movement
Disorders. Net sales from Pain Management and Movement Disorders products for
fiscal year 2009 were $1.145 billion, an increase of 7 percent when compared to
the prior fiscal year. The growth was driven by sales of products in Pain
Management including worldwide sales of the RestoreULTRA neurostimulation
system for pain management and sales in the U.S. of our Specify 5-6-5 surgical
lead for spinal cord stimulation. RestoreULTRA, which was launched in March
2008, is our next generation rechargeable neurostimulator with advanced
programming capabilities and is the thinnest 16-electrode neurostimulator on
the market. Additionally, revenue growth was negatively impacted by the launch
of a competitive product and a short-term supply shortfall with our implantable
pumps during the fiscal year. Movement Disorders revenue was driven by
worldwide net sales of Activa Deep Brain Stimulation (DBS) Therapy. Activa DBS
Therapy is used for the treatment of common movement disorders including
Parkinsons disease, essential tremor and dystonia.

Net
sales of Gastroenterology and Urology products for fiscal year 2009 were $289
million, an increase of 19 percent when compared to the prior fiscal year. The
growth in Gastroenterology and Urology was led by worldwide sales of our
InterStim II product.

9

---

Neuromodulation
net sales for fiscal year 2008 increased 11 percent from the prior fiscal year
to $1.311 billion. Foreign currency translation had a favorable impact of
$32 million on net sales when compared to the prior fiscal year. In the third
quarter of fiscal year 2007, we divested our Urology diagnostics product line
and in the first quarter of fiscal year 2008 we completed the divestiture of
our Gastroenterology and Neurological diagnostics product lines. The loss of
these product lines had a negative net sales growth impact of 4 percent for
fiscal year 2008.

Net
sales for fiscal year 2008 from Pain Management and Movement Disorders products
were $1.069 billion, an increase of 11 percent over the prior period. The
growth was driven by key products in Pain Management including RestoreULTRA,
RestoreADVANCED and PrimeADVANCED neurostimulation systems for pain management,
our SynchroMed II drug delivery pump and our surgical lead for spinal cord
stimulation, the Specify 5-6-5. Movement Disorder revenue was driven by growth
in worldwide net sales of Activa DBS Therapy.

Net
sales of Gastroenterology and Urology products increased 10 percent over fiscal
year 2007 to $242 million. The growth in Gastroenterology and Urology was led
by net sales of our InterStim II product, which experienced its first full
fiscal year on the market, and was partially offset by the impact of the
divestitures of the Gastroenterology and Urology diagnostic product lines.

Looking
ahead, we expect our Neuromodulation operating segment should be impacted by
the following:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Continued
 acceptance of RestoreULTRA, our most advanced rechargeable neurostimulator.
 RestoreULTRA also offers an innovative patient programmer that gives patients
 the ability to customize their pain control.                                                                                                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Continued
 acceptance of our Activa DBS Therapy for the treatment of common movement
 disorders. We continue to educate neurologists and the patient population on
 the benefits that our Activa DBS Therapy offers them. Additionally, Activa PC
 and RC, our next generation neurostimulators, received FDA approval in April
 2009; we look forward to the anticipated launch in the U.S. in the first
 quarter of fiscal year 2010. Activa PC and RC were launched in Europe in January
 2009. Activa PC is a primary cell device and Activa RC is the therapys first
 rechargeable device.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Continued
 acceptance of InterStim Therapy for the treatment of overactive bladder and
 urinary incontinence.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Continued
 acceptance of InterStim Therapy for the treatment of fecal incontinence
 outside the U.S., and future launch and acceptance within the U.S. We have
 submitted a pre-market approval for InterStim Therapy for the treatment of
 fecal incontinence and expect approval in the first half of fiscal year 2010.                                                                                                                                                                                                                                                                       

DiabetesDiabetes products consist of external insulin pumps
and related consumables (together referred to as Durable Pump Systems), and
subcutaneous continuous glucose monitoring systems. Diabetes net sales for fiscal
year 2009 were $1.114 billion, an increase of 9 percent when compared to the
prior fiscal year. Foreign currency translation had an unfavorable impact on
net sales of approximately $13 million when compared to the prior fiscal year.

Durable
Pump Systems net sales for fiscal year 2009 were $983 million, an increase of 5
percent when compared to the prior fiscal year. The increase in net sales
resulted from demand for the MiniMed Paradigm REAL-Time System that integrates
continuous glucose monitoring and insulin pump functionality and related
consumables. Net sales of Continuous Glucose Monitoring systems (CGM) and other
accessories were $131 million, an increase of 56 percent when compared to the
prior fiscal year. Growth was driven by strong acceptance of CGM in the U.S.
and an increase in U.S. sales of glucose test strips.

Diabetes
net sales in fiscal year 2008 increased 18 percent over the prior fiscal year
to $1.019 billion. Foreign currency translation had a favorable impact of $29
million on net sales when compared to the prior fiscal year.

Durable
Pump Systems net sales for fiscal year 2008 were $935 million, representing
growth of 15 percent over the prior fiscal year. The increase in net sales
resulted from strong worldwide market acceptance of the MiniMed Paradigm
REAL-Time System and related consumables. The sales increase of 35 percent
outside the U.S. was especially strong, driven by growth in the markets in
which the MiniMed Paradigm REAL-Time System was launched. The strong growth
outside the U.S. was offset by slowed growth in the U.S., as we experienced a
modest slowdown in replacement business given the timing of upgrades to our
latest technology. Net sales of CGM and other accessories were $84 million, an
increase of 75 percent when compared to the prior fiscal year. Growth was
driven by strong acceptance of CGM in the U.S.

Looking
ahead, we expect our Diabetes operating segment should be impacted by the
following:

| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | Continued
 acceptance from both physicians and patients of the MiniMed Paradigm
 REAL-Time System.

10

---

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Continued
 acceptance and improved U.S. reimbursement of the iPro CGM, a professional CGM recorder that provides
 physicians valuable insight into their patients glucose levels. The iPro CGM was launched in the U.S. in
 July 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Future
 acceptance and customer preference for Medtronic products due to the
 strategic marketing collaboration with Eli Lilly (Lilly), which was announced
 on May 19, 2009. The alliance reached with Lilly provides for marketing and
 sales operations in the U.S. to improve the delivery of diabetes education
 for insulin-taking patients and their caregivers. This will include the
 development of new educational resources and classes around the initiation
 and intensive management of insulin, insulin pump therapy and continuous
 glucose monitoring.                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Continued
 acceptance and customer preference for Medtronic products due to the
 alliances with LifeScan, Inc. (LifeScan), a J&J company,
 and Bayer Diabetes Care (Bayer), a member of the Bayer group, which we
 announced on August 21, 2007. The alliances reached with LifeScan (for
 the U.S. market) and Bayer (for markets outside the U.S.) provide for the
 distribution and marketing of blood glucose meters that communicate with
 Medtronics insulin pumps. These alliances provide our customers an
 integrated solution for managing diabetes, thereby improving the quality of life
 and ease of use. We launched our co-developed blood glucose meters with Bayer
 and LifeScan in February 2008 and April 2008, respectively.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | The future
 launch and acceptance of a series of new insulin pumps, including the
 Paradigm Veo, which offers low glucose suspend that assists in protecting
 against the risk of hypoglycemia by automatically suspending insulin delivery
 when glucose falls below a specified threshold set by the user. The Paradigm
 Veo was launched in the United Kingdom in June 2009 and is expected to be launched in
 other markets outside the U.S. in fiscal year 2010.                                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Potential
 slowdown in consumer spending. Given the elective nature of an insulin pump
 for the management of diabetes and the possible high out-of-pocket costs to
 the customer, there is potential exposure to macroeconomic pressures which
 could negatively impact the near-term sales growth within Diabetes.                                                                                                                                                                                                                                                                                                                                                                                                                             

Surgical
TechnologiesSurgical Technologies products are used
to treat conditions of the ear, nose and throat, and certain neurological
disorders. Additionally, we manufacture and sell image-guided surgery and
intra-operative imaging systems. Our portfolio consists of powered
tissue-removal systems and other microendoscopy instruments, implantable
devices, nerve monitoring systems, disposable fluid-control products, a
Ménières disease therapy device, hydrocephalus shunt devices, external
drainage systems, cranial fixation devices, neuroendoscopes, dura repair
products and image-guided surgery and intra-operative imaging systems. Surgical
Technologies net sales for fiscal year 2009 were $857 million, an increase of
10 percent when compared to the prior fiscal year. Foreign currency
translation had an unfavorable impact on net sales of approximately $11
million when compared to the prior fiscal year.

Core
ENT net sales for fiscal year 2009 were $352 million, an increase of 9 percent
when compared to the prior fiscal year. The increase reflected the continued
success of Fusion EM IGS, an advanced electromagnetic-based image-guided
surgery system to facilitate sinus surgeries. In addition, there was strong
performance in nerve monitoring and drill disposables.

Neurologic
Technologies net sales for fiscal year 2009 were $320 million, an increase of 7
percent when compared to the prior fiscal year. The primary driver of growth
was worldwide increased sales of disposables associated with high-speed drill
systems including the EHS Stylus high-speed powered surgical drill system.
Additionally, the Strata valves, used in the treatment of hydrocephalus,
contributed to the revenue growth.

Navigation
net sales for fiscal year 2009 were $185 million, an increase of 16 percent
when compared to the prior fiscal year. The increase in net sales was based on
strong worldwide net sales of the O-Arm Imaging System, a multi-dimensional
surgical imaging platform that is optimized for use in spine and orthopedic
surgery, and increased service revenue in the U.S. Additionally, the
StealthStation S7 System, launched in the first quarter of fiscal year 2009,
contributed to the revenue growth. The StealthStation S7 System offers
personalized navigation support for surgeons and surgical staff in the
operating room.

Surgical
Technologies net sales for fiscal year 2008 increased by 17 percent over the
prior fiscal year to $780 million. Foreign currency translation had a favorable
impact of $20 million on net sales when compared to the prior fiscal year.

Core
ENT net sales grew 16 percent to $323 million in fiscal year 2008 led by strong
growth of sales outside the U.S. of the Straightshot M4 Microdebrider and
endoscopy sales. In the U.S., there was an increase in net sales of our Image
Guided Surgery Systems which was partially due to the launch of the Fusion EM
IGS System for use in sinus surgical procedures. Net sales of monitoring
disposables also experienced strong worldwide growth.

Neurologic
Technologies net sales grew 14 percent to $298 million in fiscal year 2008. The
primary driver of growth in Neurologic Technologies was continued acceptance
of high-speed powered surgical drill systems, including the EHS Stylus system.

11

---

Navigation
net sales for fiscal year 2008 increased 25 percent from the prior fiscal year
to $159 million based on strong U.S. net sales of the O-Arm Imaging System and
increased worldwide service revenue.

Looking
ahead, we expect our Surgical Technologies operating segment should be impacted
by the following:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Continued
 acceptance of our Fusion EM IGS System, which was launched in the U.S. in the
 third quarter of fiscal year 2008.                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Continued
 acceptance of the StealthStation S7 System and the Synergy Cranial 2.0
 software which were launched in the first and fourth quarters of fiscal year
 2009, respectively. The StealthStation S7 System offers personalized
 navigation support for surgeons and surgical staff in the operating room. The
 Synergy Cranial 2.0 software completed the software offering for cranial
 procedures on the StealthStation S7 system hardware platform.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Continued
 adoption of power systems for sinus procedures outside the U.S., as well as
 continued global adoption of nerve monitoring for ENT and thyroid procedures.                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Launch of
 new products, including the Integrated Power Console, Spine Shaver and the
 NIM 3.0, a next generation nerve monitoring system.                                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Continued
 acceptance of the O-Arm Imaging System.                                                                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Further
 integration of Restore Medical, Inc.s (Restore) Pillar Palatal Implant
 System (Pillar System) and Influents Repose System (Repose System) for the
 treatment of sleep breathing disorders. We anticipate the Pillar System and
 Repose System will deliver new growth by providing us with proven
 office-based procedures in a very fast growing segment of the obstructive
 sleep apnea market.                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Potential
 slowdown in consumer and hospital spending as a result of the recent economic
 downturn. Given the elective nature
 of many of the underlying ENT procedures and the large capital equipment
 component of the Surgical Technologies businesses, there is potential
 exposure to macroeconomic pressures that could negatively impact the
 near-term sales growth within Surgical Technologies.                                                   

Continued net
sales growth in all operating segments is contingent on our ability to gain
further market share, penetrate existing markets, develop new products, improve
existing products and develop new markets.

Costs and Expenses

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

|                                     |  |              |   |      |   |      |  
|------------------------------------ |  | ------------ | - | ---- | - | ---- | -
|                                     |  | Fiscal
 Year |  
|                                     |  | 2009         |   | 2008 |   | 2007 |  
|Cost of
 products sold               |  | 24.1         | % | 25.5 | % | 25.8 | %
|Research
 and development            |  | 9.3          |   | 9.4  |   | 10.1 |  
|Selling,
 general and administrative |  | 35.3         |   | 34.8 |   | 33.8 |  
|Special
 charges                     |  | 0.7          |   | 0.6  |   | 0.8  |  
|Restructuring
 charges               |  | 0.8          |   | 0.3  |   | 0.2  |  
|Certain
 litigation charges          |  | 4.9          |   | 2.7  |   | 0.3  |  
|IPR&D
 charges                       |  | 4.3          |   | 2.9  |   |     |  
|Other
 expense, net                  |  | 2.7          |   | 3.2  |   | 1.7  |  
|Interest
 expense/(income), net      |  | 0.2          |   | (0.8 | ) | (1.3 | )

Cost
of Products SoldCost of products sold was $3.518
billion in fiscal year 2009 representing 24.1 percent of net sales, a decrease
of 1.4 percentage points from fiscal year 2008. Cost of products sold as a
percentage of net sales was positively impacted by 0.4 of a percentage point of
favorable foreign currency translation, 0.2 of a percentage point of favorable
manufacturing variances, 0.1 of a percentage point of favorable product mix,
and 0.4 of a percentage point of favorable scrap and other product costs. In
addition, cost of products sold as a percentage of net sales for the fiscal year
ended April 25, 2008 was negatively impacted by 0.3 of a percentage point as a
result of the $34 million increase in cost of products sold associated with the
fair value adjustment for the inventory acquired in the Kyphon acquisition.

12

---

Cost
of products sold was $3.446 billion in fiscal year 2008 representing 25.5
percent of net sales, a decrease of 0.3 of a percentage point from fiscal year
2007. The cost of products sold was positively impacted by 0.7 of a percentage
point of favorable foreign currency translation and 0.3 of a percentage point
for reduced other product costs and favorable manufacturing variances. These
decreases were offset by 0.3 of a percentage point associated with the impact
of the $34 million fair value adjustment for the inventory acquired in the
Kyphon acquisition and 0.4 of a percentage point of unfavorability for scrap
and other product costs associated with the suspension of the worldwide
distribution of the Fidelis lead and scrap costs at our Physio-Control business
segment.

Research
and DevelopmentConsistent with prior periods, we have
continued to invest in the future by spending aggressively on research and
development efforts. Research and development spending was $1.355 billion in
fiscal year 2009, representing 9.3 percent of net sales, a decrease of 0.1 of a
percentage point from fiscal year 2008. The decrease is primarily the result of
a reclassification of certain expenses to selling, general and administrative
of $46 million for the fiscal year that would have otherwise been included in
research and development in the prior years.

Research
and development spending was $1.275 billion in fiscal year 2008,
representing 9.4 percent of net sales, a decrease of 0.7 of a percentage point
from fiscal year 2007. While our fiscal year 2008 research and development
spending increased over the prior fiscal year, our restructuring initiatives
and our efforts to prioritize projects with the greatest potential for future
growth impacted the fiscal year 2008 rate of spending.

We
remain committed to developing technological enhancements and new indications
for existing products, and less invasive and new technologies to address unmet
medical needs. That commitment leads to our initiation and participation in
many clinical trials each fiscal year. Furthermore, we expect our development
activities to help reduce patient care costs and the length of hospital stays
in the future. In addition to our investment in research and development, we
continue to access new technologies in areas served by our existing businesses,
as well as in new areas, through acquisitions, licensing agreements, alliances
and certain strategic equity investments.

Selling,
General and Administrative Fiscal year 2009 selling,
general and administrative expense as a percentage of net sales increased by
0.5 of a percentage point from fiscal 2008 to 35.3 percent. For fiscal year
2009, the reclassification of certain expenses from research and development
had a negative impact of 0.3 of a percentage point on selling, general and
administrative expense. In addition, foreign exchange had a negative impact of
0.2 of a percentage point on fiscal year 2009 selling, general and
administrative expense. We continue to drive our initiatives to leverage our
cost structure in order to help reduce selling, general and administrative
expense.

Fiscal
year 2008 selling, general and administrative expense as a percentage of net
sales increased by 1.0 percentage point from fiscal year 2007 to 34.8
percent. The increase in selling, general and administrative expense for fiscal
year 2008 was predominantly driven by the acquisition of Kyphon, which increased
selling, general and administrative expense by 0.6 of a percentage point. The remainder
of the increase was due to expenses associated with our previously communicated
investment in selling and marketing activities related to the U.S. launches of
the Prestige Cervical Disc System and Endeavor, and the continued
implementation of our global information technology system, which included the
full conversion of our U.S. distribution systems in the second quarter of
fiscal year 2008. These increases were offset by our continual cost control
measures across all of our businesses and attempts to leverage the general and
administrative expense categories.

Special,
Restructuring, Certain Litigation and IPR&D Charges
and
Certain Tax AdjustmentsWe believe that in order to properly
understand our short-term and long-term financial trends, investors may find it
useful to consider the impact of special, restructuring, certain litigation and
IPR&D charges and certain tax adjustments. Special (such as asset
impairment or contributions to The Medtronic Foundation), restructuring, certain
litigation and IPR&D charges and certain tax adjustments recorded during
the previous three fiscal years were as follows:

|                                                                                                            |  |              |       |      |   |      |   |   |      |  
|----------------------------------------------------------------------------------------------------------- |  | ------------ | ----- | ---- | - | ---- | - | - | ---- | -
|                                                                                                            |  | Fiscal
 Year |      
|(dollars
 in millions)                                                                                      |  | 2009         |       | 2008 |   | 2007 |  
|Special charges:                                                                                            |  |              |       |      |   |      |   |   |      |  
|Asset impairment charges                                                                                    |  | $            |      |      | $ | 78   |   | $ | 98   |  
|Medtronic Foundation contribution                                                                           |  |              | 100   |      |   |     |   |   |     |  
|Total special charges                                                                                       |  |              | 100   |      |   | 78   |   |   | 98   |  
|Restructuring charges                                                                                       |  |              | 123   |      |   | 45   |   |   | 36   |  
|Certain litigation charges                                                                                  |  |              | 714   |      |   | 366  |   |   | 40   |  
|IPR&D charges                                                                                               |  |              | 621   |      |   | 390  |   |   |     |  
|Total special, restructuring, certain
 litigation and IPR&D charges                                         |  |              | 1,558 |      |   | 879  |   |   | 174  |  
|Net tax impact of special, restructuring,
 certain litigation and IPR&D charges and certain tax adjustments |  |              | (444  | )    |   | (137 | ) |   | (179 | )
|Total special, restructuring, certain
 litigation and IPR&D charges and certain tax adjustments, net of tax |  | $            | 1,114 |      | $ | 742  |   | $ | (5   | )

13

---

Special
Charges In fiscal year 2009, consistent with our ongoing commitment to improving
the health of people and communities throughout the world, we recorded a
$100 million contribution to The Medtronic Foundation, which is a related party
non-profit organization. The contribution to The Medtronic Foundation was paid
in the fourth quarter of fiscal year 2009.

In
fiscal year 2008, we recorded a special charge related to the impairment of
intangible assets associated with our benign prostatic hyperplasia, or enlarged
prostate, product line purchased in fiscal year 2002. The development of the
market, relative to our original assumptions, has changed as a result of the
broad acceptance of a new line of drugs to treat the symptoms of an enlarged
prostate. After analyzing the estimated future cash flows utilizing this
technology, based on the market development, we determined that the carrying
value of these intangible assets was impaired and a write-down of
$78 million was necessary.

In
fiscal year 2007, we concluded two intangible assets were fully impaired due to
inadequate clinical results and the resulting delays in product development. As
a result, we recorded a $98 million special charge relating to the impairments
of intangible assets stemming from the July 1, 2005 acquisition of
Transneuronix, Inc. (TNI) and the November 1, 2004 acquisition of Angiolink
Corporation (Angiolink). TNI focused on the development of an implantable
gastric stimulator to treat obesity. Angiolink focused on the development of
wound closure devices for vascular procedures.

See
Note 2 to the consolidated financial statements for further discussion of
special charges.

Restructuring

Fiscal
Year 2009 Initiative

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

The
fiscal year 2009 initiative will result in charges being recognized in both the
fourth quarter of fiscal year 2009 and the first quarter of fiscal year 2010,
and we expect that when complete, will eliminate approximately 1,500  1,800
positions. We anticipate that the additional expense that we will recognize in
the first quarter of fiscal year 2010 related to this initiative will be in the
range of $60 million to $80 million.

Of
the 1,500  1,800 positions that will be eliminated as part of this initiative,
approximately 975 were identified for elimination in the fourth quarter of
fiscal year 2009 and will be achieved through early retirement packages offered
to employees, voluntary separation and involuntary separation. Of these 975
positions, approximately 280 positions have been eliminated as of April 24,
2009. The restructuring initiatives are scheduled to be substantially complete
by the end of fiscal year 2010, and are expected to produce annualized
operating savings in the range of $80 million to $90 million related to the 975
positions currently identified. These savings will arise mostly from reduced
compensation expense.

Global
Realignment Initiative

In
the fourth quarter of fiscal year 2008, as part of a global realignment
initiative, we recorded a $31 million restructuring charge, which consisted of
employee termination costs of $27 million and asset write-downs of $4 million.
The asset write-downs were recorded within cost of products sold in the consolidated
statement of earnings. The global realignment initiative focused on shifting
resources to those areas where we have the greatest opportunities for growth
and streamlining operations to drive operating leverage. The global realignment
initiative impacted most businesses and certain corporate functions.

As
a continuation of the global realignment initiative that began in fiscal year
2008, in the first quarter of fiscal year 2009 we incurred $96 million of
incremental restructuring charges, which consisted of employee termination
costs of $91 million and asset write-downs of $5 million. The majority of the
expense recognized in the first quarter of fiscal year 2009 was related to the
execution of our global realignment initiative outside the U.S. This included
the realignment and elimination of personnel throughout Europe and the Emerging
Markets and the closure of an existing facility in the Netherlands that has
been integrated into the U.S. operations. The remainder of the expense was
associated with enhanced severance benefits provided to employees identified in
the fourth quarter of fiscal year 2008. These incremental costs were not
accrued in fiscal year 2008 because the enhanced benefits had not yet been
communicated to the impacted employees.

14

---

In
the fourth quarter of fiscal year 2009, we recorded a $7 million reversal of
excess reserves related to the global realignment initiative. This reversal is
primarily a result of favorable severance negotiations with certain employee
populations outside the U.S. as well as a higher than expected percentage of
employees identified for elimination finding positions elsewhere within the
Company.

As
of the end of the first quarter of fiscal year 2009, the Company had identified
approximately 900 positions for elimination which were to be achieved through
both voluntary and involuntary separation. Of the 900 positions identified,
approximately 740 have been eliminated as of April 24, 2009. The restructuring
initiatives are scheduled to be substantially complete by the end of the first
quarter of fiscal year 2010, and are expected to produce annualized operating
savings of approximately $96 million. These savings will arise mostly from
reduced compensation expense.

Fiscal
Year 2007 Initiative

In
the fourth quarter of fiscal year 2007, we recorded a $36 million restructuring
charge, which consisted of employee termination costs of $28 million and asset
write-downs of $8 million. The asset write-downs consisted of a $5 million charge
for inventory write-downs and a $3 million charge for non-inventory asset
write-downs. The inventory and asset write-downs were recorded within cost of
products sold in the consolidated statement of earnings. These
initiatives were designed to drive manufacturing efficiencies in our
CardioVascular business, downsize our Physio-Control business due to our
voluntary suspension of U.S. shipments and rebalance resources within our CRDM
business in response to market dynamics.

As
a continuation of our fiscal year 2007 initiative, in the first quarter of
fiscal year 2008 we incurred $14 million of incremental restructuring charges
associated with compensation provided to employees whose employment terminated
with the Company in the first quarter of fiscal year 2008. These incremental
costs were not accrued in fiscal year 2007 because these benefits had not yet
been communicated to the impacted employees. Included in the total $14 million
restructuring charge is $4 million of incremental defined benefit pension and
post-retirement related expense for those employees who accepted early
retirement packages. For further discussion on the incremental defined benefit
pension and post-retirement related expense, see Note 14 to the consolidated
financial statements.

When
the restructuring initiative began in fiscal year 2007, we identified
approximately 900 positions for elimination which were achieved through early
retirement packages offered to employees, voluntary separation and involuntary
separation. As of April 25, 2008, the initiatives begun in the fourth quarter
of fiscal year 2007 were substantially complete. This restructuring initiative
is expected to produce annualized operating savings of approximately $125
million mostly from reduced compensation expense.

For
additional information, see Note 3 to the consolidated financial statements.

Certain
Litigation Charges We classify material litigation reserves recognized as
certain litigation charges.

During
fiscal year 2009, we incurred four certain litigation charges totaling $714
million. The first charge in the amount of $178 million relates to litigation
with DePuy regarding patent infringement
claims stemming from the Vertex line of multiaxial screws. On June 1, 2009, the
U.S. Court of Appeals for the Federal Circuit affirmed the December 2007 ruling
of infringement and awarded damages based on lost profits, but reversed certain
elements of the original 2007 award. Prior to the U.S. Court of Appeals
decision, we had not recorded expense related to the damages awarded in 2007 as
we did not believe that an unfavorable outcome in this matter was probable
under SFAS No. 5. As a result of the U.S. Court of Appeals decision, we have
now recorded a reserve of $178 million which is expected to cover the revised
damages award and pre- and post-judgment interest. Since the DePuy litigation
originated prior to April 24, 2009, we have appropriately
recognized this charge in the consolidated financial statements for the fiscal
year ended April 24, 2009. See Note 16
to the consolidated financial statements for additional information.

The
second charge in the amount of $270 million relates to a settlement of royalty
disputes with J&J which concern Medtronics
licensed use of certain patents. The agreement reached in the fourth quarter of
fiscal year 2009 ended all current and potential disputes between the two
parties under their 1997 settlement and license agreement relating to coronary
angioplasty stent design and balloon material patents. The settlement amount
was paid in May 2009. See Note 16 to
the consolidated financial statements for additional information.

15

---

The
third charge in the amount of $229 million relates to litigation with Cordis
Corporation (Cordis), a subsidiary of J&J. The Cordis litigation originated
in October 1997 and pertains to patent infringement claims on previous
generations of bare metal stents that are no longer on the market. On September
30, 2008, the U.S. District Court entered final judgment including accrued
interest, totaling approximately $521 million, to Cordis. We had previously
recorded a charge of $243 million related to this litigation in the third
quarter of fiscal year 2008. At the time the $243 million charge was recorded,
the range of potential loss related to this matter was subject to a high degree
of estimation. The amount recorded represented an estimate of the low end of
the range of probable outcomes related to the matter. Given that the Company
and J&J were involved in a number of litigation matters which span across
businesses, we entered into negotiations with J&J in an attempt to settle
some of the additional litigation simultaneous with the payment of this
judgment. Ultimately, the agreement reached with Cordis required a total cash
payment of $472 million, which included the settlement of several outstanding
legal matters between the parties. The charge of $229 million in the second
quarter of fiscal year 2009 is the net result of $472 million in cash payments,
offset by the existing reserves on the balance sheet including interest accrued
on the $243 million since the date established. As of April 24, 2009, the
settlement amount of $472 million was paid.

The
fourth charge recognized in fiscal year 2009 relates to litigation that
originated in May 2006 with Fastenetix LLC (Fastenetix), a patent holding
company. The agreement reached with Fastenetix required a total cash payment of
$125 million for the settlement of ongoing litigation and the purchase of
patents. Of the $125 million, $37 million was assigned to past damages in the
case and the remaining $88 million was recorded as purchased intellectual
property that has an estimated useful life of 7 years. As of April 24, 2009,
the settlement amount of $125 million was paid.

During
fiscal year 2008, we incurred certain litigation charges of $366 million. Of
that amount, $123 million related to the settlement of certain lawsuits
relating to the Marquis line of ICDs and CRT-Ds that were subject to a field
action announced on February 10, 2005. As discussed in detail above, the
remainder of the charge, $243 million, relates to an estimated reserve
established for litigation with Cordis. In May 2008, we paid substantially all
of the settlement for certain lawsuits relating to the Marquis line of ICDs and
CRT-Ds. See Note 16 to the
consolidated financial statements for additional information.

During
fiscal year 2007, we recorded a certain litigation charge of $40 million
related to a settlement agreement with the U.S. Department of Justice which
requires the government to obtain dismissal of two qui tam civil suits pending
against us, and is conditioned upon such dismissal being obtained. The two
suits were based upon allegations about certain sales and marketing practices
in the Spinal business. The settlement agreement reflects our assertion that
the Company and its current employees have not engaged in any wrongdoing or
illegal activity. The settlement amount was paid in May 2009.

See
Note 2 to the consolidated financial statements for further discussion of these
cases.

IPR&D Charges During
fiscal year 2009, we recorded $621 million of IPR&D charges of which $307
million related to the acquisition of Ventor, $123 million related to the
acquisition of CoreValve, $97 million related to the acquisition of Ablation
Frontiers, $72 million related to the acquisition of CryoCath and $22 million
was for the purchase of certain intellectual property for use in our Spinal and
Diabetes businesses. These payments were expensed as IPR&D since
technological feasibility of the underlying projects had not yet been reached
and such technology has no future alternative use.

During
fiscal year 2008, we recorded $390 million of IPR&D charges of which $42
million related to the acquisition of NDI Medical, Inc. (NDI), a development stage
company, $290 million related to a technology acquired through the purchase of
Kyphon, $20 million related to the purchase of intellectual property from
Setagon, Inc., $25 million related to a milestone payment under the existing
terms of a royalty bearing, non-exclusive patent cross-licensing agreement with
NeuroPace, Inc. and $13 million was for unrelated purchases of certain
intellectual property. These payments were expensed as IPR&D since technological
feasibility of the underlying projects had not yet been reached and such
technology has no future alternative use.

There
were no IPR&D charges for fiscal year 2007.

See
Note 4 to the consolidated financial statements for further discussion on
IPR&D charges.

We
are responsible for the valuation of IPR&D charges. The values assigned to
IPR&D are based on valuations that have been prepared using methodologies
and valuation techniques consistent with those used by independent appraisers.
All values were determined by identifying research projects in areas for which
technological feasibility had not been established. Additionally, the values
were determined by estimating the revenue and expenses associated with a projects
sales cycle and the amount of after-tax cash flows attributable to these
projects. The future cash flows were discounted to present value utilizing an
appropriate risk-adjusted rate of return. The rate of return included a factor
that takes into account the uncertainty surrounding the successful development
of the IPR&D.

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 products 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, delay or failure to obtain
required market clearances and patent litigation. If commercial viability were
not achieved, we would likely look to other alternatives to provide these
therapies.

16

---

See
the Acquisitions section of this managements discussion and analysis for
detailed discussion of each material acquisition in fiscal years 2009 and 2008.

Certain
Tax AdjustmentsWe classify the material
recognition or derecognition of uncertain tax positions as certain tax
adjustments.

In
fiscal year 2009, we recorded a $132 million certain tax benefit associated
with the reversal of excess tax accruals in connection with the settlement of
certain issues reached with the U.S. Internal Revenue Service (IRS) involving
the review of our fiscal year 2005 and fiscal year 2006 domestic income tax
returns, the resolution of various state audit proceedings covering fiscal
years 1997 through 2007 and the completion of foreign audits covering various
years. The $132 million certain tax benefit was recorded in the provision for income taxes in the
consolidated statement of earnings for fiscal year 2009.

There
were no certain tax adjustments in fiscal year 2008.

In
fiscal year 2007, we recorded a $129 million certain tax benefit associated
with the reversal of excess tax accruals in connection with the settlement
reached with the IRS with respect to their review of our fiscal years 2003 and
2004 domestic income tax returns and the resolution of competent authority
issues for fiscal years 1992 through 2000. The $129 million certain tax benefit
was recorded in the provision for income
taxes in the consolidated statement of earnings for fiscal year
2007.

See
the Income Taxes section of this managements discussion and analysis for
further discussion of the certain tax adjustments.

Other Expense, Net Other expense, net
includes intellectual property amortization expense, royalty income and
expense, realized equity security gains and losses, realized foreign currency
transaction and derivative gains and losses and impairment charges on equity
securities. In fiscal year 2009, other expense, net was $396 million, a
decrease of $40 million from $436 million in the prior fiscal year. The
decrease of $40 million for fiscal year 2009 was primarily due to the impact of
foreign currency gains and losses. Total foreign currency losses recorded in other expense, net in fiscal year
2009 were $28 million as compared to losses of $148 million in the prior fiscal
year. Additionally, other expense, net was partially offset by incremental
expense from royalties on the sales of Endeavor products and $92 million of
amortization on intangible assets related to the Kyphon acquisition in the
current fiscal year compared to $46 million in the prior fiscal year.

In
fiscal year 2008, other expense, net was $436 million, an increase of
$224 million from $212 million in fiscal year 2007. This change is
primarily due to the impact of foreign currency gains and losses, which
resulted in losses in fiscal year 2008 of $148 million versus gains in fiscal
year 2007 of $20 million, and $46 million of amortization on intangible assets
resulting from the Kyphon acquisition. Additionally, prior year other expense,
net was offset by $55 million due to the accelerated amortization of deferred
income in connection with a product supply agreement in the CardioVascular
business, where the other party elected not to exercise its option to extend
the agreement.

Interest Expense/(Income), NetInterest
expense/(income), net includes interest earned on our investments, interest
paid on our borrowings, amortization of debt issuance costs and the net
realized gain or loss on the sale or impairment of available-for-sale (AFS)
debt securities. In fiscal year 2009, interest expense/(income), net was $29
million, as compared to $(109) million in fiscal year 2008. The change from interest
income, net of $109 million in fiscal year 2008 to interest expense, net of $29
million in fiscal year 2009 is the result of lower average cash and investment
balances during fiscal year 2009 as a result of the cash utilized to finance
the Kyphon acquisition that took place in the third quarter of fiscal year 2008
and lower interest rates being earned on our short- and long-term investments
during the twelve months ended April 24, 2009. Interest expense also decreased
in fiscal year 2009 as a result of having lower interest rates on our
outstanding debt in comparison to fiscal year 2008. See our discussion in the
Liquidity and Capital Resources section of this managements discussion and
analysis for more information regarding our investment portfolio.

In
fiscal year 2008, interest income, net was $109 million, a decrease of
$45 million from interest income, net of $154 million in fiscal year
2007. The decrease in interest income, net in fiscal year 2008 as compared to
fiscal year 2007 was a result of the impact of the cash utilized to finance the
Kyphon acquisition, increased borrowings outstanding and a decline in interest
rates being received on our short- and long-term investments. The decrease was
partially offset by recognition of $26 million in net gains on the sale of AFS
debt securities.

17

---

Income Taxes

|                                                                                                    |  |              |      |                                      |   |      |   |         |      |         |  |      |   |  |      |  
|--------------------------------------------------------------------------------------------------- |  | ------------ | ---- | ------------------------------------ | - | ---- | - | ------- | ---- | ------- |  | ---- | - |  | ---- | -
|                                                                                                    |  | Fiscal
 Year |      | Percentage
 PointIncrease/(Decrease) |  
|(dollars in millions)                                                                               |  | 2009         |      | 2008                                 |   | 2007 |   | FY09/08 |      | FY08/07 | 
|Provision for income taxes                                                                          |  | $            | 425  |                                      | $ | 654  |   | $       | 713  |         |  | N/A  |   |  | N/A  |  
|Effective tax rate                                                                                  |  |              | 16.4 | %                                    |   | 22.7 | % |         | 20.3 | %       |  | (6.3 | ) |  | 2.4  |  
|Impact of special, restructuring, certain
 litigation and IPR&D charges and certain tax adjustments |  |              | (4.5 | )                                    |   | 1.7  |   |         | (3.9 | )       |  | (6.2 | ) |  | 5.6  |  
|Non-GAAP nominal tax rate (1)                                                                       |  |              | 20.9 | %                                    |   | 21.0 | % |         | 24.2 | %       |  | (0.1 | ) |  | (3.2 | )

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 
|   
|(1) | Non-GAAP
 nominal tax rate is defined as the income tax provision as a percentage of
 earnings before income taxes, excluding special, restructuring, certain
 litigation and IPR&D charges and certain tax adjustments. We believe that
 the resulting non-GAAP financial measure provides useful information to
 investors because it excludes the effect of these discrete items so that investors
 can compare our recurring results over multiple periods.

The
effective tax rate of 16.4 percent decreased by 6.3 percentage points from
fiscal year 2008 to fiscal year 2009. The change in our effective tax rate was
primarily due to the impact of special, restructuring, certain litigation and
IPR&D charges and certain tax adjustments. The 6.2 percentage points
decrease in the impact from special, restructuring, certain litigation and
IPR&D charges and certain tax adjustments is largely due to the $132
million benefit from the certain tax adjustment associated with the reversal of
excess tax accruals in connection with the settlement of certain issues reached
with the U.S. Internal Revenue Service (IRS) involving the review of the
Companys fiscal year 2005 and fiscal year 2006 domestic income tax returns,
the resolution of various state audit proceedings covering fiscal years 1997
through 2007 and the completion of foreign audits covering various years
recorded in fiscal year 2009. Our non-GAAP nominal tax rate for fiscal year
2009 was 20.9 percent compared to 21.0 percent from the prior fiscal year. The
decrease in our non-GAAP nominal tax rate for fiscal year 2009 as compared to
the prior fiscal year was due to the impact of tax benefits derived from our
international operations and operational tax benefits described below.

During
fiscal year 2009, we recorded $44 million in operational tax benefits. This
included a $16 million operational tax benefit associated with the retroactive
renewal and extension of the research and development credit enacted by the Tax
Extenders and Alternative Minimum Tax Relief Act of 2008 which related to the
first seven months of calendar year 2008. The remaining $28 million of
operational tax benefit related to the finalization of certain tax returns,
changes to uncertain tax position reserves and the impact of a state law change
in 2009. During fiscal year 2008, we recorded $37 million in operational tax
benefits related to the finalization of certain tax returns and changes to uncertain
tax position reserves. These tax adjustments are operational in nature and are
recorded in the provision for income taxes on the consolidated statements of
earnings. Excluding the impact of the operational tax adjustments, our non-GAAP
nominal tax rate would have been 22.0 percent for fiscal years 2009 and 2008.

The
fiscal year 2008 effective tax rate of 22.7 percent increased by
2.4 percentage points from fiscal year 2007. The change in our effective
tax rate was due to the tax impact of special, restructuring, certain
litigation and IPR&D charges and certain tax adjustments partially offset
by the tax benefits derived from our international operations. The 5.6
percentage points increase in the tax impact from special, restructuring,
certain litigation and IPR&D charges and certain tax adjustments is largely
due to the non-deductible IPR&D charges incurred during fiscal year 2008
compared to the $129 million benefit from the certain tax adjustment recorded
in fiscal year 2007 associated with the reversal of excess tax accruals in
connection with the settlement reached with the IRS with respect to their
review of our fiscal years 2003 and 2004 domestic income tax returns and the
resolution of competent authority issues for fiscal years 1992 through 2000.
Our non-GAAP nominal tax rate for fiscal year 2008 was 21.0 percent compared to
24.2 percent from the prior fiscal year. The decrease in the non-GAAP nominal
tax rate of 3.2 percentage points is mainly due to increased benefits from our
international operations subject to tax rates lower than the U.S. statutory
rates.

Tax
audits associated with the allocation of income, and other complex issues, may
require an extended period of time to resolve and may result in income tax
adjustments if changes to our allocation are required between jurisdictions
with different tax rates. Tax authorities periodically review our tax returns
and propose adjustments to our tax filings. The IRS has settled its audits with
us for all years through fiscal year 1996. Tax years settled with the IRS may
remain open for foreign tax audits and competent authority proceedings.
Competent authority proceedings are a means to resolve intercompany pricing
disagreements between countries.

In
August 2003, the IRS proposed adjustments arising out of its audit of the
fiscal years 1997, 1998 and 1999 tax returns. We initiated a defense of these
adjustments at the IRS appellate level, and in the second quarter of fiscal
year 2006 we reached settlement on most, but not all matters. The remaining
issue relates to the allocation of income between Medtronic, Inc., and its
wholly owned subsidiary in Switzerland. On April 16, 2008, the IRS issued a
statutory notice of deficiency with respect to this remaining issue. We filed a
Petition with the U.S. Tax Court on July 14, 2008 objecting to the deficiency
and intend to defend our position vigorously.

In
September 2005, the IRS issued its audit report for fiscal years 2000, 2001 and
2002. In addition, the IRS issued its audit report for fiscal years 2003 and
2004 in March 2007. We have reached agreement with the IRS on substantially all
of the proposed adjustments for these fiscal years 2000 through 2004. The only
item of significance that remains open for these years relates to the carryover
impact of the allocation of income issue proposed for fiscal years 1997 through
1999.

18

---

In
March 2009, the IRS issued its audit report for fiscal years 2005 and 2006. We
have reached agreement with the IRS on many, but not all, of the proposed
adjustments for fiscal years 2005 and 2006. The significant issues that remain
unresolved relate to the allocation of income between Medtronic, Inc. and its
wholly owned subsidiaries and the timing of the deductibility of a settlement
payment. For the proposed adjustments that we do not agree with, we have filed our protest with the IRS.

Our reserve for the uncertain tax positions related to these
significant unresolved matters with the IRS, described above, is subject to a high degree of estimation
and management judgment. Resolution of these significant unresolved matters, or positions taken by the IRS or foreign tax
authorities during future tax audits, could have a material impact on our financial results in future periods.
We continue to believe that our reserves for uncertain tax positions are appropriate and have meritorious defenses for our tax
filings and will vigorously defend them during the audit process, appellate process and through litigation
in courts, as necessary.

See
Note 13 to the consolidated financial statements for additional information.

Liquidity and Capital
Resources

|                                                                              |  |            |         |      |   |         |  
|----------------------------------------------------------------------------- |  | ---------- | ------- | ---- | - | ------- | -
|                                                                              |  | Fical Year |        
|(dollars in millions)                                                         |  | 2009       |         | 2008 |  
|Working
 capital                                                              |  | $          | 4,313   |      | $ | 3,787   |  
|Current
 ratio*                                                               |  |            | 2.4:1.0 |      |   | 2.1:1.0 |  
|Cash, cash
 equivalents, and short-term investments                           |  | $          | 1,676   |      | $ | 1,613   |  
|Long-term
 investments in debt securities**                                   |  |            | 2,242   |      |   | 2,078   |  
|Cash, cash equivalents, short-term
 investments and long-term debt securities |  | $          | 3,918   |      | $ | 3,691   |  
|Short-term
 borrowings and long-term debt                                     |  | $          | 7,294   |      | $ | 6,956   |  
|Net cash
 position***                                                         |  | $          | (3,376  | )    | $ | (3,265  | )

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

We
believe our liquidity remains strong as of April 24, 2009 and our strong
balance sheet and liquidity provide us with flexibility in the future. We
believe our existing cash and investments, as well as our unused lines of
credit and commercial paper capacity of $2.799 billion, if needed, will satisfy
our foreseeable working capital requirements for at least the next twelve
months. However, we periodically consider various financing alternatives and
may, from time to time, seek to take advantage of favorable interest rate
environments or other market conditions. At April 24, 2009, our Standard and
Poors Ratings Group and Moodys Investors Service ratings remain unchanged as
compared to the fiscal year ended April 25, 2008 with long-term debt ratings of
AA- and A1, respectively, and strong short-term debt ratings of A-1+ and P-1.

The
decrease in our net cash position in fiscal year 2009 as compared to fiscal
year 2008 was primarily due to the fiscal year 2009 issuance of new debt partially
offset by positive cash flow from operations. For further information see the
Summary of Cash Flows section of this managements discussion and analysis.

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

When
applicable, Note 16 to the consolidated financial statements provides
information regarding amounts we have accrued related to significant legal
proceedings. In accordance with SFAS No. 5, we record a liability in our
consolidated financial statements for these actions when a loss is known or
considered probable and the amount can be reasonably estimated. For the fiscal
year ended April 24, 2009, we have made significant payments related to certain
legal proceedings. For information regarding these payments, please see the
Special, Restructuring, Certain Litigation and IPR&D Charges and Certain
Tax Adjustments section of this managements discussion and analysis for
further information.

At
April 24, 2009 and April 25, 2008, approximately $3.628 billion and $3.317
billion, respectively, of cash, cash equivalents, short-term investments and
long-term investments in debt securities were held by our non-U.S.
subsidiaries. These funds are available for use by worldwide operations; however,
if these funds were repatriated to the U.S. or used for U.S. operations, the
amounts would generally be subject to U.S. tax. As a result, we have not chosen
to repatriate this cash but instead use cash generated from U.S. operations and
short- and long-term borrowings to meet our U.S. cash needs. Long-term
investments at April 24, 2009 also include $100 million of cash invested in government securities
held in an indemnification trust established for self-insurance coverage for
our directors and officers. These investments are restricted and can only be
used to indemnify or advance expenses related to claims against our directors
and/or officers.

19

---

We
have investments in marketable debt securities that are classified and
accounted for as available-for-sale. Our debt securities include corporate debt
securities, government and agency securities, certificates of deposit and
mortgage backed and other asset backed securities including auction rate
securities. Market conditions during fiscal year 2009 and subsequent to our
April 24, 2009 year-end continue to indicate significant uncertainty on the
part of investors on the economic outlook for the U.S. and for financial
institutions. This uncertainty has created reduced liquidity across the fixed
income investment market, including certain securities in which we have
invested. As a result, some of our investments have experienced reduced
liquidity including unsuccessful monthly auctions for our auction rate security
holdings. Although certain securities are illiquid, if we required capital we
believe we could liquidate a substantial amount of our portfolio and incur no
material impairment loss or borrow under our commercial paper program or lines
of credit.

For
the fiscal year ended April 24, 2009, we recognized an other-than-temporary
impairment loss on AFS debt securities of $38 million. In determining this
other-than-temporary impairment loss, we considered the provisions of SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities, and
related guidance. This guidance specifies that we consider a variety of
factors, including the quality and estimated value of the underlying credit
support for our holding and the financial condition and credit rating of the
issuer. Based on our assessment of the credit quality of the underlying
collateral and credit support available to each of the remaining securities in
which we are invested, we believe we have recorded all necessary
other-than-temporary impairments as we have the ability and the intent to hold
these investments long enough to avoid realizing further losses. However, as of
April 24, 2009, we have $175 million of gross unrealized losses on our
aggregate short-term and long-term investments of $2.647 billion; if market
conditions continue to deteriorate further, some of these holdings may
experience other-than-temporary impairment in the future which could have a
material impact on our financial results. Management is required to use
estimates and assumptions in its valuation of our investments, which requires a
high degree of judgment, and therefore actual results could differ materially
from those estimates. See Note 6 to the consolidated financial statements for
additional information regarding fair value measurements under SFAS No. 157,
Fair Value Measurements.

Summary of Cash Flows

|                                                              |  |              |        |      |   |        |   |   |        |  
|------------------------------------------------------------- |  | ------------ | ------ | ---- | - | ------ | - | - | ------ | -
|                                                              |  | Fiscal
 Year |       
|(dollars in millions)                                         |  | 2009         |        | 2008 |   | 2007   |  
|Cash
 provided by (used in):                                  |  |              |        |      |   |        |   |   |        |  
|Operating
 activities                                         |  | $            | 3,878  |      | $ | 3,489  |   | $ | 2,979  |  
|Investing
 activities                                         |  |              | (2,740 | )    |   | (2,790 | ) |   | (1,701 | )
|Financing
 activities                                         |  |              | (845   | )    |   | (835   | ) |   | (3,011 | )
|Effect of
 exchange rate changes on cash and cash equivalents |  |              | (82    | )    |   | (60    | ) |   | (5     | )
|Net change
 in cash and cash equivalents                      |  | $            | 211    |      | $ | (196   | ) | $ | (1,738 | )

Operating
ActivitiesOur net cash provided by operating
activities was $3.878 billion for the fiscal year ended April 24, 2009 compared
to $3.489 billion provided by operating activities for the same period of the
prior year. The $389 million increase in net cash provided by operating
activities is primarily attributable to the increase in earnings and due to the
timing of receipts and payments for disbursements in the ordinary course of
business.

Our
net cash provided by operating activities was $3.489 billion for the fiscal
year ended April 25, 2008 compared to net cash provided by operating activities
of $2.979 billion in the same period of the prior year. The $510 million
increase in net cash provided by operating activities was primarily
attributable to a $442 million decrease in cash used for operating assets and
liabilities. The decrease in cash used was led by our improved management of
outstanding accounts receivable and inventory.

Investing
ActivitiesOur net cash used in investing activities
was $2.740 billion for the fiscal year ended April 24, 2009 compared to $2.790
billion used in investing activities for the fiscal year ended April 25, 2008.
Although we had a number of acquisitions which took place in fiscal year 2009,
overall cash used for acquisitions decreased in comparison to the prior fiscal
year which included the acquisition of Kyphon. The reduction in acquisition
spending was largely offset by increased investing in marketable securities in
fiscal year 2009 which resulted in net purchases of $115 million as compared to
net proceeds of $2.124 billion in the prior year as we readied our cash
position for the acquisition of Kyphon. Lastly, fiscal year 2009 included
increased other investing activities which primarily relate to the purchase of
minority investments. Although we generally invest in a number of early stage
companies each year, fiscal year 2009 included the use of $221 million in cash
for the purchase of a 15 percent interest in Weigao which is a component of our
strategy to increase investment in China.

Our
net cash used in investing activities was $2.790 billion for the fiscal year
ended April 25, 2008 compared to $1.701 billion used in investing activities
for the fiscal year ended April 27, 2007. The $1.089 billion increase in net
cash used in investing activities was primarily attributable to the $4.185
billion increase in cash used for acquisitions and the purchase of intellectual
property, principally the Kyphon acquisition, partially offset by $3.067
billion in incremental cash generated through the liquidation of marketable
securities as compared to the prior year.

20

---

Financing
ActivitiesOur net cash used in financing activities
was consistent with the prior year at $845 million for the fiscal year ended
April 24, 2009 compared to $835 million for the fiscal year ended April 25,
2008. Proceeds from net short- and long-term borrowing were approximately $500
million lower in fiscal year 2009 as compared to fiscal year 2008, primarily
due to the lower acquisition related cash needs in the current fiscal year. Our
cash returned to shareholders in the form of dividends and the repurchase of
common stock was approximately $500 million lower in fiscal year 2009 as
compared to fiscal year 2008. Although dividends were up during fiscal year
2009 by approximately $300 million due to an increase in the amount of
dividends per share, this increase was more than offset by approximately $800
million in lower share repurchases as compared to fiscal year 2008.

Our
net cash used in financing activities was $835 million for the fiscal year
ended April 25, 2008, compared to net cash used in financing activities of
$3.011 billion for the fiscal year ended April 27, 2007. The $2.176 billion
decrease in net cash used in financing activities was primarily attributable to
the fact that in the prior year $1.877 billion in cash was used to repurchase
long-term debt as the bond holders put the Contingent Convertible Debentures to
us and in fiscal year 2008 we generated proceeds of $843 million from net
short- and long-term borrowings. These cash inflows were offset by a $505
million increase in cash used for share repurchases.

Off-Balance Sheet Arrangements and Long-Term
Contractual Obligations

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

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

We
believe our off-balance sheet arrangements do not have a material current or
anticipated future effect on our consolidated earnings, financial position or
cash flows. Presented below is a summary of contractual obligations and other
minimum commercial commitments as of April 24, 2009. See Notes 8, 9 and 15 to
the consolidated financial statements for additional information regarding
long-term debt, foreign currency contracts and lease obligations, respectively.
Additionally, see Note 13 to the consolidated financial statements for
additional information regarding accrued income tax obligations, which are not
reflected in the table below.

21

---

|                                                                                   |  |                          |       |      |   |       |  |      |       |      |   |      |  |            |       |  |   |     |  |   |       | 
|---------------------------------------------------------------------------------- |  | ------------------------ | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ---- |  | ---------- | ----- |  | - | --- |  | - | ----- | 
|                                                                                   |  | Maturity
 by Fiscal Year |      
|                                                                                   |  | Total                    |       | 2010 |   | 2011  |  | 2012 |       | 2013 |   | 2014 |  | Thereafter |      
|(dollars
 in millions)                                                             |  |                          |       |      |   |       |  |      |       |      |   |      |  |            |       |  |   |     |  |   |       | 
|Contractual obligations related to off-balance sheet
arrangements:                 |  |                          |       |      |   |       |  |      |       |      |   |      |  |            |       |  |   |     |  |   |       | 
|Foreign currency contracts (1)                                                     |  | $                        | 5,296 |      | $ | 3,546 |  | $    | 1,501 |      | $ | 249  |  | $          |      |  | $ |    |  | $ |      | 
|Operating leases (2)                                                               |  |                          | 237   |      |   | 77    |  |      | 50    |      |   | 31   |  |            | 23    |  |   | 21  |  |   | 35    | 
|Inventory purchases (3)                                                            |  |                          | 509   |      |   | 296   |  |      | 132   |      |   | 36   |  |            | 17    |  |   | 12  |  |   | 16    | 
|Commitments to fund minority
 investments/contingent acquisition consideration (4) |  |                          | 491   |      |   | 89    |  |      | 214   |      |   | 90   |  |            | 25    |  |   | 8   |  |   | 65    | 
|Interest payments (5)                                                              |  |                          | 1,354 |      |   | 182   |  |      | 173   |      |   | 131  |  |            | 131   |  |   | 95  |  |   | 642   | 
|Other (6)                                                                          |  |                          | 213   |      |   | 63    |  |      | 48    |      |   | 36   |  |            | 19    |  |   | 15  |  |   | 32    | 
|Total                                                                              |  | $                        | 8,100 |      | $ | 4,253 |  | $    | 2,118 |      | $ | 573  |  | $          | 215   |  | $ | 151 |  | $ | 790   | 
|                                                                                   |  |                          |       |      |   |       |  |      |       |      |   |      |  |            |       |  |   |     |  |   |       | 
|Contractual obligations reflected in the balance
sheet:                            |  |                          |       |      |   |       |  |      |       |      |   |      |  |            |       |  |   |     |  |   |       | 
|Long-term debt, excluding capital leases
 (7)                                      |  | $                        | 6,665 |      | $ |      |  | $    | 2,600 |      | $ | 15   |  | $          | 2,200 |  | $ | 550 |  | $ | 1,300 | 
|Capital leases (8)                                                                 |  |                          | 67    |      |   | 14    |  |      | 16    |      |   | 17   |  |            | 20    |  |   |    |  |   |      | 
|Total                                                                              |  | $                        | 6,732 |      | $ | 14    |  | $    | 2,616 |      | $ | 32   |  | $          | 2,220 |  | $ | 550 |  | $ | 1,300 | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As these
 obligations were entered into as hedges, the majority of these obligations
 will be offset by losses/gains on the related assets, liabilities and
 transactions being hedged.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(2) | Certain
 leases require us to pay real estate taxes, insurance, maintenance and other
 operating expenses associated with the leased premises. These future costs
 are not included in the schedule above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(3) | We have
 included inventory purchase commitments which are legally binding and specify
 minimum purchase quantities. These purchase commitments do not exceed our
 projected requirements and are in the normal course of business. These
 commitments do not include open purchase orders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(4) | Certain
 commitments related to the funding of minority investments and/or previous
 acquisitions are contingent upon the achievement of certain product-related
 milestones and various other favorable operational conditions. While it is
 not certain if and/or when these payments will be made, the maturity dates
 included in this table reflect our best estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(5) | Interest
 payments in the table above reflect the interest on our outstanding debt,
 including the $1.250 billion of New Senior Notes, $4.400 billion of Senior
 Convertible Notes, $1.000 billion of Senior Notes and $15 million of
 Contingent Convertible Debentures. The interest rate on each outstanding
 obligation varies and interest is payable semi-annually. The interest rate is
 4.500 percent on $550 million of the New Senior Notes, 5.600 percent on $400
 million of the New Senior Notes, 6.500 percent on $300 million of the New
 Senior Notes, 1.500 percent on the $2.200 billion Senior Convertible Notes
 due 2011 and 1.625 percent on the $2.200 billion Senior Convertible Notes due
 2013, 4.375 percent on the $400 million of Senior Notes due 2010, 4.750
 percent on the $600 million of Senior Notes due 2015 and 1.250 percent on the
 Contingent Convertible Debentures due 2021.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(6) | These
 obligations include certain research and development arrangements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(7) | Long-term
 debt in the table above includes $1.250 billion New Senior Notes, $4.400
 billion Senior Convertible Notes issued in April 2006, and $1.000 billion
 Senior Notes issued in September 2005 and $15 million related to our
 Contingent Convertible Debentures. The table above excludes the remaining
 fair value from the five year interest rate swap entered into in November
 2005 and the eight year interest rate swap agreement entered into in June
 2007 that were terminated in December 2008. See Note 8 to the consolidated
 financial statements for additional information regarding the interest rate
 swap agreement terminations.                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(8) | Capital
 lease obligations include a sale-leaseback agreement entered into in fiscal
 year 2006 whereby certain manufacturing equipment was sold and is being
 leased by us over a seven year period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Debt and Capital

In
June 2007, our Board of Directors authorized the repurchase of up to 50 million
shares of our common stock. In addition, in April 2006, the Board of Directors
made a special authorization for the repurchase of up to 50 million shares in
connection with the $4.400 billion Senior Convertible Note offering (see below
for further discussion).

Shares
are repurchased from time to time to support our stock-based compensation
programs and to take advantage of favorable market conditions. During fiscal
years 2009 and 2008, we repurchased approximately 16.5 million shares and 30.7
million shares at an average price of $45.94 and $50.28, respectively. As of
April 24, 2009, we have approximately 17.8 million shares remaining under
current buyback authorizations approved by the Board of Directors. On June 18, 2009, our Board
of Directors authorized the repurchase of an additional 60 million shares of our common stock.

In
March 2009, we issued three tranches of Senior Notes (New Senior Notes) with
the aggregate face value of $1.250 billion. The first tranche consisted of $550
million of 4.500 percent Senior Notes due 2014, the second tranche consisted of
$400 million of 5.600 percent Senior Notes due 2019 and the third tranche
consisted of $300 million of 6.500 percent Senior Notes due 2039. The first
tranche was issued at par, the second tranche was issued at a discount which
resulted in an effective interest rate of 5.609 percent and the third tranche
was issued at a discount which resulted in an effective interest rate of 6.519
percent. Interest on each series of New Senior Notes is payable semi-annually,
on March 15 and September 15 of each year, commencing September 15, 2009. The
New Senior Notes are unsecured senior obligations that rank equally with all
other unsecured and unsubordinated indebtedness. The indentures under which the
New Senior Notes were issued contain customary covenants, all of which we
remain in compliance with as of April 24, 2009. We used the net proceeds from
the sale of the New Senior Notes for repayment of a portion of our outstanding
commercial paper and for general corporate uses.

22

---

In
April 2006, we issued $2.200 billion of 1.500 percent Senior Convertible Notes
due 2011 and $2.200 billion of 1.625 percent Senior Convertible Notes due 2013,
collectively the Senior Convertible Notes. The Senior Convertible Notes were
issued at par and pay interest in cash semi-annually in arrears on April 15 and
October 15 of each year. The Senior Convertible Notes are unsecured
unsubordinated obligations and rank equally with all other unsecured and
unsubordinated indebtedness. The Senior Convertible Notes have an initial
conversion price of $56.14 per share. The Senior Convertible Notes may only be
converted: (i) during any calendar quarter if the closing price of our common
stock reaches 140 percent of the conversion price for 20 trading days during a
specified period, or (ii) if specified distributions to holders of our common
stock are made or specified corporate transactions occur, or (iii) during the
last month prior to maturity of the applicable notes. Upon conversion, a holder
would receive: (i) cash equal to the lesser of the principal amount of the note
or the conversion value and (ii) to the extent the conversion value exceeds the
principal amount of the note, shares of our common stock, cash or a combination
of common stock and cash, at our option. In addition, upon a change in control,
as defined, the holders may require us to purchase for cash all or a portion of
their notes for 100 percent of the principal amount of the notes plus accrued
and unpaid interest, if any, plus a number of additional make-whole shares of
our common stock, as set forth in the applicable indenture. The indentures
under which the Senior Convertible Notes were issued contain customary
covenants, all of which we remain in compliance with as of April 24, 2009. A
total of $2.500 billion of the net proceeds from these note issuances were used
to repurchase common stock. As of April 24, 2009, pursuant to provisions in the
indentures relating to our increase of its quarterly dividend to shareholders,
the conversion rates for each of the Senior Convertible Notes is now 18.0474,
which correspondingly changed the conversion price per share for each of the
Senior Convertible Notes to $55.41. See Note 8 to the consolidated financial
statements for further discussion of the accounting treatment of these Senior
Convertible Notes.

Concurrent
with the issuance of the Senior Convertible Notes, we purchased call options on
our common stock in private transactions. The call options allow us to receive
shares of our common stock and/or cash from counterparties equal to the amounts
of common stock and/or cash related to the excess conversion value that we
would pay to the holders of the Senior Convertible Notes upon conversion. These
call options will terminate upon the earlier of the maturity dates of the
related Senior Convertible Notes or the first day all of the related Senior
Convertible Notes are no longer outstanding due to conversion or otherwise. The
call options, which cost an aggregate $1.075 billion ($699 million net of tax
benefit), were recorded as a reduction of shareholders equity. See Note 8 to
the consolidated financial statements for further discussion of the accounting
treatment of these call options.

In
separate transactions, we sold warrants to issue shares of our common stock at
an exercise price of $76.56 per share in private transactions. Pursuant to
these transactions, warrants for 41 million shares of our common stock may be
settled over a specified period beginning in July 2011 and warrants for 41
million shares of our common stock may be settled over a specified period
beginning in July 2013 (the settlement dates). If the average price of our
common stock during a defined period ending on or about the respective
settlement dates exceeds the exercise price of the warrants, the warrants will
be settled in shares of our common stock. Proceeds received from the issuance
of the warrants totaled approximately $517 million and were recorded as an
addition to shareholders equity. See Note 8 to the consolidated financial
statements for further discussion of the accounting treatment. In April 2009,
certain of the holders requested adjustment to the exercise price of the
warrants from $76.30 to $75.56 pursuant to the anti-dilution provisions of the
warrants relating to our payment of dividends to common shareholders.

In
September 2005, we issued two tranches of Senior Notes with the aggregate face
value of $1.000 billion. The first tranche consisted of $400 million of 4.375
percent Senior Notes due 2010 and the second tranche consisted of $600 million
of 4.750 percent Senior Notes due 2015. Each tranche was issued at a discount
which resulted in an effective interest rate of 4.433 percent and 4.760 percent
for the five and ten year Senior Notes, respectively. Interest on each series
of Senior Notes is payable semi-annually, on March 15 and September 15 of each
year. The Senior Notes are unsecured unsubordinated obligations and rank equally
with all other unsecured and unsubordinated indebtedness. The indentures under
which the Senior Notes were issued contain customary covenants, all of which we
remain in compliance with as of April 24, 2009. We used the net proceeds from
the sale of the Senior Notes for repayment of a portion of our outstanding
commercial paper.

In
November 2005 and June 2007, we entered into a five year interest rate swap
agreement with a notional amount of $200 million, and an eight year interest
rate swap agreement with a notional amount of $300 million, respectively. These
interest rate swap agreements were designated as fair value hedges of the
changes in fair value of a portion of our fixed-rate $400 million Senior Notes
due 2010 and fixed-rate $600 million Senior Notes due 2015, respectively. The
outstanding market values of these swap agreements were $8 million and $27
million of unrealized gains, respectively, at April 25, 2008. The unrealized
gains of $8 million and $27 million at April 25, 2008 were recorded in long-term debt with the offset recorded in
other assets on the consolidated
balance sheets.

In
December 2008, we terminated the interest rate swap agreements. At that time,
the contracts were in an asset position, resulting in cash receipts of $62
million, which included $3 million of accrued interest. The gain from
terminating the interest rate swap agreements increased the outstanding balance
of the Senior Notes and is being amortized as a reduction of interest expense
over the remaining life of the Senior Notes. The cash flows from the
termination of these interest rate swap agreements have been reported as
operating activities in the consolidated statement of cash flows.

23

---

As
of April 24, 2009, we have $15 million remaining in aggregate principal amount
of 1.250 percent Contingent Convertible Debentures, Series B due 2021 (the
Debentures) outstanding. Interest is payable semi-annually. Each Debenture is
convertible into shares of common stock at an initial conversion price of
$61.81 per share; however, the Debentures are not convertible before their
final maturity unless the closing price of the Companys common stock reaches
110 percent of the conversion price for 20 trading days during a consecutive 30
trading day period. Upon conversion of the Debentures, we will pay holders cash
equal to the lesser of the principal amount of the Debentures or their
conversion value, and shares of the Companys common stock to the extent the
conversion value exceeds the principal amount of the Debentures. We may be
required to repurchase the remaining debentures at the option of the holders in
September 2011 or 2016. For put options exercised by the holders of the
Debentures, the purchase price is equal to the principal amount of the applicable
debenture plus any accrued and unpaid interest thereon to the repurchase date.
If the put option is exercised, we will pay holders the repurchase price solely
in cash. In September 2008, as a result of certain holders of the Debentures
exercising their put options, we repurchased $79 million of the Debentures for
cash. We can redeem the remaining debentures for cash at any time.

We
maintain a commercial paper program that allows us to have a maximum of $2.250
billion in commercial paper outstanding, with maturities up to 364 days from
the date of issuance. At April 24, 2009 and April 25, 2008, outstanding
commercial paper totaled $385 million and $874 million, respectively. During
fiscal years 2009 and 2008, the weighted average original maturity of the
commercial paper outstanding was approximately 50 and 35 days, respectively,
and the weighted average interest rate was 1.60 percent and 4.46 percent,
respectively.

In
connection with the issuance of the contingent convertible debentures, New
Senior Notes, Senior Notes, Senior Convertible Notes and commercial paper,
Standard and Poors Ratings Group and Moodys Investors Service issued us
strong long-term debt ratings of AA- and A1, respectively, and strong
short-term debt ratings of A-1+ and P-1, respectively. These ratings remain
unchanged from the same periods of the prior year.

We
have existing unsecured lines of credit of approximately $2.807 billion with
various banks at April 24, 2009. The existing lines of credit include a
five-year $1.750 billion syndicated credit facility dated December 20, 2006
that will expire on December 20, 2011 (Credit Facility). The Credit Facility
provides backup funding for the commercial paper program and may also be used
for general corporate purposes. The Credit Facility provides us with the
ability to increase its capacity by an additional $500 million at any time
during the life of the five-year term of the agreement.

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

As
of April 24, 2009 and April 25, 2008, $508 million and $1.350 billion,
respectively, were outstanding on all lines of credit.

Interest
rates on advances on our lines of credit are determined by a pricing matrix,
based on our long-term debt ratings, assigned by Standard and Poors Ratings
Group and Moodys Investors Service. Facility fees are payable on the credit
facilities and are determined in the same manner as the interest rates. The
agreements also contain other customary covenants, all of which we remain in
compliance with as of April 24, 2009.

As
of April 24, 2009, we have unused credit lines and commercial paper capacity of
approximately $2.799 billion.

Acquisitions

In
April 2009, we acquired CoreValve. Under the terms of the
agreement, the transaction included an initial up-front payment of $700 million
plus potential additional payments contingent upon achievement of certain
clinical and revenue milestones. CoreValve develops percutaneous,
catheter-based transfemoral aortic valve replacement products.

In
February 2009, we acquired Ventor, a development stage company
focused on transcatheter heart valve technologies for the treatment of aortic
valve disease. Total consideration for the transaction, net of cash acquired,
was approximately $308 million, of which $307 million was expensed as IPR&D
since technological feasibility of the underlying project had not yet been
reached and such technology has no future alternative use. This acquisition
adds two technologies to our transcatheter valve portfolio: a minimally
invasive, surgical transapical technology and a next generation percutaneous,
transfemoral technology.

It
is expected that the acquisitions of CoreValve and Ventor will allow us to
pursue opportunities that have natural synergies with our existing heart valve
franchise in our CardioVascular business and leverage our global footprint.

In
February 2009, we also acquired Ablation Frontiers. Under the
terms of the agreement, the transaction included an initial up-front payment of
$225 million plus potential additional payments contingent upon achievement of
certain clinical and revenue milestones. Total consideration for the
transaction was approximately $235 million including the
assumption and settlement of existing Ablation Frontiers debt and payment of
direct acquisition costs. Ablation Frontiers develops radiofrequency (RF)
ablation solutions for treatment of atrial fibrillation.

24

---

In November
2008, we acquired CryoCath. Under the terms of the agreement, CryoCath
shareholders received $8.75 Canadian dollars per share in cash for each share
of CryoCath common stock that they owned. Total consideration for the
transaction, net of cash acquired, was approximately $352 million U.S. dollars
including the purchase of outstanding CryoCath common stock, the assumption and
settlement of existing CryoCath debt and the payment of direct acquisition
costs. CyroCath develops cryotherapy products to treat cardiac arrhythmias.
CryoCaths Arctic Front product is a minimally invasive cryo-balloon catheter
designed specifically to treat atrial fibrillation and is currently approved in
markets outside the U.S.

It is
expected that the acquisitions of Ablation Frontiers and CryoCath will allow
our CRDM business to extend its reach into the under-penetrated market of
catheter based treatment of atrial fibrillation.

In
July 2008, we acquired Restore. Under the terms of the agreement, Restore
shareholders received $1.60 per share in cash for each share of Restore common
stock they owned. Total consideration for the transaction, net of cash
acquired, was approximately $29 million. Restores Pillar System will provide
us with a minimally invasive, implantable medical device used to treat the soft
palate component of sleep breathing disorders, including mild to moderate
obstructive sleep apnea and snoring.

The
pro forma impact of the above acquisitions were not significant, individually
or in the aggregate, to our results for the fiscal years ended April 24, 2009 or April 25, 2008. The results of operations
related to each company have been included in our consolidated statements of
earnings since the date each company was acquired.

In
April 2008, we recorded an IPR&D charge of $42 million related to the
acquisition of NDI, a development stage company focused on
commercially developing technology to stimulate the dorsal genital nerve as a
means to treat urinary incontinence. Total consideration for NDI was
approximately $42 million which included $39 million in cash and the forgiveness
of $3 million of pre-existing loans provided to NDI. The acquisition will
provide us with exclusive rights to develop and use NDIs technology in the
treatment of urinary urge incontinence. This payment was expensed as IPR&D
since technological feasibility of the underlying projects had not yet been
reached and such technology has no future alternative use.

In
November 2007, we acquired Kyphon and it became our wholly owned subsidiary.
Kyphon develops and markets medical devices designed to restore and preserve
spinal function using minimally invasive technology. Kyphons primary products
are used in balloon kyphoplasty for the treatment of spinal compression
fractures caused by osteoporosis or cancer, and in the interspinous process
decompression (IPD) procedure for treating the symptoms of lumbar spinal
stenosis. It is expected that the acquisition of Kyphon will add to the growth
of our existing Spinal business by extending its product offerings and enabling
us to provide physicians with a broader range of therapies for use at all
stages of the care continuum.

Under
the terms of the agreement announced in July 2007, Kyphon shareholders received
$71 per share in cash for each share of Kyphon common stock they owned. Total
consideration for the transaction was $4.203 billion which includes payments to
Kyphon shareholders for the cancellation of outstanding shares, the assumption
and settlement of existing Kyphon debt and payment of direct acquisition costs.
Total debt assumed relates to Kyphons obligations under existing credit and
term loan facilities and outstanding senior convertible notes. As of the date
of the transaction, the existing credit and term loan facilities were fully
paid and terminated. The senior convertible notes were converted by the holders
in the weeks following the close of the transaction and have been included in
the total purchase consideration above. In addition, the total consideration
includes the proceeds of unwinding the related convertible note hedges and
cancellation and payment of the warrants to the hedge participants that were
originally issued by Kyphon in February 2007.

The
transaction was financed through a combination of $3.303 billion cash on hand,
the issuance of $600 million short-term commercial paper and borrowing $300
million through a new long-term unsecured revolving credit facility.

The
results of operations related to Kyphon have been included in our consolidated
statements of earnings since the date of the acquisition and include the full
amortization of a $34 million inventory write-up recorded as part of the Kyphon
acquisition accounting. The pro forma impact of Kyphon was significant to our
results for fiscal year 2008. See Note 4 to the consolidated financial statements
for the unaudited pro forma results of operations for fiscal years 2008 and
2007.

In
November 2007, we also acquired Setagon, Inc. (Setagon), a development stage
company focused on commercially developing metallic nanoporous surface modification
technology. The acquisition will provide us with exclusive rights to use and
develop Setagons Controllable Elution Systems technology in the treatment of
cardiovascular disease. Total consideration for Setagon was approximately $20
million in cash, subject to purchase price increases, which would be triggered
by the achievement of certain milestones. The $20 million was expensed as
IPR&D since technological feasibility of the underlying projects had not
yet been reached and such technology has no future alternative use.

25

---

In
June 2007, we acquired substantially all of the O-Arm Imaging System (O-Arm)
assets of Breakaway Imaging, LLC (Breakaway), a privately held company. Prior
to the acquisition, we had the exclusive rights to distribute and market the
O-Arm. The O-Arm provides multi-dimensional surgical imaging for use in spinal
and orthopedic surgical procedures. The acquisition is expected to bring the
O-Arm into a broad portfolio of image guided surgical solutions. Total
consideration for Breakaway was approximately $26 million in cash, subject to
purchase price increases, which would be triggered by the achievement of
certain milestones. The pro forma impact of Breakaway was not significant to our
results for the fiscal year ended April 25, 2008.

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

New Accounting Pronouncements

Information
regarding new accounting pronouncements is included in Note 1 to the
consolidated financial statements.

Operations Outside of the United States

The
table below illustrates U.S. net sales versus net sales outside the U.S. for
fiscal years April 24, 2009, April 25, 2008 and April 27, 2007:

|                      |  |               |        |      |   |        |  |   |        | 
|--------------------- |  | ------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                      |  | Fiscal
 Years |       
|(dollars in millions) |  | 2009          |        | 2008 |   | 2007   | 
|U.S. net
 sales       |  | $             | 8,997  |      | $ | 8,336  |  | $ | 7,900  | 
|Non-U.S. net
 sales   |  |               | 5,602  |      |   | 5,179  |  |   | 4,399  | 
|Total net
 sales      |  | $             | 14,599 |      | $ | 13,515 |  | $ | 12,299 | 

From
fiscal year 2008 to fiscal 2009, consolidated net sales growth in the U.S. and
outside the U.S. both grew 8 percent. Foreign currency had a negative impact of
$100 million on net sales for fiscal year 2009. Outside the U.S., net sales
growth was led by strong performance in Spinal, Diabetes and Surgical
Technologies. Spinal net sales growth was led by growth in Core Spinal due to
increased sales of the CD HORIZON family of products. Also, the acquisition of
Kyphon in the third quarter of fiscal year 2008 increased the sales growth for
Spinal as the comparative period only includes six months of Kyphon net sales.
Diabetes growth outside the U.S. was led by the continued acceptance of the
MiniMed Paradigm REAL-Time System. Increased sales of the O-Arm
Imaging System led to the growth within the Surgical Technologies business
outside the U.S.

From
fiscal year 2007 to fiscal year 2008, consolidated net sales in the U.S. grew
6 percent compared to 18 percent growth in net sales outside the U.S.
The slower U.S. growth was primarily a result of the voluntary suspension of
the Fidelis lead and the voluntary suspension of U.S. shipments of
Physio-Control products from our Redmond, Washington facility. Outside the
U.S., net sales growth was strong across all businesses and led by strong performance
in CardioVascular, Diabetes and CRDM, the benefit of the addition of Kyphon in
Spinal and a favorable impact of foreign currency translation which added 9
percentage points to the outside the U.S. growth rate. CardioVascular net sales
were led by market share gains with Endeavor and Endeavor Resolute. Diabetes
sales increased as a result of further acceptance of the MiniMed Paradigm REAL-Time System.
Increased sales of Defibrillation Systems and Pacing Systems led the
increase within our CRDM business.

Net
sales outside the U.S. are accompanied by certain financial risks, such as
collection of receivables, which typically have longer payment terms.
Outstanding receivables from customers outside the U.S. totaled $1.592 billion
at April 24, 2009, or 50 percent, of total outstanding accounts receivable, and
$1.800 billion at April 25, 2008, or 53 percent, of total outstanding accounts
receivable.

Market Risk

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

26

---

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

We
had foreign exchange derivative contracts outstanding in notional amounts of
$5.296 billion and $6.613 billion at April 24, 2009 and April 25, 2008,
respectively. The fair value of these contracts at April 24, 2009 was $405
million more than the original contract value. A sensitivity analysis of
changes in the fair value of all foreign exchange derivative contracts at April
24, 2009 indicates that, if the U.S. dollar uniformly strengthened/weakened by
10 percent against all currencies, the fair value of these contracts would
increase/decrease by $495 million, respectively. Any gains and losses on the
fair value of derivative contracts would be largely offset by gains and losses
on the underlying transactions. These offsetting gains and losses are not
reflected in the above analysis. We are also exposed to interest rate changes
affecting principally our investments in interest rate sensitive instruments. A
sensitivity analysis of the impact on our interest rate sensitive financial
instruments of a hypothetical 10 percent change in short-term interest rates
compared to interest rates at April 24, 2009 indicates that the fair value of
these instruments would correspondingly change by $22 million.

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

We
historically lent certain fixed income securities to enhance our investment
income. These lending activities were indemnified against counterparty risk and
collateralized at an average rate of 102 percent, with the collateral
determined based on the underlying securities and creditworthiness of the
borrowers. The value of the securities on loan at April 25, 2008 was
$610 million. Due to our concerns about the liquidity condition in the
fixed income markets, we suspended our lending program in the second quarter of
fiscal year 2009 and had no lending activity during the third and fourth
quarters of fiscal year 2009.

Cautionary Factors That May Affect Future Results

This
Annual Report may include forward-looking statements. Forward-looking
statements broadly involve our current expectations or forecasts of future
results. Our forward-looking statements generally relate to our growth and growth
strategies, financial results, product development, regulatory approvals,
competitive strengths, intellectual property rights, litigation and tax matters, mergers and
acquisitions, market acceptance of our products, accounting estimates,
financing activities, ongoing contractual obligations and sales efforts. Such statements
can be identified by the use of terminology such as anticipate, believe,
could, estimate, expect, forecast, intend, may,
plan, possible,
project, should, will and similar words or expressions. Forward-looking
statements in this Annual Report include, but are not limited to, growth in our
Spinal business related to the Kyphon acquisition and our intended
reorganization and consolidation of certain activities; future launches of
products and continued acceptance of products in our operating segments; the
effectiveness of our development activities in reducing patient care costs; the
elimination of certain positions or costs related to restructuring initiatives;
outcomes in our litigation matters; the continued strength of our balance sheet
and liquidity; and the potential impact of our compliance with governmental
regulations. One must carefully consider forward-looking statements and
understand that such statements may be affected by inaccurate assumptions and
may involve a variety of risks and uncertainties, known and unknown, including,
among others, those discussed in the section titled Government Regulation and
Other Considerations in our Form 10-K, in the section entitled Risk Factors
in our Form 10-K, as well as those related to competition in the medical device
industry, reduction or interruption in our supply, quality problems, liquidity,
decreasing prices, adverse regulatory action, litigation success,
self-insurance, healthcare policy changes and international operations.
Consequently, no forward-looking statement can be guaranteed and actual results
may vary materially. We intend to take advantage of the Safe Harbor provisions
of the Private Securities Litigation Reform Act of 1995 regarding our
forward-looking statements, and are including this sentence for the express
purpose of enabling us to use the protections of the safe harbor with respect
to all forward-looking statements.

We
undertake no obligation to update any statement we make, but investors are
advised to consult any further disclosures by us in our filings with the
Securities and Exchange Commission, especially on Forms 10-K, 10-Q and 8-K, in
which we discuss in more detail various important factors that could cause
actual results to differ from expected or historical results. In addition,
actual results may differ materially from those anticipated due to a number of
factors, including, among others, those discussed in the section entitled Risk
Factors in our Form 10-K. It is not possible to foresee or identify all such
factors. As such, investors should not consider any list of such factors to be
an exhaustive statement of all risks, uncertainties or potentially inaccurate
assumptions.

27

---

Reports of
Management

Managements Report on the Financial
Statements

The
management of Medtronic, Inc. is responsible for the integrity of the
financial information presented in this Annual Report. The consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America. Where necessary, and as
discussed under Critical Accounting
Estimates on pages 2-4, the consolidated financial statements
reflect estimates based on managements judgment.

The
consolidated financial statements have been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, who conducted their
audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). The independent registered public accounting
firms responsibility is to express an opinion that such financial statements
present fairly, in all material respects, our financial position, results of
operations and cash flows in accordance with accounting principles generally
accepted in the United States.

Managements Report on Internal Control over
Financial Reporting

Management
is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. Management conducted an evaluation of the
effectiveness of 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 (COSO). Based
on this evaluation, management concluded that the Companys internal control
over financial reporting was effective as of April 24, 2009. Our internal
control over financial reporting as of April 24, 2009 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
who has also audited our consolidated financial statements.

/s/ William A.
Hawkins
William A. Hawkins Chairman and Chief Executive Officer

/s/ Gary L.
Ellis
Gary L. Ellis Senior Vice President and Chief Financial
Officer

28

---

Report of
Independent Registered Public Accounting Firm

To the
Shareholders and Board of Directors of Medtronic, Inc.:

In our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, shareholders equity and cash flows
present fairly, in all material respects, the financial position of Medtronic,
Inc. and its subsidiaries (the Company) at April 24, 2009 and April 25, 2008,
and the results of their operations and their cash flows for each of the three
fiscal years in the period ended April 24, 2009 in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of April 24, 2009, based on criteria
established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial statements, 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 Managements Report on Internal Control over
Financial Reporting. Our responsibility is to express opinions on these
financial statements and on the Companys internal control over financial
reporting based on our integrated 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 audits to obtain
reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. Our audit of internal control
over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances.
We believe that our audits provide a reasonable basis for our opinions.

As discussed
in Notes 6 and 14 to the consolidated financial statements, in 2009 the Company
changed the manner in which it determines fair value in certain situations as a
result of adopting the required provisions of Statement of Financial Accounting
Standard (SFAS) No. 157, Fair Value Measurements and changed the date it
uses to measure the funded status of its defined benefit pension and other
postretirement plans as a result of adopting the remaining provisions of SFAS
No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans. As discussed in Note 13 to the consolidated financial
statements, in 2008 the Company changed the manner in which it accounts for
income taxes as a result of adopting the provisions of Financial Accounting
Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes.

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
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the company; (ii) 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
(iii) 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.

/s/
PricewaterhouseCoopers LLP

PricewaterhouseCoopers
LLP
Minneapolis, Minnesota
June 18, 2009

29

---

Medtronic,
Inc.Consolidated Statements
of Earnings

|                                                               |  |              |         |      |   |         |   |   |         |  
|-------------------------------------------------------------- |  | ------------ | ------- | ---- | - | ------- | - | - | ------- | -
|                                                               |  | Fiscal
 Year |        
|                                                               |  | 2009         |         | 2008 |   | 2007    |  
|(in
 millions, except per share data)                          |  |              |         |      |   |         |   |   |         |  
|Net sales                                                      |  | $            | 14,599  |      | $ | 13,515  |   | $ | 12,299  |  
|                                                               |  |              |         |      |   |         |   |   |         |  
|Costs and expenses:                                            |  |              |         |      |   |         |   |   |         |  
|Cost of products sold                                          |  |              | 3,518   |      |   | 3,446   |   |   | 3,168   |  
|Research and development expense                               |  |              | 1,355   |      |   | 1,275   |   |   | 1,239   |  
|Selling, general and administrative expense                    |  |              | 5,152   |      |   | 4,707   |   |   | 4,153   |  
|Special charges                                                |  |              | 100     |      |   | 78      |   |   | 98      |  
|Restructuring charges                                          |  |              | 120     |      |   | 41      |   |   | 28      |  
|Certain litigation charges                                     |  |              | 714     |      |   | 366     |   |   | 40      |  
|Purchased in-process research and
 development (IPR&D) charges |  |              | 621     |      |   | 390     |   |   |        |  
|Other expense, net                                             |  |              | 396     |      |   | 436     |   |   | 212     |  
|Interest expense/(income), net                                 |  |              | 29      |      |   | (109    | ) |   | (154    | )
|Total costs and expenses                                       |  |              | 12,005  |      |   | 10,630  |   |   | 8,784   |  
|                                                               |  |              |         |      |   |         |   |   |         |  
|Earnings before income taxes                                   |  |              | 2,594   |      |   | 2,885   |   |   | 3,515   |  
|                                                               |  |              |         |      |   |         |   |   |         |  
|Provision for income taxes                                     |  |              | 425     |      |   | 654     |   |   | 713     |  
|                                                               |  |              |         |      |   |         |   |   |         |  
|Net earnings                                                   |  | $            | 2,169   |      | $ | 2,231   |   | $ | 2,802   |  
|                                                               |  |              |         |      |   |         |   |   |         |  
|Earnings per share:                                            |  |              |         |      |   |         |   |   |         |  
|                                                               |  |              |         |      |   |         |   |   |         |  
|Basic                                                          |  | $            | 1.94    |      | $ | 1.97    |   | $ | 2.44    |  
|Diluted                                                        |  | $            | 1.93    |      | $ | 1.95    |   | $ | 2.41    |  
|                                                               |  |              |         |      |   |         |   |   |         |  
|Weighted average shares outstanding:                           |  |              |         |      |   |         |   |   |         |  
|                                                               |  |              |         |      |   |         |   |   |         |  
|Basic                                                          |  |              | 1,117.8 |      |   | 1,130.7 |   |   | 1,149.7 |  
|Diluted                                                        |  |              | 1,124.0 |      |   | 1,142.1 |   |   | 1,161.8 |  
|                                                               |  |              |         |      |   |         |   |   |         |  
|Cash dividends declared per common share                       |  | $            | 0.75    |      | $ | 0.50    |   | $ | 0.44    |  

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

30

---

Medtronic,
Inc.Consolidated Balance Sheets

|                                                                                                                                            |  |                  |        |                  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------ | ---------------- | - | ------ | -
|                                                                                                                                            |  | April 24, 
 2009 |        | April 25, 
 2008 |  
|(in millions, except per share data)                                                                                                        |  |                  |        |                  |   |        |  
|ASSETS                                                                                                                                      |  |                  |        |                  |   |        |  
|                                                                                                                                            |  |                  |        |                  |   |        |  
|Current assets:                                                                                                                             |  |                  |        |                  |   |        |  
|Cash and cash equivalents                                                                                                                   |  | $                | 1,271  |                  | $ | 1,060  |  
|Short-term investments                                                                                                                      |  |                  | 405    |                  |   | 553    |  
|Accounts receivable, less allowances of $61
 and $99, respectively                                                                          |  |                  | 3,123  |                  |   | 3,287  |  
|Income tax receivable                                                                                                                       |  |                  |       |                  |   | 73     |  
|Inventories                                                                                                                                 |  |                  | 1,426  |                  |   | 1,280  |  
|Deferred tax assets, net                                                                                                                    |  |                  | 605    |                  |   | 600    |  
|Prepaid expenses and other current assets                                                                                                   |  |                  | 630    |                  |   | 469    |  
|                                                                                                                                            |  |                  |        |                  |   |        |  
|Total current assets                                                                                                                        |  |                  | 7,460  |                  |   | 7,322  |  
|                                                                                                                                            |  |                  |        |                  |   |        |  
|Property, plant and equipment, net                                                                                                          |  |                  | 2,279  |                  |   | 2,221  |  
|Goodwill                                                                                                                                    |  |                  | 8,195  |                  |   | 7,519  |  
|Other intangible assets, net                                                                                                                |  |                  | 2,477  |                  |   | 2,193  |  
|Long-term investments                                                                                                                       |  |                  | 2,769  |                  |   | 2,322  |  
|Long-term deferred tax assets, net                                                                                                          |  |                  | 65     |                  |   | 103    |  
|Other assets                                                                                                                                |  |                  | 416    |                  |   | 518    |  
|                                                                                                                                            |  |                  |        |                  |   |        |  
|Total assets                                                                                                                                |  | $                | 23,661 |                  | $ | 22,198 |  
|                                                                                                                                            |  |                  |        |                  |   |        |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                        |  |                  |        |                  |   |        |  
|                                                                                                                                            |  |                  |        |                  |   |        |  
|Current liabilities:                                                                                                                        |  |                  |        |                  |   |        |  
|Short-term borrowings                                                                                                                       |  | $                | 522    |                  | $ | 1,154  |  
|Accounts payable                                                                                                                            |  |                  | 382    |                  |   | 383    |  
|Accrued compensation                                                                                                                        |  |                  | 901    |                  |   | 789    |  
|Accrued income taxes                                                                                                                        |  |                  | 130    |                  |   |       |  
|Other accrued expenses                                                                                                                      |  |                  | 1,212  |                  |   | 1,209  |  
|                                                                                                                                            |  |                  |        |                  |   |        |  
|Total current liabilities                                                                                                                   |  |                  | 3,147  |                  |   | 3,535  |  
|                                                                                                                                            |  |                  |        |                  |   |        |  
|Long-term debt                                                                                                                              |  |                  | 6,772  |                  |   | 5,802  |  
|Long-term accrued compensation and retirement
benefits                                                                                      |  |                  | 329    |                  |   | 304    |  
|Long-term accrued income taxes                                                                                                              |  |                  | 475    |                  |   | 519    |  
|Other long-term liabilities                                                                                                                 |  |                  | 87     |                  |   | 502    |  
|                                                                                                                                            |  |                  |        |                  |   |        |  
|Total liabilities                                                                                                                           |  |                  | 10,810 |                  |   | 10,662 |  
|                                                                                                                                            |  |                  |        |                  |   |        |  
|Commitments and contingencies (Note 16)                                                                                                     |  |                  |       |                  |   |       |  
|                                                                                                                                            |  |                  |        |                  |   |        |  
|Shareholders equity:                                                                                                                       |  |                  |        |                  |   |        |  
|Preferred stock par value $1.00; 2.5
 million shares authorized, none outstanding                                                          |  |                  |       |                  |   |       |  
|                                                                                                                                           
|Common stock par value $0.10; 1.6 billion
 shares authorized, 1,119,140,192 and 1,124,926,775 shares issued and
 outstanding, respectively |  |                  | 112    |                  |   | 112    |  
|Retained earnings                                                                                                                           |  |                  | 12,941 |                  |   | 11,710 |  
|Accumulated other comprehensive loss                                                                                                        |  |                  | (202   | )                |   | (286   | )
|                                                                                                                                            |  |                  |        |                  |   |        |  
|Total shareholders equity                                                                                                                  |  |                  | 12,851 |                  |   | 11,536 |  
|                                                                                                                                            |  |                  |        |                  |   |        |  
|Total liabilities and shareholders equity                                                                                                  |  | $                | 23,661 |                  | $ | 22,198 |  

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

31

---

Medtronic, Inc. 
ConsolidatedStatements
of Shareholders Equity

|                                                                                                   |  |                |       |               |   |                    |   |                                                  |        |                              |   |      |   |   |        |  
|-------------------------------------------------------------------------------------------------- |  | -------------- | ----- | ------------- | - | ------------------ | - | ------------------------------------------------ | ------ | ---------------------------- | - | ---- | - | - | ------ | -
|                                                                                                   |  | Common
 Shares |       | Common
 Stock |   | Retained
 Earnings |   | Accumulated
 Other
 Comprehensive
 (Loss)/Income |        | Total
 Shareholders
 Equity |  
|(in millions)                                                                                      |  |                |       |               |   |                    |   |                                                  |        |                              |   |      |   |   |        |  
|Balance April 28, 2006                                                                             |  |                | 1,155 |               | $ | 116                |   | $                                                | 9,112  |                              | $ | 155  |   | $ | 9,383  |  
|Net earnings                                                                                       |  |                |      |               |   |                   |   |                                                  | 2,802  |                              |   |     |   |   | 2,802  |  
|Other comprehensive (loss)/income                                                                  |  |                |       |               |   |                    |   |                                                  |        |                              |   |      |   |   |        |  
|Unrealized gain on investments                                                                     |  |                |      |               |   |                   |   |                                                  |       |                              |   | 20   |   |   | 20     |  
|Translation adjustment                                                                             |  |                |      |               |   |                   |   |                                                  |       |                              |   | 18   |   |   | 18     |  
|Minimum pension liability                                                                          |  |                |      |               |   |                   |   |                                                  |       |                              |   | 24   |   |   | 24     |  
|Unrealized loss on foreign exchange
 derivatives                                                   |  |                |      |               |   |                   |   |                                                  |       |                              |   | (70  | ) |   | (70    | )
|Total comprehensive income                                                                         |  |                |       |               |   |                    |   |                                                  |        |                              |   |      |   |   | 2,794  |  
|Dividends to shareholders                                                                          |  |                |      |               |   |                   |   |                                                  | (504   | )                            |   |     |   |   | (504   | )
|Issuance of common stock under stock
 purchase and award plans                                     |  |                | 10    |               |   | 1                  |   |                                                  | 330    |                              |   |     |   |   | 331    |  
|Adjustment to adopt SFAS No. 158                                                                   |  |                |      |               |   |                   |   |                                                  |       |                              |   | (209 | ) |   | (209   | )
|Repurchase of common stock                                                                         |  |                | (22   | )             |   | (3                 | ) |                                                  | (1,036 | )                            |   |     |   |   | (1,039 | )
|Excess tax benefit from exercise of
 stock-based awards                                            |  |                |      |               |   |                   |   |                                                  | 36     |                              |   |     |   |   | 36     |  
|Stock-based compensation                                                                           |  |                |      |               |   |                   |   |                                                  | 185    |                              |   |     |   |   | 185    |  
|Balance April 27, 2007                                                                             |  |                | 1,143 |               | $ | 114                |   | $                                                | 10,925 |                              | $ | (62  | ) | $ | 10,977 |  
|Net earnings                                                                                       |  |                |      |               |   |                   |   |                                                  | 2,231  |                              |   |     |   |   | 2,231  |  
|Other comprehensive (loss)/income                                                                  |  |                |       |               |   |                    |   |                                                  |        |                              |   |      |   |   |        |  
|Unrealized loss on investments                                                                     |  |                |      |               |   |                   |   |                                                  |       |                              |   | (47  | ) |   | (47    | )
|Translation adjustment                                                                             |  |                |      |               |   |                   |   |                                                  |       |                              |   | 14   |   |   | 14     |  
|Net change in retirement obligations                                                               |  |                |      |               |   |                   |   |                                                  |       |                              |   | 37   |   |   | 37     |  
|Unrealized loss on foreign exchange
 derivatives                                                   |  |                |      |               |   |                   |   |                                                  |       |                              |   | (211 | ) |   | (211   | )
|Total comprehensive income                                                                         |  |                |       |               |   |                    |   |                                                  |        |                              |   |      |   |   | 2,024  |  
|Dividends to shareholders                                                                          |  |                |      |               |   |                   |   |                                                  | (565   | )                            |   |     |   |   | (565   | )
|Issuance of common stock under stock
 purchase and award plans                                     |  |                | 13    |               |   | 1                  |   |                                                  | 402    |                              |   |     |   |   | 403    |  
|Adjustment to deferred tax benefit recorded
 on adoption of SFAS No. 158                           |  |                |      |               |   |                   |   |                                                  |       |                              |   | (17  | ) |   | (17    | )
|Repurchase of common stock                                                                         |  |                | (31   | )             |   | (3                 | ) |                                                  | (1,541 | )                            |   |     |   |   | (1,544 | )
|Excess tax benefit from exercise of
 stock-based awards                                            |  |                |      |               |   |                   |   |                                                  | 40     |                              |   |     |   |   | 40     |  
|Stock-based compensation                                                                           |  |                |      |               |   |                   |   |                                                  | 217    |                              |   |     |   |   | 217    |  
|Cumulative effect adjustment to retained
 earnings related to the adoption of FIN No. 48 (Note 13) |  |                |      |               |   |                   |   |                                                  | 1      |                              |   |     |   |   | 1      |  
|Balance April 25, 2008                                                                             |  |                | 1,125 |               | $ | 112                |   | $                                                | 11,710 |                              | $ | (286 | ) | $ | 11,536 |  
|Net earnings                                                                                       |  |                |      |               |   |                   |   |                                                  | 2,169  |                              |   |     |   |   | 2,169  |  
|Other comprehensive (loss)/income                                                                  |  |                |       |               |   |                    |   |                                                  |        |                              |   |      |   |   |        |  
|Unrealized loss on investments                                                                     |  |                |      |               |   |                   |   |                                                  |       |                              |   | (54  | ) |   | (54    | )
|Translation adjustment                                                                             |  |                |      |               |   |                   |   |                                                  |       |                              |   | (147 | ) |   | (147   | )
|Net change in retirement obligations                                                               |  |                |      |               |   |                   |   |                                                  |       |                              |   | (210 | ) |   | (210   | )
|Unrealized gain on foreign exchange
 derivatives                                                   |  |                |      |               |   |                   |   |                                                  |       |                              |   | 494  |   |   | 494    |  
|Total comprehensive income                                                                         |  |                |       |               |   |                    |   |                                                  |        |                              |   |      |   |   | 2,252  |  
|Dividends to shareholders                                                                          |  |                |      |               |   |                   |   |                                                  | (843   | )                            |   |     |   |   | (843   | )
|Issuance of common stock under stock
 purchase and award plans                                     |  |                | 11    |               |   | 2                  |   |                                                  | 414    |                              |   |     |   |   | 416    |  
|Adjustment for change in plan measurement
 date pursuant to SFAS No. 158 (Note 14)                 |  |                |      |               |   |                   |   |                                                  | (13    | )                            |   | 1    |   |   | (12    | )
|Repurchase of common stock                                                                         |  |                | (17   | )             |   | (2                 | ) |                                                  | (757   | )                            |   |     |   |   | (759   | )
|Excess tax benefit from exercise of
 stock-based awards                                            |  |                |      |               |   |                   |   |                                                  | 24     |                              |   |     |   |   | 24     |  
|Stock-based compensation                                                                           |  |                |      |               |   |                   |   |                                                  | 237    |                              |   |     |   |   | 237    |  
|Balance April 24, 2009                                                                             |  |                | 1,119 |               | $ | 112                |   | $                                                | 12,941 |                              | $ | (202 | ) | $ | 12,851 |  

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

32

---

Medtronic, Inc. 
ConsolidatedStatements
of Cash Flows

|                                                                                     |  |              |        |      |   |        |   |   |         |  
|------------------------------------------------------------------------------------ |  | ------------ | ------ | ---- | - | ------ | - | - | ------- | -
|                                                                                     |  | Fiscal
 Year |       
|                                                                                    
|                                                                                     |  | 2009         |        | 2008 |   | 2007   |  
|(in millions)                                                                        |  |              |        |      |   |        |   |   |         |  
|Operating Activities:                                                                |  |              |        |      |   |        |   |   |         |  
|Net earnings                                                                         |  | $            | 2,169  |      | $ | 2,231  |   | $ | 2,802   |  
|Adjustments to reconcile net earnings to
 net cash provided by operating activities: |  |              |        |      |   |        |   |   |         |  
|Depreciation and amortization                                                        |  |              | 699    |      |   | 637    |   |   | 583     |  
|Special charges                                                                      |  |              |       |      |   | 78     |   |   | 98      |  
|IPR&D charges                                                                        |  |              | 621    |      |   | 390    |   |   |        |  
|Provision for doubtful accounts                                                      |  |              | 23     |      |   | 31     |   |   | 31      |  
|Deferred income taxes                                                                |  |              | (116   | )    |   | (49    | ) |   | (236    | )
|Stock-based compensation                                                             |  |              | 237    |      |   | 217    |   |   | 185     |  
|Excess tax benefit from exercise of
 stock-based awards                              |  |              | (24    | )    |   | (40    | ) |   | (36     | )
|Change in operating assets and liabilities,
 net of effect of acquisitions:          |  |              |        |      |   |        |   |   |         |  
|Accounts receivable                                                                  |  |              | 108    |      |   | (461   | ) |   | (326    | )
|Inventories                                                                          |  |              | (212   | )    |   | 30     |   |   | (24     | )
|Prepaid expenses and other assets                                                    |  |              | (121   | )    |   | 92     |   |   | (45     | )
|Accounts payable and accrued liabilities                                             |  |              | 520    |      |   | 61     |   |   | 17      |  
|Other operating assets and liabilities                                               |  |              | (26    | )    |   | 272    |   |   | (70     | )
|Net cash provided by operating activities                                            |  |              | 3,878  |      |   | 3,489  |   |   | 2,979   |  
|                                                                                     |  |              |        |      |   |        |   |   |         |  
|Investing Activities:                                                                |  |              |        |      |   |        |   |   |         |  
|Acquisitions, net of cash acquired                                                   |  |              | (1,624 | )    |   | (4,221 | ) |   | (8      | )
|Purchase of intellectual property                                                    |  |              | (165   | )    |   | (93    | ) |   | (121    | )
|Additions to property, plant and equipment                                           |  |              | (498   | )    |   | (513   | ) |   | (573    | )
|Purchases of marketable securities                                                   |  |              | (2,960 | )    |   | (6,433 | ) |   | (11,837 | )
|Sales and maturities of marketable
 securities                                       |  |              | 2,845  |      |   | 8,557  |   |   | 10,894  |  
|Other investing activities, net                                                      |  |              | (338   | )    |   | (87    | ) |   | (56     | )
|Net cash used in investing activities                                                |  |              | (2,740 | )    |   | (2,790 | ) |   | (1,701  | )
|                                                                                     |  |              |        |      |   |        |   |   |         |  
|Financing Activities:                                                                |  |              |        |      |   |        |   |   |         |  
|Change in short-term borrowings, net                                                 |  |              | (633   | )    |   | 543    |   |   | 45      |  
|Payments on long-term debt                                                           |  |              | (300   | )    |   | (12    | ) |   | (1,880  | )
|Issuance of long-term debt                                                           |  |              | 1,250  |      |   | 300    |   |   |        |  
|Dividends to shareholders                                                            |  |              | (843   | )    |   | (565   | ) |   | (504    | )
|Issuance of common stock under stock
 purchase and award plans                       |  |              | 416    |      |   | 403    |   |   | 331     |  
|Excess tax benefit from exercise of
 stock-based awards                              |  |              | 24     |      |   | 40     |   |   | 36      |  
|Repurchase of common stock                                                           |  |              | (759   | )    |   | (1,544 | ) |   | (1,039  | )
|Net cash used in financing activities                                                |  |              | (845   | )    |   | (835   | ) |   | (3,011  | )
|                                                                                     |  |              |        |      |   |        |   |   |         |  
|Effect of exchange rate changes on cash and
 cash equivalents                        |  |              | (82    | )    |   | (60    | ) |   | (5      | )
|Net change in cash and cash equivalents                                              |  |              | 211    |      |   | (196   | ) |   | (1,738  | )
|Cash and cash equivalents at beginning of
 period                                    |  |              | 1,060  |      |   | 1,256  |   |   | 2,994   |  
|Cash and cash equivalents at end of period                                           |  | $            | 1,271  |      | $ | 1,060  |   | $ | 1,256   |  
|                                                                                     |  |              |        |      |   |        |   |   |         |  
|Supplemental Cash Flow Information                                                   |  |              |        |      |   |        |   |   |         |  
|Cash paid for:                                                                       |  |              |        |      |   |        |   |   |         |  
|Income taxes                                                                         |  | $            | 436    |      | $ | 717    |   | $ | 1,034   |  
|Interest                                                                             |  |              | 208    |      |   | 258    |   |   | 230     |  
|Supplemental noncash investing and
 financing activities:                            |  |              |        |      |   |        |   |   |         |  
|Reclassification of debentures from
 short-term to long-term debt                    |  | $            | 15     |      | $ |       |   | $ | 94      |  
|Reclassification of debentures from long-term
 to short-term debt                    |  |              |       |      |   | 94     |   |   |        |  

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

33

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

1.       Summary of
Significant Accounting Policies

Nature of Operations   Medtronic,
Inc. (Medtronic or the Company) is the global leader in medical technology -
alleviating pain, restoring health, and extending life for millions of people
around the world. The Company provides innovative products and therapies for
use by medical professionals to meet the healthcare needs of their patients.
Primary products include those for cardiac rhythm disorders, cardiovascular
disease, neurological disorders, spinal conditions and musculoskeletal trauma,
urological and digestive disorders, diabetes and ear, nose and throat
conditions.

The
Company is headquartered in Minneapolis, Minnesota, and markets its products
primarily through a direct sales force in the United States (U.S.) and a
combination of direct sales representatives and independent distributors in
international markets. The primary markets for products are the U.S., Western
Europe and Japan.

Principles of Consolidation   The
consolidated financial statements include the accounts of Medtronic, Inc., and
all of its subsidiaries. All significant intercompany transactions and accounts
have been eliminated. The principles of Financial Accounting Standards Board
(FASB) Interpretation (FIN) No. 46 (revised December 2003), Consolidation of Variable
Interest Entities and Accounting Research Bulletin (ARB) No. 51, Consolidated
Financial Statements are considered when determining whether an entity is
subject to consolidation.

Fiscal Year-End   The
Company utilizes a 52/53-week fiscal year, ending the last Friday in April. The
Companys fiscal years 2009, 2008 and 2007 ended on April 24, 2009, April 25,
2008 and April 27, 2007, respectively, all of which were  fifty-two week years. Fiscal
year 2010 will be a fifty-three week year.

Use of Estimates   The
preparation of the financial statements in conformity with accounting
principles generally accepted in the U.S. (U.S. GAAP) requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
materially from those estimates.

Cash Equivalents   The
Company considers highly liquid investments with maturities of three months or
less from the date of purchase to be cash equivalents. These investments are
carried at cost, which approximates fair value.

Investments   Investments in
marketable equity securities and debt securities are classified and accounted
for as available-for-sale (AFS) at April 24, 2009 and April 25, 2008. AFS debt
securities are recorded at fair value in both short-termandlong-term investments and
marketable equity securities are recorded at fair value in long-term investments on the consolidated
balance sheets. The change in
fair value for AFS securities is recorded, net of taxes, as a component of accumulated other comprehensive (loss)/income on the consolidated balance sheets. Management determines the appropriate
classification of its investments in debt and equity securities at the time of
purchase and reevaluates such determinations at each balance sheet date.

Certain
of the Companys investments in equity and other securities are long-term,
strategic investments in companies that are in varied stages of development.
The Company accounts for these investments under the cost or the equity method
of accounting, as appropriate. The valuation of equity and other securities
accounted for under the cost method considers all available financial
information related to the investee, including valuations based on recent
third-party equity investments in the investee. If an unrealized loss for any
investment is considered to be other-than-temporary, the loss will be
recognized in the consolidated statements of earnings in the period the
determination is made. Equity securities accounted for under the equity method
are initially recorded at the amount of the Companys investment and adjusted
each period for the Companys share of the investees income or loss and
dividends paid. Equity securities accounted for under both the cost and equity
methods are reviewed quarterly for changes in circumstance or the occurrence of
events that suggest the Companys investment may not be recoverable. See Note 5
for discussion of the gains and losses recognized on equity and other
securities.

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. Uncollectible accounts are written-off against the
allowance when it is deemed that a customer account is uncollectible. The
allowance for doubtful accounts was $61 million at April 24, 2009 and $99
million at April 25, 2008.

34

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

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

|                 |  |                  |       |                  |   |       | 
|---------------- |  | ---------------- | ----- | ---------------- | - | ----- | 
|(in millions)    |  | April
 24,
 2009 |       | April
 25,
 2008 |  
|Finished
 goods  |  | $                | 854   |                  | $ | 784   | 
|Work in
 process |  |                  | 251   |                  |   | 250   | 
|Raw
 materials   |  |                  | 321   |                  |   | 246   | 
|Total            |  | $                | 1,426 |                  | $ | 1,280 | 

Property, Plant and Equipment Property,
plant and equipment is stated at cost. Additions and improvements that extend
the lives of the assets are capitalized while expenditures for repairs and
maintenance are expensed as incurred. Depreciation is provided using the
straight-line method over the estimated useful lives of the various assets.
Property, plant and equipment balances and corresponding lives are as follows:

|                                      |  |                  |        |                |   |                 |   |          | 
|------------------------------------- |  | ---------------- | ------ | -------------- | - | --------------- | - | -------- | 
|(in millions)                         |  | April
 24,
 2009 |        | April
 25,2008 |   | Lives(in years) |  
|Land and
 land improvements           |  | $                | 124    |                | $ | 123             |   | Up to 20 | 
|Buildings
 and leasehold improvements |  |                  | 1,296  |                |   | 1,240           |   | Up to 40 | 
|Equipment                             |  |                  | 3,144  |                |   | 3,066           |   | 3-7      | 
|Construction
 in progress             |  |                  | 323    |                |   | 314             |   |         | 
|Subtotal                              |  |                  | 4,887  |                |   | 4,743           |   |          | 
|Less:
 Accumulated depreciation       |  |                  | (2,608 | )              |   | (2,522          | ) |          | 
|Property,
 plant and equipment, net   |  | $                | 2,279  |                | $ | 2,221           |   |          | 

Depreciation
expense of $418 million, $417 million and $401 million was recognized in
fiscal years 2009, 2008 and 2007, respectively.

Goodwill Goodwill is the excess of purchase
price of an acquired entity over the amounts assigned to assets acquired and
liabilities assumed in a business combination. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets, goodwill is not amortized. Goodwill is tested for impairment annually
and when an event occurs or circumstances change that would indicate the
carrying amount may be impaired. Impairment testing for goodwill is done at a
reporting unit level. An impairment loss is recognized when the carrying amount
of the reporting units net assets exceeds the estimated fair value of the
reporting unit. The estimated fair value is determined using a discounted
future cash flows analysis. The Company completed its annual goodwill
impairment test in the third quarter of fiscal years 2009, 2008 and 2007 and
determined that no goodwill was impaired.

Intangible Assets Intangible assets include
patents, trademarks and purchased technology. Intangible assets with a definite
life are amortized on a straight-line or accelerated basis, as appropriate,
with estimated useful lives ranging from 3 to 20 years. Intangible assets with
a definite life are tested for impairment whenever events or circumstances
indicate that a carrying amount of an asset (asset group) may not be
recoverable. Impairment is calculated as the excess of the assets carrying
value over its fair value. Fair value is generally determined using a
discounted future cash flows analysis. As of April 24, 2009, all of the
Companys intangible assets are definite lived and amortized on a straight-line
basis.

Warranty Obligation The Company offers a
warranty on various products. The Company estimates the costs that may be
incurred under its warranties and records a liability in the amount of such
costs at the time the product is sold. Factors that affect the Companys
warranty liability include the number of units sold, historical and anticipated
rates of warranty claims and cost per claim. The Company periodically assesses
the adequacy of its recorded warranty liabilities and adjusts the amounts as
necessary. The amount of the reserve recorded is equal to the costs to repair
or otherwise satisfy the claim. The Company includes the covered costs
associated with field actions, if any, in warranty expense.

35

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

Changes
in the Companys product warranty obligations during the years ended April 24,
2009 and April 25, 2008 consisted of the following:

|                          |  |   |     |  
|------------------------- |  | - | --- | -
|(in millions)             |  |   |     |  
|Balance April 27, 2007    |  | $ | 34  |  
|Warranty claims provision |  |   | 22  |  
|Settlements made          |  |   | (13 | )
|Balance April 25, 2008    |  | $ | 43  |  
|Warranty claims provision |  |   | 23  |  
|Settlements made          |  |   | (31 | )
|Balance April 24, 2009    |  | $ | 35  |  

Self-Insurance It is the Companys policy
to self-insure the vast majority of its insurable risks including medical and
dental costs, disability coverage, physical loss to property, business
interruptions, workers compensation, comprehensive general, director and officer
and product liability. Insurance coverage is obtained for those risks required
to be insured by law or contract. A provision for losses under the self-insured
program is recorded and revised quarterly. The Company uses claims data and
historical experience, as applicable, to estimate liabilities associated with
the exposures that the Company has self-insured. Based on historical loss
trends, the Company believes that its self-insurance program accruals are
adequate to cover future losses. Historical trends, however, may not be
indicative of future losses. These losses could have a material adverse impact
on the Companys consolidated financial statements.

Retirement Benefit Plan Assumptions The
Company sponsors various retirement benefit plans, including defined benefit
pension plans (pension benefits), post-retirement medical plans
(post-retirement benefits), defined contribution savings plans and termination
indemnity plans, covering substantially all U.S. employees and many employees
outside the U.S. Pension benefit plan costs include assumptions for the
discount rate, retirement age, compensation rate increases and the expected
return on plan assets. Post-retirement medical plan costs include assumptions
for the discount rate, retirement age, expected return on plan assets and
healthcare cost trend rate assumptions.

The
Company evaluates the discount rate, retirement age, compensation rate
increases, expected return on plan assets and healthcare cost trend rates of
its pension benefit and post-retirement medical plans annually. In evaluating
these assumptions, many factors are considered, including an evaluation of
assumptions made by other companies, historical assumptions compared to actual
results, current market conditions, asset allocations and the views of leading
financial advisors and economists. In evaluating the expected retirement age
assumption, the Company considers the retirement ages of past employees
eligible for pension and medical benefits together with expectations of future
retirement ages.

It
is reasonably possible that changes in these assumptions will occur in the near
term and, due to the uncertainties inherent in setting assumptions, the effect
of such changes could be material to the Companys consolidated financial
statements. Refer to Note 14 for additional information regarding the Companys
retirement benefit plans.

Revenue Recognition The Company sells its
products primarily through a direct sales force in the U.S. and a combination
of direct sales representatives and independent distributors in international
markets. The Company recognizes revenue when title to the goods and risk of
loss transfers to customers, provided there are no material remaining
performance obligations required of the Company or any matters requiring
customer acceptance. In cases where the Company utilizes distributors or ships
product directly to the end user, it recognizes revenue upon shipment provided
all revenue recognition criteria have been met. A portion of the Companys
revenue is generated from inventory maintained at hospitals or with field
representatives. For these products, revenue is recognized at the time that the
product has been used or implanted. The Company records estimated sales
returns, discounts and rebates as a reduction of net sales in the same period
revenue is recognized.

Research and Development Research and
development costs are expensed when incurred. Research and development costs
include costs of all basic research activities as well as other research,
engineering and technical effort required to develop a new product or service
or make significant improvement to an existing product or manufacturing
process. Research and development costs also include pre-approval regulatory
and clinical trial expenses.

IPR&D When the Company acquires another
entity, the purchase price is allocated, as applicable, between IPR&D,
other identifiable intangible assets, net tangible assets and goodwill. The
Companys policy defines IPR&D as the value assigned to those projects for
which the related products have not received regulatory approval and have no
alternative future use. Determining the portion of the purchase price allocated
to IPR&D requires the Company to make significant estimates. The amount of
the purchase price allocated to IPR&D is determined by estimating the
future cash flows of each project or technology and discounting the net cash
flows back to their present values. The discount rate used is determined at the
time of acquisition in accordance with accepted valuation methods. These
methodologies include consideration of the risk of the project not achieving
commercial feasibility.

36

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

Other Expense, Net Other expense, net
includes intellectual property amortization expense, royalty income and
expense, realized equity security gains and losses, realized foreign currency
transaction and derivative gains and losses and impairment charges on equity securities.

Stock-Based Compensation The Companys
compensation programs include share-based payments. All awards under
share-based payment programs are accounted for at fair value and these fair
values are generally amortized on a straight-line basis over the vesting terms
into cost of products sold, research and development expense and selling, general and administrative expensein
the consolidated statement of earnings, as appropriate. Refer to Note 12 for
additional information.

Foreign
Currency Translation Assets and liabilities are translated to U.S. dollars at
period-end exchange rates, and the resulting gains and losses arising from the
translation of net assets located outside the U.S. are recorded as a cumulative
translation adjustment, a component of accumulated
other comprehensive (loss)/income on the consolidated balance
sheets. Elements of the consolidated statements of earnings are translated at
average exchange rates in effect during the period and foreign currency
transaction gains and losses are included in other
expense, net in the consolidated statements of earnings.

Comprehensive Income and Accumulated Other
Comprehensive (Loss)/Income In addition to net earnings,
comprehensive income includes changes in foreign currency translation
adjustments (including the change in current exchange rates, or spot rates, of
net investment hedges), unrealized gains and losses on foreign exchange
derivative contracts qualifying and designated as cash flow hedges, net changes
in retirement obligation funded status and unrealized gains and losses on AFS
marketable securities. Comprehensive income in fiscal years 2009, 2008 and 2007
was $2.252 billion, $2.024 billion and $2.794 billion, respectively.

Presented
below is a summary of activity for each component of accumulated other comprehensive (loss)/income for fiscal
years 2009, 2008 and 2007:

|                                                                         |  |                                         |     |                                      |   |                                         |   |                                                           |      |                                                 |   |      |   |   |      |  
|------------------------------------------------------------------------ |  | --------------------------------------- | --- | ------------------------------------ | - | --------------------------------------- | - | --------------------------------------------------------- | ---- | ----------------------------------------------- | - | ---- | - | - | ---- | -
|(in millions)                                                            |  | Unrealized
 Gain/(Loss) on
 Investments |     | Cumulative
 Translation
 Adjustments |   | Net
 Change in
 Retirement
 Obligations |   | Unrealized
 Gain/(Loss) on
 Foreign Exchange
 Derivatives |      | Accumulated Other
 Comprehensive
 Income/(Loss) |  
|Balance April 28, 2006                                                   |  | $                                       | (14 | )                                    | $ | 177                                     |   | $                                                         | (24  | )                                               | $ | 15   |   | $ | 155  |  
|Other comprehensive (loss)/income                                        |  |                                         | 20  |                                      |   | 18                                      |   |                                                           | 24   |                                                 |   | (70  | ) |   | (8   | )
|Adoption of SFAS No. 158                                                 |  |                                         |    |                                      |   |                                        |   |                                                           | (209 | )                                               |   |     |   |   | (209 | )
|Balance April 27, 2007                                                   |  | $                                       | 6   |                                      | $ | 195                                     |   | $                                                         | (209 | )                                               | $ | (55  | ) | $ | (62  | )
|Other comprehensive (loss)/income                                        |  |                                         | (47 | )                                    |   | 14                                      |   |                                                           | 37   |                                                 |   | (211 | ) |   | (207 | )
|Adjustment to deferred tax benefit recorded
 on adoption of SFAS No. 158 |  |                                         |    |                                      |   |                                        |   |                                                           | (17  | )                                               |   |     |   |   | (17  | )
|Balance April 25, 2008                                                   |  | $                                       | (41 | )                                    | $ | 209                                     |   | $                                                         | (189 | )                                               | $ | (266 | ) | $ | (286 | )
|Other comprehensive (loss)/income                                        |  |                                         | (54 | )                                    |   | (147                                    | ) |                                                           | (210 | )                                               |   | 494  |   |   | 83   |  
|Adjustment for change in plan measurement
 date pursuant to SFAS No. 158 |  |                                         |    |                                      |   |                                        |   |                                                           | 1    |                                                 |   |     |   |   | 1    |  
|Balance April 24, 2009                                                   |  | $                                       | (95 | )                                    | $ | 62                                      |   | $                                                         | (398 | )                                               | $ | 228  |   | $ | (202 | )

Translation
adjustments are not adjusted for income taxes as substantially all translation
adjustments relate to permanent investments in non-U.S. subsidiaries. The tax
expense/(benefit) on the unrealized gain/(loss) on foreign exchange derivatives
in fiscal years 2009, 2008 and 2007 was $320 million, $(132) million and $(38)
million, respectively. The minimum pension liability was eliminated at the end
of fiscal year 2007 as a result of the Companys adoption of SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans
 an amendment of FASB Statements No. 87, 88, 106 and 132(R) (SFAS No. 158).
The tax benefit related to SFAS No. 158 was $109 million, $17 million and $92
million in fiscal years 2009, 2008 and 2007, respectively. The Company adopted
the new measurement date provisions of SFAS No. 158 in the fourth quarter of
fiscal year 2009 which resulted in a one-time adjustment to retained earnings
and accumulated other comprehensive income in that period. The tax expense on
the adjustment to other comprehensive income for the change in measurement date
was less than $1 million. The tax expense/(benefit) on the unrealized
gain/(loss) on investments in fiscal years 2009, 2008 and 2007 was $(33)
million, $(26) million and $11 million, respectively.

37

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

Derivatives SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, (SFAS No. 133) as amended,
requires companies to recognize all derivatives as assets and liabilities on
the balance sheet and to measure the instruments at fair value through earnings
unless the derivative qualifies as a hedge. If the derivative is a hedge,
depending on the nature of the hedge and hedge effectiveness, changes in the
fair value of the derivative will either be recorded currently through earnings
or recognized in accumulated other
comprehensive (loss)/income on the consolidated balance sheets until
the hedged item is recognized in earnings upon settlement/termination. The
changes in the fair value of the derivative will offset the change in fair
value of the hedged asset, liability, net investment or probable commitment.
The Company evaluates hedge effectiveness at inception and on an ongoing basis.
If a derivative is no longer expected to be highly effective, hedge accounting
is discontinued. Hedge ineffectiveness, if any, is recorded in earnings.

The
Company uses derivative instruments, primarily forward exchange contracts, to
manage its exposure related to foreign exchange rate changes. The Company
enters into contracts with major financial institutions that change in value as
foreign exchange rates change. These contracts are designated either as cash
flow hedges, net investment hedges or freestanding derivatives. It is the Companys
policy to enter into forward exchange derivative contracts only to the extent
true exposures exist; the Company does not enter into forward exchange
derivative contracts for speculative purposes. Principal currencies hedged are
the Euro and the Japanese Yen. All derivative instruments are recorded at fair
value on the consolidated balance sheets, as a component of prepaid expenses and other current assets, other
long-term assets, other accrued expenses or other long-term liabilities depending upon
the gain or loss position of the contract and contract maturity date.

Forward
contracts designated as cash flow hedges are designed to hedge the variability
of cash flows associated with forecasted transactions denominated in a foreign
currency that will take place in the future. Changes in value of derivatives
designated as cash flow hedges are recorded in accumulated
other comprehensive (loss)/income on the consolidated balance sheets
until earnings are affected by the variability of the underlying cash flows. At
that time, the applicable amount of gain or loss from the derivative
instrument, that is deferred in shareholders equity, is reclassified to
earnings and is included in other expense,
net or cost of products soldin
the consolidated statements of earnings, depending on the underlying
transaction that is being hedged.

The
purpose of net investment hedges is to hedge the long-term investment (equity)
in foreign operations. The gains and losses related to the change in the
forward exchange rates of the net investment hedges are recorded currently in
earnings as other expense, net.
The gains and losses based on changes in the current exchange rates, or spot
rates, are recorded as a cumulative translation adjustment, a component of accumulated other comprehensive (loss)/incomeon
the consolidated balance sheets.

The
Company uses forward exchange contracts to offset its exposure to the change in
value of certain foreign currency denominated intercompany assets and
liabilities. These forward exchange contracts are not designated as hedges, and
therefore, changes in the value of these freestanding derivatives are
recognized currently in earnings, thereby offsetting the current earnings
effect of the related foreign currency denominated assets and liabilities.

In
addition, the Company uses interest rate derivative instruments to manage its
exposure to interest rate movements and to reduce borrowing costs by converting
fixed-rate debt into floating-rate debt. The objective of the instruments is to
more effectively balance the Companys borrowing costs and interest rate risk.
These derivative instruments are designated as fair value hedges under SFAS No.
133. Changes in the fair value of the derivative instrument are recorded inother expense, net,and are offset by
gains or losses on the underlying debt instrument. Interest expense includes
interest payments made or received under interest rate derivative instruments.

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

38

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

The table
below sets forth the computation of basic and diluted earnings per share:

|                                                      |  |              |         |      |   |         |  |   |         | 
|----------------------------------------------------- |  | ------------ | ------- | ---- | - | ------- |  | - | ------- | 
|                                                      |  | Fiscal
 Year |        
|(in millions, except per share data)                  |  | 2009         |         | 2008 |   | 2007    | 
|Numerator:                                            |  |              |         |      |   |         |  |   |         | 
|Net earnings                                          |  | $            | 2,169   |      | $ | 2,231   |  | $ | 2,802   | 
|Denominator:                                          |  |              |         |      |   |         |  |   |         | 
|Basic 
 weighted average shares outstanding          |  |              | 1,117.8 |      |   | 1,130.7 |  |   | 1,149.7 | 
|Effect of
 dilutive securities:                       |  |              |         |      |   |         |  |   |         | 
|Employee
 stock options                               |  |              | 2.4     |      |   | 9.7     |  |   | 9.9     | 
|Employee
 restricted stock and restricted stock units |  |              | 3.0     |      |   | 0.9     |  |   | 1.0     | 
|Other                                                 |  |              | 0.8     |      |   | 0.8     |  |   | 1.2     | 
|Diluted 
 weighted average shares outstanding        |  |              | 1,124.0 |      |   | 1,142.1 |  |   | 1,161.8 | 
|                                                      |  |              |         |      |   |         |  |   |         | 
|Basic
 earnings per share                             |  | $            | 1.94    |      | $ | 1.97    |  | $ | 2.44    | 
|Diluted
 earnings per share                           |  | $            | 1.93    |      | $ | 1.95    |  | $ | 2.41    | 

The
calculation of weighted average diluted shares outstanding excludes options for
approximately 62 million, 22 million and 35 million common shares in fiscal
years 2009, 2008 and 2007, respectively, as the exercise price of those options
was greater than the average market price, resulting in an anti-dilutive effect
on diluted earnings per share.

New Accounting Standards

Effective
April 26, 2008, the Company adopted the required provisions of Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157
establishes a framework for measuring fair value in accordance with generally
accepted accounting principles, clarifies the definition of fair value within
that framework and expands disclosures about fair value measurements. SFAS No.
157 applies whenever other standards require (or permit) assets or liabilities
to be measured at fair value, except for the measurement of share-based
payments. SFAS No. 157 does not expand the use of fair value in any new
circumstances. For certain types of financial instruments, SFAS No. 157
required a limited form of retrospective transition, whereby the cumulative
impact of the change in principle is recognized in the opening balance in
retained earnings in the fiscal year of adoption. All other provisions of SFAS
No. 157 will be applied prospectively. On February 12, 2008, the FASB issued
FASB Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement No. 157
(FSP FAS No. 157-2). FSP FAS No. 157-2 defers the implementation of SFAS No.
157 for certain nonfinancial assets and nonfinancial liabilities. Accordingly,
the Company adopted the required provisions of SFAS No. 157 at the beginning of
fiscal year 2009 and the remaining provisions will be adopted by the Company at
the beginning of fiscal year 2010. The fiscal year 2009 adoption did not result
in a material impact to the Companys financial statements (see Note 6). The
adoption of the remaining parts of SFAS No. 157 in fiscal year 2010 in
accordance with FSP FAS No. 157-2 is not expected to be material to the
consolidated financial statements.

Additionally,
in April 2009, the FASB issued FSP SFAS No. 157-4, Determining Fair Value When
the Volume and Level and Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly (FSP SFAS No.
157-4). FSP SFAS No. 157-4 provides guidance for estimating fair value in
accordance with SFAS No. 157 when the volume and level of activity for the
asset or liability have significantly decreased when compared with normal
market activity for the asset or liability (or similar assets or liabilities)
and for identifying circumstances that indicate a transaction is not orderly.
Additionally, FSP SFAS No. 157-4 amends SFAS No. 157 to require disclosure in
interim and annual periods of the inputs and valuation techniques used to
measure fair value. FSP SFAS No. 157-4 is effective for the Company beginning
in the first quarter of fiscal year 2010 and is required to be applied
prospectively. The Company is currently evaluating the impact that FSP SFAS No.
157-4 will have on the consolidated financial statements.

In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS
No. 141(R)). SFAS No. 141(R) replaces SFAS No. 141, Business Combinations.
SFAS No. 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any noncontrolling interests in the acquiree
and the goodwill acquired. Some of the key changes under SFAS No. 141(R) will
impact the accounting treatment for certain acquisition related items
including: (1) accounting for IPR&D as an indefinite-lived intangible asset
until approved or discontinued rather than as an immediate expense; (2)
expensing acquisition costs rather than adding them to the cost of an
acquisition; (3) expensing restructuring costs in connection with an acquisition
rather than adding them to the cost of an acquisition; and (4) including the
fair value of contingent consideration at the date of an acquisition in the
cost of an acquisition. SFAS No. 141(R) also includes a substantial number of
new disclosure requirements. SFAS No. 141(R) will be effective for the Company
beginning fiscal year 2010 and must be applied prospectively to all new
acquisitions closing on or after April 25, 2009. SFAS No. 141(R) is expected to
have a material impact on how the Company will identify, negotiate and value
future acquisitions and a material impact on how an acquisition will affect the
Companys consolidated financial statements.

39

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS No. 160).
SFAS No. 160 will change the accounting and reporting for minority interests,
which will be recharacterized as noncontrolling interests and classified as a
component of equity as compared to a liability today. This new consolidation
method will significantly change the accounting for partial and/or step
acquisitions. SFAS No. 160 will be effective for the Company in the first quarter
of fiscal year 2010. The adoption of SFAS No. 160 will not have a material
impact to the Companys consolidated financial statements.

In
May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) (FSP APB 14-1). FSP APB 14-1 requires the proceeds from the
issuance of such convertible debt instruments to be allocated between a
liability component (issued at a discount) and an equity component. The
resulting debt discount is amortized over the period the convertible debt is
expected to be outstanding as additional non-cash interest expense. The change
in accounting treatment is effective for the Company beginning in fiscal year
2010, and will be applied retrospectively to prior periods. FSP APB 14-1
changes the accounting treatment for the Companys $2.200 billion of 1.500
percent and $2.200 billion of 1.625 percent Senior Convertible Notes due in
2011 and 2013, respectively, which were issued in April 2006, and the $15
million remaining balance of the Companys Contingent Convertible Debentures
due 2021. Based on the Companys evaluation, upon adoption of FSP APB 14-1 in
fiscal year 2010, the convertible debt liability will decrease by approximately
$520 million and 2009 and 2010 interest expense for the convertible debt will
increase by approximately $154 million and $167 million, respectively. Using
diluted weighted average shares outstanding for the twelve months ended April
24, 2009, the impact to diluted earnings per share is a decrease of $0.09 for
fiscal year 2009. Using an estimate of diluted weighted average shares
outstanding, the Company estimates the impact to diluted earnings per share is
a decrease of $0.10 for fiscal year 2010.

In
June 2008, the FASB issued FSP Emerging Issues Task Force (EITF) Issue No.
03-6-1, Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities (FSP EITF No. 03-6-1). FSP EITF No.
03-6-1 provides that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation
of EPS pursuant to the two-class method. FSP EITF No. 03-6-1 is effective for
the Company beginning in the first quarter of fiscal year 2010. Upon adoption,
all prior-period EPS data is required to be adjusted retrospectively (including
interim financial statements, summaries of earnings and selected financial
data) to conform with the provisions of FSP EITF No. 03-6-1. The Company
calculated that FSP EITF No. 03-6-1 will not have a material impact to diluted earnings per
share for the fiscal year ended April 24, 2009.

In
November 2008, the FASB ratified EITF Issue No. 08-6, Equity Method Investment
Accounting Considerations (EITF No. 08-6). EITF No. 08-6 applies to all
investments accounted for under the equity method and clarifies the accounting
for certain transactions and impairment considerations involving equity method
investments. EITF No. 08-6 is effective for the Company beginning in the first
quarter of fiscal year 2010. The adoption of EITF No. 08-6 will not be material
to the consolidated financial statements.

In
November 2008, the FASB ratified EITF Issue No. 08-7, Accounting for Defensive
Intangible Assets (EITF No. 08-7). EITF No. 08-7 applies to defensive
intangible assets, which are acquired intangible assets that an entity does not
intend to actively use but does intend to prevent others from obtaining access
to the asset. EITF No. 08-7 requires an entity to account for defensive
intangible assets as a separate unit of accounting. Defensive intangible assets
should not be included as part of the cost of an entitys existing intangible
assets because the defensive intangible assets are separately identifiable.
Defensive intangible assets must be recognized at fair value in accordance with
SFAS No. 141(R) and SFAS No. 157. EITF No. 08-7 is effective for intangible
assets acquired by the Company beginning in the first quarter of fiscal year
2010. The adoption of EITF No. 08-7 is not expected to be material to the
consolidated financial statements.

In
December 2008, the FASB issued FSP SFAS No. 132(R)-1, Employers Disclosures
About Postretirement Benefit Plan Assets (FSP SFAS No. 132(R)-1). FSP SFAS No.
132(R)-1 requires increased disclosures about an entitys postretirement
benefit plan assets. Specifically, FSP SFAS No. 132(R)-1 requires an entity to
disclose information regarding its investment policies and strategies, its
categories of plan assets, its fair value measurements of plan assets and any
significant concentrations of risk in plan assets. FSP SFAS No. 132(R)-1 is
effective for the Company beginning in the first quarter of fiscal year 2010
but only requires the revised disclosures on a prospective basis. The Company
will provide the additional disclosures necessary to the consolidated financial
statements beginning in the Companys fourth quarter of fiscal year 2010.

40

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

In
April 2009, the FASB issued FSP SFAS No. 141(R)-1, Accounting for Assets
Acquired and Liabilities Assumed in a Business Combination That Arise from
Contingencies (FSP SFAS No. 141(R)-1). FSP SFAS No. 141(R)-1 amends and
clarifies the initial recognition and measurement, subsequent measurement and
accounting and disclosure of assets and liabilities arising from contingencies
in a business combination under SFAS No. 141(R). FSP SFAS No. 141(R)-1 is
effective for the Company beginning fiscal year 2010 and must be applied to
assets and liabilities arising from contingencies in business combinations for
which the acquisition date is on or after April 25, 2009. The adoption of FSP
SFAS No. 141(R)-1 will not be material to the consolidated financial
statements.

In
April 2009, the FASB issued FSP SFAS No. 107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments (FSP SFAS No. 107-1 and
APB 28-1). FSP SFAS No. 107-1 and APB 28-1 requires disclosures about fair
value of financial instruments for interim period reporting as well as in
annual financial statements. Additionally, this FSP requires disclosures
regarding the methods and significant assumptions used to estimate the fair
value of financial instruments. FSP SFAS No. 107-1 and APB 28-1 is effective
for the Company beginning in the first quarter of fiscal year 2010 but only
requires the revised disclosures on a prospective basis. The Company will
provide the additional disclosures necessary to the consolidated financial
statements beginning in the Companys first quarter of fiscal year 2010.

In
April 2009, the FASB issued FSP SFAS No. 115-2 and SFAS No. 124-2, Recognition
and Presentation of Other-Than-Temporary Impairments (FSP SFAS Nos. 115-2 and
124-2). FSP SFAS Nos. 115-2 and 124-2 amends the other-than-temporary guidance
for debt securities and requires additional interim and annual disclosures of
other-than-temporary impairments on debt and equity securities. Under FSP SFAS
Nos. 115-2 and 124-2, an other-than-temporary impairment of a debt security
shall be considered to have occurred if an entity (1) intends to sell the debt
security, (2) more likely than not will be required to sell the security before
recovery of its amortized cost basis or (3) does not expect to recover the
entire amortized cost basis of the security even if it does not intend to sell
the security. Once it is determined that an other-than-temporary impairment has
occurred, FSP SFAS Nos. 115-2 and 124-2 provides guidance on when to recognize
the other-than-temporary impairment in earnings or in other comprehensive
income. Depending on which of the above factor(s) causes the impairment to be
considered other-than-temporary, (1) the entire shortfall of the securitys
fair value versus its amortized cost basis or (2) only the credit loss portion
would be recognized in earnings while the remaining shortfall (if any) would be
recorded in other comprehensive income. FSP SFAS Nos. 115-2 and 124-2 is
effective for the Company beginning in the first quarter of fiscal year 2010
and is required to be applied retrospectively to existing investments with a
cumulative adjustment to retained earnings and prospectively to new investments
purchased after the effective date. The Company is currently evaluating the
impact that FSP SFAS Nos. 115-2 and 124-2 will have on the consolidated
financial statements.

In
May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS No. 165).
SFAS No. 165 requires an entity to recognize in the financial statements the
effects of all subsequent events that provide additional evidence about
conditions that existed at the date of the balance sheet. For nonrecognized
subsequent events that must be disclosed to keep the financial statements from
being misleading, an entity will be required to disclose the nature of the
event as well as an estimate of its financial effect, or a statement that such
an estimate cannot be made. In addition, SFAS No. 165 requires an entity to
disclose the date through which subsequent events have been evaluated. SFAS No.
165 is effective for the Company beginning in the first quarter of fiscal year
2010 and is required to be applied prospectively. The adoption of SFAS No. 165
will not be material to the consolidated financial statements.

2.       Special and Certain Litigation Charges

Special Charges

In
fiscal year 2009, consistent with the Companys commitment to improving the
health of people and communities throughout the world, the Company recorded a
$100 million contribution to The Medtronic Foundation, which is a related party
non-profit organization. The contribution to The Medtronic Foundation was paid
in the fourth quarter of fiscal year 2009.

In
fiscal year 2008, the Company recorded a special charge of $78 million related
to the impairment of intangible assets associated with its benign prostatic
hyperplasia, or enlarged prostate, product line purchased in fiscal year 2002.
The development of the market, relative to the Companys original assumptions,
has changed as a result of the broad acceptance of a new line of drugs to treat
the symptoms of an enlarged prostate. After analyzing the estimated future cash
flows utilizing this technology, based on the market development, the Company
determined that the carrying value of these intangible assets was impaired and
a write-down was necessary.

41

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

In
fiscal year 2007, the Company concluded two intangible assets were fully
impaired due to inadequate clinical results and the resulting delays in product
development. As a result, the Company recorded a $98 million special charge
related to the impairments of intangible assets stemming from the July 1, 2005
acquisition of Transneuronix, Inc. (TNI) and the November 1, 2004 acquisition
of Angiolink Corporation (Angiolink). TNI focused on the development of an
implantable gastric stimulator to treat obesity. Angiolink focused on the
development of wound closure devices for vascular procedures.

Certain Litigation Charges

The
Company classifies material litigation reserves recognized as certain
litigation charges. In fiscal year 2009, the Company incurred four certain
litigation charges totaling $714 million. The first charge in the amount of
$178 million relates to litigation with DePuy Spine (formerly DePuy/AcroMed), a
subsidiary of J&J, and Biedermann Motech GmbH (collectively, DePuy)
regarding patent infringement claims stemming from the Vertex line of
multiaxial screws. On June 1, 2009, the U.S. Court of Appeals for the Federal
Circuit affirmed the December 2007 ruling of infringement and awarded damages
based on lost profits, but reversed certain elements of the original 2007
award. Prior to the U.S. Court of Appeals decision, the Company had not
recorded expense related to the damages awarded in 2007 as the Company did not
believe that an unfavorable outcome in this matter was probable under SFAS No. 5, Accounting for Contingencies (SFAS No.
5). As a result of the U.S. Court of Appeals decision, the Company has now
recorded a reserve of $178 million which is expected to cover the revised
damages award and pre- and post-judgment interest. Since the DePuy litigation
originated prior to April 24, 2009, the Company has
appropriately recognized this charge in the consolidated financial statements
for the fiscal year ended April 24, 2009. See Note 16 for additional information.

The
second charge in the amount of $270 million relates to a settlement of royalty
disputes with Johnson & Johnson (J&J) which concern Medtronics
licensed use of certain patents. The agreement reached in the fourth quarter of
fiscal year 2009 ended all current and potential disputes between the two
parties under their 1997 settlement and license agreement relating to coronary
angioplasty stent design and balloon material patents. The Company paid the
settlement in May 2009. See Note 16 for additional information.

The
third charge in the amount of $229 million relates to litigation with Cordis
Corporation (Cordis), a subsidiary of J&J. The Cordis litigation originated
in October 1997 and pertains to patent infringement claims on previous
generations of bare metal stents that are no longer on the market. On September
30, 2008, the U.S. District Court entered final judgment including accrued
interest, totaling approximately $521 million, to Cordis. The Company had
previously recorded a charge of $243 million related to this litigation in the
third quarter of fiscal year 2008. At the time the $243 million charge was
recorded, the range of potential loss related to this matter was subject to a
high degree of estimation. The amount recorded represented an estimate of the
low end of the range of probable outcomes related to the matter. Given that the
Company and J&J were involved in a number of litigation matters which span
across businesses, the Company entered into negotiations with J&J in an
attempt to settle some of the additional litigation simultaneous with the
payment of this judgment. Ultimately, the agreement reached with Cordis
required a total cash payment of $472 million, which included the settlement of
several outstanding legal matters between the parties. The charge of $229
million in fiscal year 2009 is the net result of $472 million in cash payments,
offset by the existing reserves on the balance sheet including interest accrued
on the $243 million since the date established. As of April 24, 2009, the
settlement amount of $472 million was paid.

The
fourth charge recognized in fiscal year 2009 relates to litigation that
originated in May 2006 with Fastenetix LLC (Fastenetix), a patent holding
company. The litigation related to an alleged breach of a royalty agreement in
the Spinal business. The agreement reached with Fastenetix required total cash
payment of $125 million for the settlement of ongoing litigation and the
purchase of patents. Of the $125 million, $37 million was assigned to past
damages in the case and the remaining $88 million was recorded as purchased
intellectual property that has an estimated useful life of 7 years. As of April
24, 2009, the settlement amount of $125 million was paid.

In
fiscal year 2008, the Company incurred certain litigation charges of $366
million. Of that amount, $123 million related to the settlement of certain
lawsuits relating to the Marquis line of implantable cardioverter
defibrillators (ICDs) and cardiac resynchronization therapy-defibrillators
(CRT-Ds) that were subject to a field action announced on February 10, 2005. As
discussed above, the remainder of the charge, $243 million, relates to an
estimated reserve established for litigation with Cordis. In May 2008, the
Company paid substantially all of the settlement for certain lawsuits relating
to the Marquis line of ICDs and CRT-Ds. See Note 16 for additional information.

In
fiscal year 2007, the Company recorded a certain litigation charge of $40
million related to a settlement agreement with the U.S. Department of Justice
which requires the government to obtain dismissal of the two qui tam civil
suits and is conditioned upon such dismissal being obtained. To resolve the
matter, Medtronic has entered into a five-year corporate integrity agreement
effective upon dismissal of the two suits that further strengthens its employee
training and compliance systems surrounding sales and marketing practices. The
settlement agreement also reflects Medtronics assertion that the Company and
its current employees have not engaged in any wrongdoing or illegal activity.
The settlement amount was paid in May 2009.

42

---

Medtronic, Inc.
Notes to Consolidated Financial Statements

3.       Restructuring Charges

Fiscal Year 2009 Initiative

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

The
fiscal year 2009 initiative will result in charges being recognized in both the
fourth quarter of fiscal year 2009 and the first quarter of fiscal year 2010,
and the Company expects that when complete, will eliminate approximately 1,500
 1,800 positions.

Of
the 1,500  1,800 positions that will be eliminated as part of this initiative,
approximately 975 were identified for elimination in the fourth quarter of
fiscal year 2009 and will be achieved through early retirement packages offered
to employees, voluntary separation and involuntary separation. Of these 975
positions, approximately 280 positions have been eliminated as of April 24,
2009. The restructuring initiatives are scheduled to be substantially complete
by the end of fiscal year 2010.

A
summary of the activity related to the fiscal year 2009 initiative is presented
below:

|                       |  |                              |    |                    |   |       |   |   |    |  
|---------------------- |  | ---------------------------- | -- | ------------------ | - | ----- | - | - | -- | -
|                       |  | Fiscal Year 2009 Initiative  |   
|(in
 millions)         |  | Employee
 Termination
 Costs |    | Asset
 Write-downs |   | Total |  
|Balance April 25, 2008 |  | $                            |   |                    | $ |      |   | $ |   |  
|Restructuring
 charges |  |                              | 29 |                    |   | 5     |   |   | 34 |  
|Payments/write-downs   |  |                              | (1 | )                  |   | (5    | ) |   | (6 | )
|Balance April 24, 2009 |  | $                            | 28 |                    | $ |      |   | $ | 28 |  

Global Realignment Initiative

In
fiscal year 2008, as part of a global realignment initiative, the Company
recorded a $31 million restructuring charge, which consisted of employee
termination costs of $27 million and asset write-downs of $4 million. This
initiative began in the fourth quarter of fiscal year 2008 and focuses on
shifting resources to those areas where the Company has the greatest
opportunities for growth and streamlining operations to drive operating
leverage. The global realignment initiative impacts most businesses and certain
corporate functions. Within the Companys Cardiac Rhythm Disease Management
(CRDM) business, the Company reduced research and development infrastructure by
closing a facility outside the U.S., reprioritizing research and development
projects to focus on the core business and consolidating manufacturing
operations to drive operating leverage. Within Spinal, the Company reorganized
and consolidated certain activities where Medtronics existing infrastructure,
resources and systems could be leveraged to obtain greater operational
synergies. The global realignment initiative was also designed to further
consolidate manufacturing of CardioVascular products, streamline distribution
of products in select businesses and to reduce general and administrative costs
in the Companys corporate functions. The asset write-downs were recorded
within cost of products sold in
the consolidated statement of earnings. The employee termination costs of $27
million consist of severance and the associated costs of continued medical
benefits and outplacement services.

As
a continuation of the global realignment initiative that began in fiscal year
2008, in the first quarter of fiscal year 2009 the Company incurred $96 million
of incremental restructuring charges, which consisted of employee termination
costs of $91 million and asset write-downs of $5 million. The majority of the
expense recognized in the first quarter of fiscal year 2009 was related to the
execution of the Companys global realignment initiative outside the U.S. This
included the realignment and elimination of personnel throughout Europe and the
Emerging Markets and the closure of an existing facility in the Netherlands
that has been integrated into the U.S. operations. The remainder of the expense
was associated with enhanced severance benefits provided to employees identified
in the fourth quarter of fiscal year 2008. These incremental costs were not
accrued in fiscal year 2008 because the enhanced benefits had not yet been
communicated to the impacted employees.

43

---

Medtronic, Inc.
Notes to Consolidated Financial Statements

In
the fourth quarter of fiscal year 2009, the Company recorded a $7 million
reversal of excess reserves related to the global realignment initiative. This
reversal is primarily a result of favorable severance negotiations with certain
employee populations outside the U.S. as well as a higher than expected
percentage of employees identified for elimination finding positions elsewhere
within the Company.

As
of the end of the first quarter of fiscal year 2009, the Company had identified
approximately 900 positions for elimination which were to be achieved through
both voluntary and involuntary separation. Of the 900 positions identified,
approximately 740 have been eliminated as of April 24, 2009. The restructuring
initiatives are scheduled to be substantially complete by the end of the first
quarter of fiscal year 2010.

A
summary of the activity related to the global realignment initiative is
presented below:

|                            |  |                               |     |                    |   |       |   |   |     |  
|--------------------------- |  | ----------------------------- | --- | ------------------ | - | ----- | - | - | --- | -
|                            |  | Global Realignment Initiative |    
|(in
 millions)              |  | Employee
 Termination
 Costs  |     | Asset
 Write-downs |   | Total |  
|Balance April 27, 2007      |  | $                             |    |                    | $ |      |   | $ |    |  
|Restructuring
 charges      |  |                               | 27  |                    |   | 4     |   |   | 31  |  
|Payments/write-downs        |  |                               | (2  | )                  |   | (4    | ) |   | (6  | )
|Balance April 25, 2008      |  | $                             | 25  |                    | $ |      |   | $ | 25  |  
|Restructuring
 charges      |  |                               | 91  |                    |   | 5     |   |   | 96  |  
|Reversal of
 excess accrual |  |                               | (7  | )                  |   |      |   |   | (7  | )
|Payments/write-downs        |  |                               | (89 | )                  |   | (5    | ) |   | (94 | )
|Currency
 adjustment, net   |  |                               | (5  | )                  |   |      |   |   | (5  | )
|Balance April 24, 2009      |  | $                             | 15  |                    | $ |      |   | $ | 15  |  

Fiscal Year 2007 Initiative

In
the fourth quarter of fiscal year 2007, the Company recorded a $36 million
restructuring charge, which consisted of employee termination costs of $28
million and asset write-downs of $8 million. These initiatives were designed to
drive manufacturing efficiencies in the Companys CardioVascular business,
downsize the Physio-Control business due to the Companys voluntary suspension
of U.S. shipments and rebalance resources within the CRDM business in response
to market dynamics. The employee termination costs consist of severance and the
associated costs of continued medical benefits, and outplacement services. The
asset write-downs consisted of a $5 million charge for inventory write-downs
and a $3 million charge for non-inventory asset write-downs. The inventory and
non-inventory asset write-downs were recorded within cost of products sold in the consolidated statement of
earnings.

As
a continuation of the fiscal year 2007 initiative, in the first quarter of
fiscal year 2008 the Company incurred $14 million of incremental restructuring
charges associated with compensation provided to employees whose employment
terminated with the Company in the first quarter of fiscal year 2008. These
incremental costs were not accrued in fiscal year 2007 because these benefits
had not yet been communicated to the impacted employees. Included in the total
$14 million restructuring charge is $4 million of incremental defined benefit
pension and post-retirement related expense for those employees who accepted
early retirement packages. These costs are not included in the table
summarizing restructuring costs below because they are associated with costs
that are accounted for under the pension and postretirement rules. For further
discussion on the incremental defined benefit pension and post-retirement
related expense, see Note 14.

When
the restructuring initiative began in fiscal year 2007, the Company identified
approximately 900 positions for elimination which were achieved through early retirement
packages offered to employees, voluntary separation and involuntary separation,
as necessary. As of April 25, 2008, the initiatives begun in the fourth quarter
of fiscal year 2007 were substantially complete.

44

---

Medtronic, Inc.
Notes to Consolidated Financial Statements

A summary of
the activity related to the fiscal year 2007 initiative is presented below:

|                       |  |                              |     |                    |   |       |   |   |     |  
|---------------------- |  | ---------------------------- | --- | ------------------ | - | ----- | - | - | --- | -
|                       |  | Fiscal Year 2007 Initiative  |    
|(in
 millions)         |  | Employee
 Termination
 Costs |     | Asset
 Write-downs |   | Total |  
|Balance April 28, 2006 |  | $                            |    |                    | $ |      |   | $ |    |  
|Restructuring
 charges |  |                              | 28  |                    |   | 8     |   |   | 36  |  
|Payments/write-downs   |  |                              | (5  | )                  |   | (8    | ) |   | (13 | )
|Balance April 27, 2007 |  | $                            | 23  |                    | $ |      |   | $ | 23  |  
|Restructuring
 charges |  |                              | 10  |                    |   |      |   |   | 10  |  
|Payments               |  |                              | (33 | )                  |   |      |   |   | (33 | )
|Balance April 25, 2008 |  | $                            |    |                    | $ |      |   | $ |    |  

4.       Acquisitions and IPR&D Charges

When
the Company acquires another company or a group of assets, the purchase price
is allocated, as applicable, between IPR&D, other identifiable intangible
assets, net tangible assets and goodwill as required by U.S. GAAP. Goodwill
represents the excess of the aggregate purchase price over the fair value of
net assets, including IPR&D, of acquired businesses. The values assigned to
IPR&D and other identifiable intangible assets are based on valuations that
have been prepared using methodologies and valuation techniques consistent with
those used by independent appraisers. These techniques include estimating the
future cash flows of each project or technology and discounting the net cash
flows back to their present values utilizing an appropriate risk-adjusted rate
of return (discount rate). The discount rate used is determined at the time of
the acquisition in accordance with accepted valuation methods. For IPR&D,
these methodologies include consideration of the risk of the project not
achieving commercial feasibility and include a factor that takes into account
the uncertainty surrounding the successful development of the IPR&D.

At
the time of acquisition, the Company expects all acquired IPR&D will reach
technological feasibility, but there can be no assurance that the commercial
viability of these products 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, delay or failure to obtain
required market clearances, and patent issuance, validity and litigation, if
any. If commercial viability were not achieved, the Company would likely look
to other alternatives to provide these therapies.

Fiscal Year 2009

CoreValve, Inc.

In
April 2009, the Company acquired privately held CoreValve Inc. (CoreValve).
Under the terms of the agreement announced in February 2009, the transaction
included an initial up-front payment, including direct acquisition costs, of
$700 million plus potential additional payments contingent upon achievement of
certain clinical and revenue milestones. CoreValve develops percutaneous,
catheter-based transfemoral aortic valve replacement products that are approved
in certain markets outside the U.S.

The
Company has accounted for the acquisition of CoreValve as a business
combination. Under business combination accounting, the assets and liabilities
of CoreValve were recorded as of the acquisition date, at their respective fair
values, and consolidated with the Company. The purchase price allocation is
based on estimates of the fair value of assets acquired and liabilities
assumed. The preliminary purchase price has been allocated as follows:

|                                    |  |   |     | 
|----------------------------------- |  | - | --- | 
|(in millions)                       |  |   |     | 
|Current
 assets                     |  | $ | 20  | 
|Property,
 plant and equipment      |  |   | 7   | 
|IPR&D                               |  |   | 123 | 
|Other
 intangible assets            |  |   | 291 | 
|Goodwill                            |  |   | 433 | 
|Total assets acquired               |  |   | 874 | 
|                                    |  |   |     | 
|Current
 liabilities                |  |   | 66  | 
|Long-term
 deferred tax liabilities |  |   | 108 | 
|Total liabilities assumed           |  |   | 174 | 
|Net assets
 acquired                |  | $ | 700 | 

45

---

Medtronic, Inc.
Notes to Consolidated Financial Statements

In
connection with the acquisition of CoreValve, the Company acquired $291 million
of technology-based intangible assets with an estimated useful life of 12
years. Also as part of the acquisition, the Company recognized, in total, $123
million and $433 million for IPR&D and goodwill, respectively. The
IPR&D was expensed on the date of acquisition and primarily relates to the
future launch of CoreValves catheter-based transfemoral aortic valve into the
U.S. market. For purposes of valuing the acquired IPR&D, the Company
estimated total costs to complete of approximately $80 million. The
establishment of goodwill was primarily due to the expected revenue growth that
is attributable to increased market penetration from future products and
customers. The goodwill is not deductible for tax purposes.

In
conjunction with the acquisition, the Company began to assess and formulate a
plan for the elimination of duplicative positions and the termination of
certain contractual obligations. The purchase accounting liabilities recorded
in connection with these activities were approximately $39 million and are
included as current liabilities in the purchase price allocation. The Company
continues to assess these liabilities and until the plan is finalized and the
integration activities are complete, the allocation of the purchase price is
subject to adjustment.

Ablation Frontiers, Inc.

In
February 2009, the Company acquired privately held Ablation Frontiers, Inc.
(Ablation Frontiers). Under the terms of the agreement announced in January
2009, the transaction included an initial up-front payment of $225 million plus
potential additional payments contingent upon achievement of certain clinical
and revenue milestones. Total consideration for the transaction was approximately $235 million including the assumption and settlement
of existing Ablation Frontiers debt and payment of direct acquisition costs.
Ablation Frontiers develops radiofrequency (RF) ablation solutions for
treatment of atrial fibrillation. Ablation Frontiers system of ablation
catheters and RF generator is currently approved in certain markets outside the
U.S.

The
Company has accounted for the acquisition of Ablation Frontiers as a business
combination. Under business combination accounting, the assets and liabilities
of Ablation Frontiers were recorded as of the acquisition date, at their
respective fair values, and consolidated with the Company. The purchase price
allocation is based on estimates of the fair value of assets acquired and
liabilities assumed. The purchase price has been allocated as follows:

|                                    |  |   |     | 
|----------------------------------- |  | - | --- | 
|(in millions)                       |  |   |     | 
|Current
 assets                     |  | $ | 7   | 
|Property,
 plant and equipment      |  |   | 1   | 
|IPR&D                               |  |   | 97  | 
|Other
 intangible assets            |  |   | 63  | 
|Goodwill                            |  |   | 109 | 
|Total assets acquired               |  |   | 277 | 
|                                    |  |   |     | 
|Current
 liabilities                |  |   | 19  | 
|Long-term
 deferred tax liabilities |  |   | 23  | 
|Total liabilities assumed           |  |   | 42  | 
|Net assets
 acquired                |  | $ | 235 | 

In
connection with the acquisition of Ablation Frontiers, the Company acquired $63
million of technology-based intangible assets with an estimated useful life of
11 years. Also as part of the acquisition, the Company recognized, in total,
$97 million and $109 million for IPR&D and goodwill, respectively. The
IPR&D was expensed on the date of acquisition and primarily relates to the
future launch of Ablation Frontiers system of ablation catheters and RF
generator into the U.S. market. For purposes of valuing the acquired IPR&D,
the Company estimated total costs to complete of approximately $3 million. The
establishment of goodwill was primarily due to the expected revenue growth that
is attributable to increased market penetration from future products and
customers. The goodwill is not deductible for tax purposes.

46

---

Medtronic, Inc.
Notes to Consolidated Financial Statements

CryoCath Technologies Inc.

In
November 2008, the Company acquired all of the outstanding stock of CryoCath
Technologies Inc. (CryoCath). Under the terms of the agreement announced in
September 2008, CryoCath shareholders received $8.75 Canadian dollars per share
in cash for each share of CryoCath common stock that they owned. Total
consideration for the transaction, net of cash acquired, was approximately $352
million U.S. dollars including the purchase of outstanding CryoCath common
stock, the assumption and settlement of existing CryoCath debt and payment of
direct acquisition costs. CryoCath develops cryotherapy products to treat
cardiac arrhythmias. CryoCaths Arctic Front product is a minimally invasive
cryo-balloon catheter designed specifically to treat atrial fibrillation and is
currently approved in certain markets outside the U.S.

The
Company has accounted for the acquisition of CryoCath as a business
combination. Under business combination accounting, the assets and liabilities
of CryoCath were recorded as of the acquisition date, at their respective fair
values, and consolidated with the Company. The purchase price allocation is
based on estimates of the fair value of assets acquired and liabilities
assumed. The purchase price has been allocated as follows:

|                                    |  |   |     | 
|----------------------------------- |  | - | --- | 
|(in millions)                       |  |   |     | 
|Current
 assets                     |  | $ | 24  | 
|Property,
 plant and equipment      |  |   | 2   | 
|IPR&D                               |  |   | 72  | 
|Other
 intangible assets            |  |   | 57  | 
|Goodwill                            |  |   | 179 | 
|Long-term
 deferred tax assets      |  |   | 61  | 
|Total assets acquired               |  |   | 395 | 
|                                    |  |   |     | 
|Current
 liabilities                |  |   | 25  | 
|Long-term
 deferred tax liabilities |  |   | 15  | 
|Total liabilities assumed           |  |   | 40  | 
|Net assets
 acquired                |  | $ | 355 | 

In
connection with the acquisition of CryoCath, the Company acquired $57 million
of technology-based intangible assets with an estimated useful life of 11
years. Also as part of the acquisition, the Company recognized $72 million and
$179 million for IPR&D and goodwill, respectively. The IPR&D was
expensed on the date of acquisition and primarily relates to the future launch
of Arctic Front into the U.S. market. For purposes of valuing the acquired
IPR&D, the Company estimated total costs to complete of approximately $3
million. The establishment of goodwill was primarily due to the expected
revenue growth that is attributable to increased market penetration from future
products and customers. The goodwill is not deductible for tax purposes.

Restore Medical Acquisition

In
July 2008, the Company acquired Restore Medical, Inc. (Restore). Restores
Pillar Palatal Implant System provides the Company with a minimally invasive,
implantable medical device used to treat the soft palate component of sleep
breathing disorders, including mild to moderate obstructive sleep apnea and
snoring. The Company accounted for the acquisition as a business combination.
Restore shareholders received $1.60 per share in cash for each share of Restore
common stock they owned. Total consideration for the transaction, net of cash acquired, was
approximately  $29 million. In connection with the
acquisition of Restore, the Company acquired $17 million of technology-based
intangible assets with an estimated useful life of 10 years, $8 million of net
tangible assets and $5 million of goodwill. The goodwill is not deductible for
tax purposes.

The
pro forma impact of the above acquisitions was not significant, individually or
in the aggregate, to the results of the Company for the fiscal years ended
April 24, 2009 and April 25, 2008. The results of operations related to each
company have been included in the Companys consolidated statements of earnings
since the date each company was acquired.

Other Acquisitions and IPR&D Charges

In
February 2009, the Company recorded an IPR&D charge of $307 million related
to the acquisition of privately held Ventor Technologies Ltd. (Ventor), a
development stage company focused on transcatheter heart valve technologies for
the treatment of aortic valve disease. This acquisition adds two technologies
to the Companys transcatheter valve portfolio: a minimally invasive, surgical
transapical technology and a next generation percutaneous, transfemoral
technology. Total consideration for the transaction, net of cash acquired, was
approximately $308 million. Of the $308 million, $307 million was expensed as
IPR&D since technological feasibility of the underlying project had not yet
been reached and such technology has no future alternative use and $1 million
related to other net assets acquired.

47

---

Medtronic, Inc.
Notes to Consolidated Financial Statements

During
the second and fourth quarters of fiscal year 2009, the Company recorded
IPR&D charges of $22 million related to the purchase of certain
intellectual property for use in the Spinal and Diabetes businesses. These
payments were expensed as IPR&D since technological feasibility of the
underlying product had not yet been reached and such technology has no future
alternative use.

Fiscal Year 2008

Kyphon Acquisition

In
November 2007, the Company acquired Kyphon Inc. (Kyphon) and it became a wholly
owned subsidiary of the Company. Kyphon develops and markets medical devices
designed to restore and preserve spinal function using minimally invasive
technology. Kyphons primary products are used in balloon kyphoplasty for the
treatment of spinal compression fractures caused by osteoporosis or cancer, and
in the interspinous process decompression procedure for treating the symptoms
of lumbar spinal stenosis. It is expected that the acquisition of Kyphon will
add to the growth of the Companys existing Spinal business by extending its
product offerings and enabling the Company to provide physicians with a broader
range of therapies for use at all stages of the care continuum.

Under
the terms of the agreement announced in July 2007, Kyphon shareholders received
$71 per share in cash for each share of Kyphon common stock they owned. Total
consideration for the transaction was approximately $4.203 billion, which
includes payments to Kyphon shareholders for the cancellation of outstanding
shares, the assumption and settlement of existing Kyphon debt and payment of
direct acquisition costs. Total debt assumed relates to Kyphons obligations
under existing credit and term loan facilities and outstanding senior
convertible notes. In addition, the total consideration includes the proceeds
of unwinding the related convertible note hedges and cancellation and payment
of the warrants to the hedge participants that were originally issued by Kyphon
in February 2007. The transaction was financed through a combination of
approximately $3.303 billion cash on hand, the issuance of $600 million
short-term commercial paper and borrowing $300 million through a new long-term
unsecured revolving credit facility.

The
Company has accounted for the acquisition of Kyphon as a business combination.
Under business combination accounting, the assets and liabilities of Kyphon
were recorded as of the acquisition date, at their respective fair values, and
consolidated with the Company. The breakdown of the purchase price of Kyphon
is as follows:

|                                                                                            |  |   |       | 
|------------------------------------------------------------------------------------------- |  | - | ----- | 
|(in
 millions)                                                                              |  |   |       | 
|Cash acquisition of Kyphon outstanding
 common stock                                        |  | $ | 3,300 | 
|Cash settlement of vested stock-based
 awards                                               |  |   | 218   | 
|Debt assumed and settled                                                                    |  |   | 570   | 
|Cash settlement of convertible debt
 warrants, net of proceeds from convertible note hedges |  |   | 87    | 
|Direct acquisition costs                                                                    |  |   | 28    | 
|Total purchase price                                                                        |  | $ | 4,203 | 

The purchase price allocation
is based on estimates of the fair value of assets acquired and liabilities
assumed. The purchase price has been allocated as follows:

|                               |  |   |       | 
|------------------------------ |  | - | ----- | 
|(in
 millions)                 |  |   |       | 
|Current
 assets                |  | $ | 379   | 
|Property,
 plant and equipment |  |   | 39    | 
|IPR&D                          |  |   | 290   | 
|Other
 intangible assets       |  |   | 996   | 
|Goodwill                       |  |   | 3,148 | 
|Other
 long-term assets        |  |   | 10    | 
|Total assets acquired          |  |   | 4,862 | 
|                              
|Current
 liabilities           |  |   | 344   | 
|Deferred tax
 liabilities      |  |   | 282   | 
|Other
 long-term liabilities   |  |   | 33    | 
|Total liabilities assumed      |  |   | 659   | 
|Net assets
 acquired           |  | $ | 4,203 | 

48

---

Medtronic, Inc.
Notes to Consolidated Financial Statements

In
connection with the acquisition, the Company acquired $996 million of
intangible assets that had a weighted average useful life of approximately 10.5
years. The intangible assets include $887 million of technology-based assets
and $109 million of tradenames with weighted average lives of 10.5 years and 11
years, respectively. Also as part of the acquisition, the Company recognized,
in total, $290 million and $3.148 billion for IPR&D and goodwill, respectively.
The IPR&D was expensed on the date of acquisition. Various factors
contributed to the establishment of goodwill, including: the benefit of adding
existing products of the Company to the portfolio of products already sold by
Kyphon sales representatives; the value of Kyphons highly trained assembled
workforce; and the expected revenue growth that is attributable to expanded
indications and increased market penetration from future products and
customers. The goodwill is not deductible for tax purposes.

The
$290 million IPR&D charge primarily relates to three projects: 1) future
launch of the balloon kyphoplasty (kyphoplasty) procedure into the Japanese
market, 2) future launch of the Aperius product into the U.S. market and 3) the
development of the next generation kyphoplasty balloon technology. Kyphoplasty
is Kyphons minimally invasive approach to treat spinal fractures including
vertebral compression fractures due to osteoporosis and cancer. Aperius is
Kyphons internally developed interspinous spacing device which provides a
minimally invasive approach to treat lumbar spinal stenosis. For purposes of
valuing the acquired IPR&D, the Company estimated total costs to complete
of approximately $19 million.

As
required, the Company recognized a $34 million fair value adjustment related to
inventory acquired from Kyphon. Inventory fair value is defined as the
estimated selling price less the sum of (a) cost to complete (b) direct costs
to sell and (c) a reasonable profit allowance for the selling effort. The $34
million fair value adjustment was fully expensed through cost of products sold
during the third quarter of fiscal year 2008, which reflects the estimated
period over which the acquired inventory was sold to customers.

In
connection with the acquisition, the Company began to assess and formulate a
plan for the elimination of duplicative positions, employee relocations, the
exit of certain facilities and the termination of certain contractual obligations.
The purchase accounting liabilities recorded in connection with these
activities were approximately $68 million and included approximately $48
million for termination benefits and employee relocation and approximately $20
million of estimated costs to cancel contractual obligations. During the fourth
quarter of fiscal year 2009, the Company reversed $15 million of the purchase
accounting liabilities due to a favorable outcome in negotiating the
termination of contractual obligations. The reversal of these liabilities was
recorded as a reduction of goodwill. As of April 24, 2009, the purchase
accounting liabilities related to the activities noted above have been fully
utilized.

The
Companys consolidated financial statements include Kyphons operating results
from the date of acquisition, November 2, 2007. The following unaudited pro
forma information sets forth the combined results of Medtronics and Kyphons
operations for fiscal years 2008 and 2007, as if the acquisition had occurred
at the beginning of each of the periods presented. The unaudited pro forma
results of operations for the fiscal year ended April 25, 2008 is comprised of
(i) Kyphons historical financial information for the six months ended
September 30, 2007, (ii) Medtronics pre-Kyphon historical financial
information for the six months ended October 27, 2007 and (iii) Medtronics
post-Kyphon historical financial information for the six month period that
includes the three months ended January 25, 2008 and the three months ended
April 25, 2008. The unaudited pro forma results of operations for the fiscal
year ended April 27, 2007 includes the results of Medtronics fiscal year 2007
historical financial information and the operations for Kyphon for the twelve
month period ended March 31, 2007.

The
pro forma information gives effect to actual operating results prior to the
acquisition, adjusted to reflect, among other things, reduced interest income,
additional intangible asset amortization and interest expense that would have
resulted from the change in the accounting basis of certain assets and
liabilities due to the acquisition. Pro forma adjustments are tax-effected at
the Companys statutory tax rate. No effect has been given to cost reductions
or operating synergies in this presentation. These pro forma amounts are not
necessarily indicative of the results that would have been obtained if the
acquisition had occurred as of the beginning of the periods presented or that
may occur in the future, and does not reflect future synergies, integration
costs or other such costs or savings. The unaudited pro forma condensed
consolidated financial information is presented for informational purposes
only.

|                                      |  |             |        |      |   |        | 
|------------------------------------- |  | ----------- | ------ | ---- | - | ------ | 
|                                      |  | Fiscal Year |       
|(in
 millions, except per share data) |  | 2008        |        | 2007 |  
|Net sales                             |  | $           | 13,804 |      | $ | 12,744 | 
|Net earnings                          |  | $           | 2,093  |      | $ | 2,321  | 
|                                     
|Earnings per
 share:                  |  |             |        |      |   |        | 
|Basic                                 |  | $           | 1.85   |      | $ | 2.02   | 
|Diluted                               |  | $           | 1.83   |      | $ | 2.00   | 

49

---

Medtronic, Inc.
Notes to Consolidated Financial Statements

The
unaudited pro forma financial information for fiscal years 2008 and 2007 include
a $290 million IPR&D charge and a $34 million increase in cost of products
sold related to the step-up to fair value of inventory acquired, both of which
are non-recurring.

Other Acquisitions and IPR&D Charges

In
April 2008, the Company recorded an IPR&D charge of $42 million related to
the acquisition of NDI Medical (NDI), a development stage company focused on
commercially developing technology to stimulate the dorsal genital nerve as a
means to treat urinary incontinence. Total consideration for NDI was
approximately $42 million which included $39 million in cash and the
forgiveness of $3 million of pre-existing loans provided to NDI. The
acquisition will provide the Company with exclusive rights to develop and use
NDIs technology in the treatment of urinary urge incontinence. This payment
was expensed as IPR&D since technological feasibility of the underlying
projects had not yet been reached and such technology has no future alternative
use.

In
November 2007, the Company recorded an IPR&D charge of $20 million related
to the acquisition of Setagon, Inc. (Setagon), a development stage company
focused on commercially developing metallic nanoporous surface modification
technology. The acquisition will provide the Company with exclusive rights to
use and develop Setagons Controllable Elution Systems technology in the
treatment of cardiovascular disease. Total consideration for Setagon was
approximately $20 million in cash, subject to purchase price increases, which
would be triggered by the achievement of certain milestones. This payment was
expensed as IPR&D since technological feasibility of the underlying project
had not yet been reached and such technology has no future alternative use.

In
June 2007, the Company exercised a purchase option and acquired substantially
all of the O-Arm Imaging System (O-Arm) assets of Breakaway Imaging, LLC
(Breakaway), a privately held company. Prior to the acquisition, the Company
had the exclusive rights to distribute and market the O-Arm. The O-Arm provides
multi-dimensional surgical imaging for use in spinal and orthopedic surgical
procedures. The acquisition is expected to bring the O-Arm into a broad
portfolio of image guided surgical solutions. Total consideration for Breakaway
was approximately $26 million in cash, subject to purchase price increases,
which would be triggered by the achievement of certain milestones.

In
connection with the acquisition of Breakaway, the Company acquired $22 million
of technology-based intangible assets that had an estimated useful life of 15
years at the time of acquisition, $1 million of tangible assets and $3 million
of goodwill. The goodwill is deductible for tax purposes. The pro forma impact
of the acquisition of Breakaway was not significant to the results of the
Company for the fiscal years 2008 and 2007.

Additionally,
during fiscal year 2008, the Company recorded IPR&D charges of $25 million
related to a milestone payment under the existing terms of a royalty bearing,
non-exclusive patent cross-licensing agreement with NeuroPace, Inc. and $13
million for unrelated purchases of certain intellectual property. These
payments were expensed as IPR&D since technological feasibility of the
underlying projects had not yet been reached and such technology has no future
alternative use.

Fiscal Year 2007

In
March 2007, the Company acquired manufacturing assets, know-how, and an
exclusive license to intellectual property related to the manufacture and
distribution of EndoSheath products from VisionSciences, Inc. (VSI), which was
accounted for as a purchase of assets. The license acquired from VSI expanded
the Companys existing U.S. distribution rights of EndoSheath products to
worldwide distribution rights. The EndoSheath is a sterile disposable sheath
that fits over a fiberoptic endoscope preventing contamination of the scope
during procedures and allowing reuse of the scope without further
sterilization. The consideration paid was $27 million in cash which was
primarily allocated to technology-based intangible assets with an estimated
useful life of 10 years at the time of acquisition. The purchase price is
subject to increases triggered by the achievement of certain milestones.

In
September 2006, the Company acquired and/or licensed selected patents and
patent applications owned by Dr. Eckhard Alt (Dr. Alt), or certain of
his controlled companies in a series of transactions. In connection therewith,
the Company also resolved all outstanding litigation and disputes with
Dr. Alt and certain of his controlled companies. The agreements required
the payment of total consideration of $75 million, $74 million of which was
capitalized as technology based intangible assets that had an estimated useful life of 11
years at the time of acquisition. The acquired patents or licenses pertain to
the cardiac rhythm disease management field and have both current application
and potential for future patentable commercial products.

50

---

Medtronic,
Inc. 
Notes to Consolidated Financial Statements

In
July 2006, the Company acquired substantially all of the assets of Odin Medical
Technologies, Ltd. (Odin), a privately held company. Prior to the acquisition,
the Company had an equity investment in Odin, which was accounted for under the
cost method of accounting. Odin focused on the manufacture of the PoleStar
intra-operative Magnetic Resonance Image (iMRI)-Guidance System which was
already exclusively distributed by the Company. This acquisition was expected to
help the Company further drive the acceptance of iMRI guidance in neurosurgery.
The consideration for Odin was approximately $21 million, which included $6
million in upfront cash and a $2 million milestone payment made in the three
months ended October 27, 2006. The $8 million in net cash paid resulted from
the $21 million in consideration less the value of the Companys prior
investment in Odin and Odins existing cash balance. In connection with the
acquisition of Odin, the Company acquired $9 million of technology-based
intangible assets that had an estimated useful life of 12 years at the time of
acquisition. Total goodwill was $12 million and was deductible for tax
purposes. The results of operations related to Odin have been included in the
Companys consolidated statements of earnings since the date of the
acquisition. The pro forma impact of Odin was not significant to the results of
the Company for the fiscal year ended April 27, 2007.

Contingent Consideration

Certain
of the Companys business combinations or purchases of intellectual property
involve the potential for the payment of future contingent consideration upon
the achievement of certain product development milestones and/or various other
favorable operating conditions. While it is not certain if and/or when these
payments will be made, the Company has developed an estimate of the potential
contingent consideration for each of its acquisitions with an outstanding
potential obligation. At April 24, 2009, the estimated potential amount of
future contingent consideration that the Company is expected to make associated
with all business combinations or purchases of intellectual property is
approximately $397 million. The milestones associated with the contingent
consideration must be reached in future periods ranging from fiscal years 2010
to 2016 in order for the consideration to be paid.

|   |            
|-- | -----------
|5. | Investments

The
carrying amounts of cash and cash equivalents approximate fair value due to
their short maturities.

Information
regarding the Companys short-term
and long-term investments at
April 24, 2009 is as follows:

|                                                      |  |      |       |                   |   |                    |  |            |      |   |   |       | 
|----------------------------------------------------- |  | ---- | ----- | ----------------- | - | ------------------ |  | ---------- | ---- | - | - | ----- | 
|(in millions)                                         |  | Cost |       | Unrealized
 Gains |   | Unrealized
 Losses |  | Fair Value |     
|Corporate
 debt securities                            |  | $    | 817   |                   | $ | 8                  |  | $          | (20  | ) | $ | 805   | 
|Auction rate
 securities                              |  |      | 199   |                   |   |                   |  |            | (80  | ) |   | 119   | 
|Mortgage
 backed securities                           |  |      | 789   |                   |   | 9                  |  |            | (52  | ) |   | 746   | 
|Government
 and agency securities                     |  |      | 693   |                   |   | 5                  |  |            | (1   | ) |   | 697   | 
|Certificates
 of deposit                              |  |      | 2     |                   |   |                   |  |            |     |   |   | 2     | 
|Other asset
 backed securities                        |  |      | 297   |                   |   | 3                  |  |            | (22  | ) |   | 278   | 
|Marketable
 equity securities                         |  |      | 12    |                   |   |                   |  |            |     |   |   | 12    | 
|Cost method,
 equity method and other investments (1) |  |      | 515   |                   |   |                   |  |            |     |   |   | 515   | 
|Total
 short-term and long-term investments           |  | $    | 3,324 |                   | $ | 25                 |  | $          | (175 | ) | $ | 3,174 | 

(1) Includes
$221 million for the 15 percent equity interest in Shandong Weigao Group
Medical Polymer Company Limited (Weigao), which was acquired on December 18,
2008. The cash paid for the investment was included in other investing activities, net
on the consolidated statement of cash flows.

51

---

Medtronic,
Inc. 
Notes to Consolidated Financial Statements

Information
regarding the Companys short-term
and long-term investments at
April 25, 2008 is as follows:

|                                                  |  |      |       |                   |   |                    |  |            |     |   |   |       | 
|------------------------------------------------- |  | ---- | ----- | ----------------- | - | ------------------ |  | ---------- | --- | - | - | ----- | 
|(in millions)                                     |  | Cost |       | Unrealized
 Gains |   | Unrealized
 Losses |  | Fair Value |    
|Corporate
 debt securities                        |  | $    | 942   |                   | $ | 2                  |  | $          | (15 | ) | $ | 929   | 
|Auction rate
 securities                          |  |      | 198   |                   |   |                   |  |            | (22 | ) |   | 176   | 
|Mortgage
 backed securities                       |  |      | 693   |                   |   | 3                  |  |            | (17 | ) |   | 679   | 
|Government
 and agency securities                 |  |      | 478   |                   |   | 1                  |  |            | (3  | ) |   | 476   | 
|Other asset
 backed securities                    |  |      | 382   |                   |   | 1                  |  |            | (12 | ) |   | 371   | 
|Marketable
 equity securities                     |  |      | 14    |                   |   |                   |  |            | (1  | ) |   | 13    | 
|Cost method,
 equity method and other investments |  |      | 231   |                   |   |                   |  |            |    |   |   | 231   | 
|Total
 short-term and long-term investments       |  | $    | 2,938 |                   | $ | 7                  |  | $          | (70 | ) | $ | 2,875 | 

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

|                              |  |              |       |            |   |          |  |            |       |          |   |            |  |   |        |   |   |    | 
|----------------------------- |  | ------------ | ----- | ---------- | - | -------- |  | ---------- | ----- | -------- | - | ---------- |  | - | ------ | - | - | -- | 
|                              |  | Fiscal
 Year |      
|                              |  | 2009         |       | 2008       |   | 2007     | 
|(in millions)                 |  | Debt (1)     |       | Equity (2) |   | Debt (1) |  | Equity (2) |       | Debt (1) |   | Equity (2) | 
|Proceeds
 from sales          |  | $            | 2,845 |            | $ |         |  | $          | 8,531 |          | $ | 26         |  | $ | 10,870 |   | $ | 24 | 
|Gross
 realized gains         |  | $            | 35    |            | $ |         |  | $          | 31    |          | $ | 16         |  | $ | 3      |   | $ | 16 | 
|Gross
 realized losses        |  | $            | (8    | )          | $ |         |  | $          | (5    | )        | $ |           |  | $ | (1     | ) | $ |   | 
|Impairment
 losses recognized |  | $            | 38    |            | $ | 4        |  | $          | 3     |          | $ | 4          |  | $ |       |   | $ | 26 | 

|    |                                                                                           
|--- | ------------------------------------------------------------------------------------------
|(1) | Includes
 available-for-sale (AFS) debt securities.                                       
|(2) | Includes
 marketable equity securities, cost method, equity method and other
 investments.

The
April 24, 2009 balance of AFS debt securities by contractual maturity is shown
in the following table. Within the table, maturities of mortgage-backed
securities have been allocated based upon timing of estimated cash flows,
assuming no change in the current interest rate environment. Actual maturities
may differ from contractual maturities because the issuers of the securities
may have the right to prepay obligations without prepayment penalties.

|                                        |  |                 |       | 
|--------------------------------------- |  | --------------- | ----- | 
|(in millions)                           |  | April 24,
 2009 |      
|Due in one
 year or less                |  | $               | 732   | 
|Due after
 one year through five years  |  |                 | 1,724 | 
|Due after
 five years through ten years |  |                 | 50    | 
|Due after
 ten years                    |  |                 | 141   | 
|Total debt
 securities                  |  | $               | 2,647 | 

As
of April 24, 2009, the Company has $421 million in debt securities that have
been in an unrealized loss position for more than twelve months. The aggregate
amount of unrealized losses for these investments is $154 million. As of April
24, 2009, the Company has $682 million in debt securities that have been in an
unrealized loss position for less than twelve months. The aggregate amount of
unrealized losses for these investments is $21 million. The majority of these
investments are in high quality, investment grade securities. The Company does
not consider these unrealized losses to be other-than-temporary as it has the
intent and ability to hold these investments long enough to avoid realizing any
significant losses.

The
investments in marketable debt securities detailed above are classified and
accounted for as available-for-sale and include corporate debt securities,
government and agency securities, certificates of deposit and mortgage backed
and other asset backed securities including auction rate securities. Market
conditions during fiscal year 2009 and subsequent to the Companys fiscal year
end continue to indicate significant uncertainty on the part of investors on
the economic outlook for the U.S. and for financial institutions. This
uncertainty has created reduced liquidity across the fixed income investment
market, including certain securities in which the Company has invested. As a
result, some of the Companys investments have experienced reduced liquidity
including unsuccessful monthly auctions for auction rate security holdings.

For
the fiscal year ended April 24, 2009, the Company recognized
other-than-temporary impairment losses on AFS debt securities of $38 million.
Based on the Companys assessment of the credit quality of the underlying
collateral and credit support available to each of the remaining securities in
which invested, the Company believes it has recorded all necessary
other-than-temporary impairments as the Company has the ability and the intent
to hold these investments long enough to avoid realizing any further losses.
For additional discussion, see the Liquidity and Capital Resources section of
managements discussion and analysis.

52

---

Medtronic,
Inc. 
Notes to Consolidated Financial Statements

As
of April 24, 2009 and April 25, 2008, the aggregate carrying amount of equity
and other securities without a quoted market price and accounted for using the
cost or equity method was $515 million and $231 million, respectively. The
total carrying value of these investments is reviewed quarterly for changes in
circumstance or the occurrence of events that suggest the Companys investment
may not be recoverable. The fair value of cost or equity method investments is
not estimated if there are no identified events or changes in circumstances
that may have a material adverse effect on the fair value of the investment.

Gains
and losses recognized on debt instruments are recorded in interest expense/(income), net in the consolidated
statements of earnings. Gains and losses recognized on equity instruments are
recorded in other expense, net in
the consolidated statements of earnings. Gains and losses from the sale of
investments are calculated based on the specific identification method.

The
Company historically lent certain fixed income securities to enhance its
investment income. Those lending activities were indemnified against
counterparty risk and collateralized at an average rate of 102 percent, with
the collateral determined based on the underlying securities and
creditworthiness of the borrowers. The value of the securities on loan at April
25, 2008 was $610 million. Due to the Companys concerns about the liquidity
condition in the fixed income markets, the Company suspended its securities
lending program in the second quarter of fiscal year 2009.

|   |                        
|-- | -----------------------
|6. | Fair Value Measurements

As
discussed in Note 1, the Company adopted SFAS No. 157 effective April 26,
2008, with respect to fair value measurements of (a) nonfinancial assets
and liabilities that are recognized or disclosed at fair value in the Companys
financial statements on a recurring basis (at least annually) and (b) all
financial assets and liabilities. SFAS No. 157 clarifies the definition of fair
value, establishes a framework for measuring fair value, and expands the
disclosures on fair value measurements.

Under
SFAS No. 157, fair value is defined as the exit price, or the amount that
would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants as of the measurement date.
SFAS No. 157 also establishes a hierarchy for inputs used in measuring
fair value that maximizes the use of observable inputs and minimizes the use of
unobservable inputs by requiring that the most observable inputs be used when
available. Observable inputs are inputs market participants would use in
valuing the asset or liability developed based on market data obtained from
sources independent of the Company. Unobservable inputs are inputs that reflect
the Companys assumptions about the factors market participants would use in
valuing the asset or liability developed based upon the best information
available in the circumstances. The categorization of financial assets and
financial liabilities within the valuation hierarchy is based upon the lowest
level of input that is significant to the fair value measurement. The hierarchy
is broken down into three levels defined as follows:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Level 1 -
 Inputs are quoted prices in active markets for identical assets or
 liabilities. The Companys Level 1 assets include money market funds,
 treasury bonds, marketable equity securities and foreign currency hedges that
 are valued using quoted market prices.                                                                                                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Level 2 -
 Inputs include quoted prices for similar assets or liabilities in active
 markets, quoted prices for identical or similar assets or liabilities in
 markets that are not active and inputs (other than quoted prices) that are
 observable for the asset or liability, either directly or indirectly. The
 Companys Level 2 assets and liabilities primarily include government agency
 bonds, corporate debt securities, asset backed securities and certain
 mortgage backed securities whose value is determined using inputs that are
 observable in the market or can be derived principally from or corroborated
 by observable market data.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Level 3 -
 Inputs are unobservable inputs for the asset or liability. The Companys
 Level 3 assets include certain corporate debt securities, auction rate
 securities, certain mortgage backed securities and certain asset backed
 securities. See the section below titled Level
 3 Valuation Techniquesfor further discussion of how the Company
 determines fair value for investments classified as Level 3.                                                                                                                                                                                                                                           

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

For
the Company, effective April 26, 2008, fair value under SFAS No. 157 is
principally applied to financial assets and liabilities such as marketable
equity securities and debt securities that are classified and accounted for as
available-for-sale, and derivative instruments. Derivatives include cash flow
hedges, freestanding derivative forward contracts and net investment hedges.
These items were previously and will continue to be marked-to-market at each
reporting period; however, the definition of fair value is now applied using
SFAS No. 157. The information in the following paragraphs and tables
primarily addresses matters relative to these financial assets and liabilities.
Separately, there were no material fair value measurements with respect to
nonfinancial assets or liabilities that are recognized or disclosed at fair
value in the Companys financial statements on a recurring basis subsequent to the
effective date of SFAS No. 157.

53

---

Medtronic,
Inc. 
Notes to Consolidated Financial Statements

The
following table provides information by level for assets and liabilities that
are measured at fair value, as defined by SFAS No. 157, on a recurring
basis.

|                                 |  |                            |         |                                                    |         |     |         |   |       |  |   |     | 
|-------------------------------- |  | -------------------------- | ------- | -------------------------------------------------- | ------- | --- | ------- | - | ----- |  | - | --- | 
|                                 |  | Fair ValueatApril 24, 2009 |         | Fair Value
 MeasurementsUsing Inputs Considered as |        
|                                 |  |                            |        
|(in millions)                    |  |                            | Level 1 |                                                    | Level 2 |     | Level 3 |  
|Assets:                          |  |                            |         |                                                    |         |     |         |   |       |  |   |     | 
|Corporate debt securities        |  | $                          | 805     |                                                    | $       | 8   |         | $ | 771   |  | $ | 26  | 
|Auction rate securities          |  |                            | 119     |                                                    |         |    |         |   |      |  |   | 119 | 
|Mortgage backed securities       |  |                            | 746     |                                                    |         |    |         |   | 709   |  |   | 37  | 
|Government and agency securities |  |                            | 697     |                                                    |         | 174 |         |   | 523   |  |   |    | 
|Certificates of deposit          |  |                            | 2       |                                                    |         |    |         |   | 2     |  |   |    | 
|Other asset backed securities    |  |                            | 278     |                                                    |         |    |         |   | 255   |  |   | 23  | 
|Marketable equity securities     |  |                            | 12      |                                                    |         | 12  |         |   |      |  |   |    | 
|Derivative assets                |  |                            | 436     |                                                    |         | 436 |         |   |      |  |   |    | 
|Total assets                     |  | $                          | 3,095   |                                                    | $       | 630 |         | $ | 2,260 |  | $ | 205 | 
|                                 |  |                            |         |                                                    |         |     |         |   |       |  |   |     | 
|Liabilities:                     |  |                            |         |                                                    |         |     |         |   |       |  |   |     | 
|Derivative liabilities           |  | $                          | 31      |                                                    | $       | 31  |         | $ |      |  | $ |    | 
|Total
 liabilities               |  | $                          | 31      |                                                    | $       | 31  |         | $ |      |  | $ |    | 

Level 3 Valuation Techniques

Financial
assets are considered Level 3 when their fair values are determined using
pricing models, discounted cash flow methodologies or similar techniques and at
least one significant model assumption or input is unobservable. Level 3
financial assets also include certain investment securities for which there is
limited market activity such that the determination of fair value requires
significant judgment or estimation. Level 3 investment securities primarily
include certain corporate debt securities, auction rate securities, certain
mortgage backed securities and certain asset backed securities for which there was
a decrease in the observability of market pricing for these investments. At
April 24, 2009, these securities were valued primarily using broker pricing
models that incorporate transaction details such as contractual terms,
maturity, timing and amount of future cash flows, as well as assumptions about
liquidity and credit valuation adjustments of marketplace participants at April
24, 2009.

The
following table provides a reconciliation of the beginning and ending balances
of items measured at fair value on a recurring basis in the table above that
used significant unobservable inputs (Level 3).

|                                                                                        |  |   |      |  
|--------------------------------------------------------------------------------------- |  | - | ---- | -
|(in
 millions)                                                                          |  |   |      |  
|                                                                                        |  |   |      |  
|Balance at April 26, 2008                                                               |  | $ | 448  |  
|Total
 realized losses and other-than-temporary impairment losses included in
 earnings |  |   | (38  | )
|                                                                                       
|Total
 unrealized losses included in other comprehensive income                         |  |   | (84  | )
|                                                                                       
|Net
 purchases, issuances, and settlements                                              |  |   | (209 | )
|Net
 transfers in (out) of Level 3                                                      |  |   | 88   |  
|Balance at April 24, 2009                                                               |  | $ | 205  |  

Realized
gains or losses included in earnings are included in interest expense/(income), netin the consolidated statement
of earnings.

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

The
Company had no financial assets or liabilities that are measured on a
nonrecurring basis subsequent to their initial recognition during fiscal year
2009.

54

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

The
aspects of SFAS No. 157 for which the effective date was deferred under FSP No.
157-2 until fiscal year 2010 relate to nonfinancial assets and liabilities that
are measured at fair value, but are recognized or disclosed at fair value on a
nonrecurring basis. This deferral applies to such items as nonfinancial assets
and liabilities initially measured at fair value in a business combination (but
not measured at fair value in subsequent periods) or nonfinancial long-lived
asset groups measured at fair value for an impairment assessment.

7.       Goodwill and Other Intangible Assets

The
changes in the carrying amount of goodwill for fiscal years 2009 and 2008 are
as follows:

|                                      |  |             |       |      |   |       |  
|------------------------------------- |  | ----------- | ----- | ---- | - | ----- | -
|                                      |  | Fiscal Year |      
|(in
 millions)                        |  | 2009        |       | 2008 |  
|Beginning balance                     |  | $           | 7,519 |      | $ | 4,327 |  
|Goodwill as
 a result of acquisitions |  |             | 731   |      |   | 3,178 |  
|Purchase
 accounting adjustments, net |  |             | (40   | )    |   | (10   | )
|Currency
 adjustment, net             |  |             | (15   | )    |   | 24    |  
|Ending balance                        |  | $           | 8,195 |      | $ | 7,519 |  

The
Company completed its impairment test of all goodwill for fiscal years ended April
24, 2009, April 25, 2008 and April 27, 2007 and concluded there were no
impairments.

Balances
of acquired intangible assets, excluding goodwill, are as follows:

|                                                     |  |                                    |       |                             |   |       |   |       |      |   |   |        |  
|---------------------------------------------------- |  | ---------------------------------- | ----- | --------------------------- | - | ----- | - | ----- | ---- | - | - | ------ | -
|(in millions)                                        |  | Purchased
 Technology and
 Patents |       | Trademarks
 and
 Tradenames |   | Other |   | Total |     
|Amortizable
 intangible assets as of April 24, 2009: |  |                                    |       |                             |   |       |   |       |      |   |   |        |  
|Original cost                                        |  | $                                  | 3,057 |                             | $ | 373   |   | $     | 238  |   | $ | 3,668  |  
|Accumulated amortization                             |  |                                    | (801  | )                           |   | (217  | ) |       | (173 | ) |   | (1,191 | )
|Carrying value                                       |  | $                                  | 2,256 |                             | $ | 156   |   | $     | 65   |   | $ | 2,477  |  
|                                                     |  |                                    |       |                             |   |       |   |       |      |   |   |        |  
|Weighted
 average original life (in years)           |  |                                    | 12.5  |                             |   | 10.3  |   |       | 9.4  |   |   |        |  
|                                                     |  |                                    |       |                             |   |       |   |       |      |   |   |        |  
|Amortizable
 intangible assets as of April 25, 2008: |  |                                    |       |                             |   |       |   |       |      |   |   |        |  
|Original cost                                        |  | $                                  | 2,538 |                             | $ | 373   |   | $     | 244  |   | $ | 3,155  |  
|Accumulated amortization                             |  |                                    | (616  | )                           |   | (181  | ) |       | (165 | ) |   | (962   | )
|Carrying value                                       |  | $                                  | 1,922 |                             | $ | 192   |   | $     | 79   |   | $ | 2,193  |  
|                                                     |  |                                    |       |                             |   |       |   |       |      |   |   |        |  
|Weighted
 average original life (in years)           |  |                                    | 12.9  |                             |   | 10.3  |   |       | 9.7  |   |   |        |  

Amortization
expense for fiscal years 2009, 2008 and 2007 was $281 million, $220 million and
$182 million, respectively.

55

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

Estimated
aggregate amortization expense based on the current carrying value of
amortizable intangible assets is as follows:

|                          |  |                       |       | 
|------------------------- |  | --------------------- | ----- | 
|(in millions)Fiscal
 Year |  | Amortization
 Expense |      
|2010                      |  | $                     | 302   | 
|2011                      |  |                       | 293   | 
|2012                      |  |                       | 265   | 
|2013                      |  |                       | 250   | 
|2014                      |  |                       | 242   | 
|Thereafter                |  |                       | 1,125 | 
|                          |  | $                     | 2,477 | 

8.       Financing Arrangements

Debt
consisted of the following:

|                                          |  |                          |           |                |   |                         |  |         |      |                         |   |       |  |  |      |  
|----------------------------------------- |  | ------------------------ | --------- | -------------- | - | ----------------------- |  | ------- | ---- | ----------------------- | - | ----- |  |  | ---- | -
|                                          |  |                          |           | April 24, 2009 |   | April 25, 2008          | 
|(in
 millions)                            |  | Maturity by Fiscal
 Year |           | Payable        |   | Average
 Interest
 Rate |  | Payable |      | Average
 Interest
 Rate |  
|Short-Term
 Borrowings:                   |  |                          |           |                |   |                         |  |         |      |                         |   |       |  |  |      |  
|Contingent
 convertible debentures        |  |                          | 2010-2022 |                | $ |                        |  |         |     |                         | $ | 94    |  |  | 1.25 | %
|Bank
 borrowings                          |  |                          | 2010      |                |   | 123                     |  |         | 0.92 | %                       |   | 175   |  |  | 0.87 | %
|Commercial
 paper                         |  |                          | 2010      |                |   | 385                     |  |         | 0.44 | %                       |   | 874   |  |  | 2.42 | %
|Capital
 lease obligations                |  |                          | 2010      |                |   | 14                      |  |         | 5.29 | %                       |   | 11    |  |  | 5.33 | %
|Total Short-Term Borrowings               |  |                          |           |                | $ | 522                     |  |         |      |                         | $ | 1,154 |  |  |      |  
|                                          |  |                          |           |                |   |                         |  |         |      |                         |   |       |  |  |      |  
|Long-Term
 Debt:                          |  |                          |           |                |   |                         |  |         |      |                         |   |       |  |  |      |  
|Contingent
 convertible debentures        |  |                          | 2011-2022 |                | $ | 15                      |  |         | 1.25 | %                       | $ |      |  |  |     |  
|Five-year
 senior convertible notes       |  |                          | 2011      |                |   | 2,200                   |  |         | 1.50 | %                       |   | 2,200 |  |  | 1.50 | %
|Five-year
 senior notes                   |  |                          | 2011      |                |   | 400                     |  |         | 4.38 | %                       |   | 400   |  |  | 4.38 | %
|New credit
 agreement                     |  |                          | 2011      |                |   |                        |  |         |     |                         |   | 300   |  |  | 2.90 | %
|Seven-year
 senior convertible notes      |  |                          | 2013      |                |   | 2,200                   |  |         | 1.63 | %                       |   | 2,200 |  |  | 1.63 | %
|Five-year
 new senior notes               |  |                          | 2014      |                |   | 550                     |  |         | 4.50 | %                       |   |      |  |  |     |  
|Ten-year
 senior notes                    |  |                          | 2016      |                |   | 600                     |  |         | 4.75 | %                       |   | 600   |  |  | 4.75 | %
|Ten-year new
 senior notes                |  |                          | 2019      |                |   | 400                     |  |         | 5.60 | %                       |   |      |  |  |     |  
|Thirty-year
 new senior notes             |  |                          | 2039      |                |   | 300                     |  |         | 6.50 | %                       |   |      |  |  |     |  
|Interest
 rate swaps                      |  |                          | 2011/2016 |                |   |                        |  |         |     |                         |   | 35    |  |  | 2.04 | %
|Gain from
 interest rate swap termination |  |                          | N/A       |                |   | 54                      |  |         |     |                         |   |      |  |  |     |  
|Capital lease
 obligations                |  |                          | 2010-2014 |                |   | 53                      |  |         | 5.38 | %                       |   | 67    |  |  | 5.37 | %
|Total Long-Term Debt                      |  |                          |           |                | $ | 6,772                   |  |         |      |                         | $ | 5,802 |  |  |      |  

Senior Convertible Notes In April 2006, the
Company issued $2.200 billion of 1.500 percent Senior Convertible Notes due
2011 and $2.200 billion of 1.625 percent Senior Convertible Notes due 2013
(collectively, the Senior Convertible Notes). The Senior Convertible Notes were
issued at par and pay interest in cash semi-annually in arrears on April 15 and
October 15 of each year. The Senior Convertible Notes are unsecured
unsubordinated obligations and rank equally with all other unsecured and
unsubordinated indebtedness. The Senior Convertible Notes had an initial
conversion price of $56.14 per share. The Senior Convertible Notes may only be
converted: (i) during any calendar quarter if the closing price of the
Companys common stock reaches 140 percent of the conversion price for 20
trading days during a specified period, or (ii) if specified distributions to
holders of the Companys common stock are made or specified corporate
transactions occur, or (iii) during the last month prior to maturity of the
applicable notes. Upon conversion, a holder would receive: (i) cash equal to
the lesser of the principal amount of the note or the conversion value and (ii)
to the extent the conversion value exceeds the principal amount of the note,
shares of the Companys common stock, cash or a combination of common stock and
cash, at the Companys option. In addition, upon a change in control, as
defined in the applicable indentures, the holders may require the Company to
purchase for cash all or a portion of their notes for 100 percent of the
principal amount of the notes plus accrued and unpaid interest, if any, plus a
number of additional make-whole shares of the Companys common stock, as set
forth in the applicable indenture. The indentures under which the Senior
Convertible Notes were issued contain customary covenants. A total of $2.500
billion of the net proceeds from these note issuances were used to repurchase
common stock. As of April 24, 2009, pursuant to provisions in the indentures
relating to the Companys increase of its quarterly dividend to shareholders,
the conversion rates for each of the Senior Convertible Notes is now 18.0474,
which correspondingly changed the conversion price per share for each of the
Senior Convertible Notes to $55.41.

56

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

Under
EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own Stock (EITF No. 00-19), the
notes are accounted for similar to traditional convertible debt (that is, as a
combined instrument) because the conversion spread meets the requirements of
EITF No. 00-19, including the provisions contained in paragraphs 1232 of EITF
No. 00-19. Accordingly, the conversion spread is not separated as a
derivative.

Concurrent
with the issuance of the Senior Convertible Notes, the Company purchased call
options on its common stock in private transactions. The call options allow the
Company to receive shares of the Companys common stock and/or cash from
counterparties equal to the amounts of common stock and/or cash related to the
excess conversion value that it would pay to the holders of the Senior
Convertible Notes upon conversion. These call options will terminate upon the
earlier of the maturity dates of the related Senior Convertible Notes or the
first day all of the related Senior Convertible Notes are no longer outstanding
due to conversion or otherwise. The call options, which cost an aggregate
$1.075 billion ($699 million net of tax benefit), were recorded as a reduction
of shareholders equity.

In
separate transactions, the Company sold warrants to issue shares of the
Companys common stock at an exercise price of $76.56 per share in private
transactions. Pursuant to these transactions, warrants for 41 million shares of
the Companys common stock may be settled over a specified period beginning in
July 2011 and warrants for 41 million shares of the Companys common stock may
be settled over a specified period beginning in July 2013 (the settlement
dates). If the average price of the Companys common stock during a defined period
ending on or about the respective settlement dates exceeds the exercise price
of the warrants, the warrants will be settled in shares of the Companys common
stock. Proceeds received from the issuance of the warrants totaled
approximately $517 million and were recorded as an addition to shareholders
equity. In April 2009, certain of the holders requested adjustment to the
exercise price of the warrants from $76.30 to $75.56 pursuant to the
anti-dilution provisions of the warrants relating to the Companys payment of
dividends to common shareholders.

EITF
No. 00-19 provides that contracts are initially classified as equity if (1) the
contract requires physical settlement or net-share settlement, or (2) the
contract gives the Company a choice of net-cash settlement or settlement in its
own shares (physical settlement or net-share settlement). The settlement terms
of the Companys purchased call options and sold warrant contracts provide for
net cash settlement for the particular contract or net share settlement,
depending on the method of settlement, as discussed above, which is at the
option of the Company. Based on the guidance from EITF No. 00-19 and SFAS No.
133, the purchased call option contracts were recorded as a reduction of equity
and the warrants were recorded as an addition to equity as of the trade date.
SFAS No. 133 states that a reporting entity shall not consider contracts to be
derivative instruments if the contract issued or held by the reporting entity
is both indexed to its own stock and classified in shareholders equity in its
statement of financial position. The Company concluded the purchased call
option contracts and the warrant contracts should be accounted for in
shareholders equity.

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

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

57

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

In
November 2005 and June 2007, the Company entered into a five year interest rate
swap agreement with a notional amount of $200 million, and an eight year
interest rate swap agreement with a notional amount of $300 million,
respectively. These interest rate swap agreements were designated as fair value
hedges of the changes in fair value of a portion of the Companys fixed-rate
$400 million Senior Notes due 2010 and fixed-rate $600 million Senior Notes due
2015, respectively. The outstanding market values of these swap agreements were
$8 million and $27 million of unrealized gains, respectively, at April 25, 2008.
The unrealized gains of $8 million and $27 million at April 25, 2008 were
recorded in long-term debt with
the offset recorded in other assets
on the consolidated balance sheets.

In
December 2008, the Company terminated the interest rate swap agreements. At
that time, the contracts were in an asset position, resulting in cash receipts
of $62 million, which included $3 million of accrued interest. The gain from
terminating the interest rate swap agreements increased the outstanding balance
of the Senior Notes and is being amortized as a reduction of interest expense
over the remaining life of the Senior Notes. The cash flows from the
termination of these interest rate swap agreements have been reported as
operating activities in the consolidated statement of cash flows.

Contingent Convertible Debentures As of
April 24, 2009, the Company has $15 million remaining in aggregate principal
amount of 1.250 percent Contingent Convertible Debentures, Series B due 2021
(the Debentures) outstanding. Interest is payable semi-annually. Each Debenture
is convertible into shares of common stock at an initial conversion price of
$61.81 per share; however, the Debentures are not convertible before their
final maturity unless the closing price of our common stock reaches 110 percent
of the conversion price for 20 trading days during a consecutive 30 trading day
period. Upon conversion of the Debentures, the Company will pay holders cash
equal to the lesser of the principal amount of the Debentures or their conversion
value, and shares of the Companys common stock to the extent the conversion
value exceeds the principal amount of the Debentures. The Company may be
required to repurchase the remaining debentures at the option of the holders in
September 2011 or 2016. For put options exercised by the holders of the
Debentures, the purchase price is equal to the principal amount of the
applicable debenture plus any accrued and unpaid interest thereon to the
repurchase date. If the put option is exercised, the Company will pay holders
the repurchase price solely in cash. The Company can redeem the debentures for
cash at any time.

Commercial Paper The Company maintains a
commercial paper program that allows the Company to have a maximum of $2.250
billion in commercial paper outstanding, with maturities up to 364 days from
the date of issuance. At April 24, 2009 and April 25, 2008, outstanding
commercial paper totaled $385 million and $874 million, respectively. During
fiscal years 2009 and 2008, the weighted average original maturity of the
commercial paper outstanding was approximately 50 and 35 days, respectively,
and the weighted average interest rate was 1.60 percent and 4.46 percent,
respectively. The issuance of commercial paper reduces the amount of credit
available under our existing lines of credit.

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

Lines of CreditThe Company has existing
unsecured lines of credit of approximately $2.807 billion with various banks at
April 24, 2009. The existing lines of credit include a five-year $1.750 billion
syndicated credit facility dated December 20, 2006 that will expire on December
20, 2011 (Credit Facility). The Credit Facility provides backup funding for the
commercial paper program and may also be used for general corporate purposes.
The Credit Facility provides the Company with the ability to increase its
capacity by an additional $500 million at any time during the life of the
five-year term of the agreement.

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

As
of April 24, 2009 and April 25, 2008, $508 million and $1.350 billion,
respectively, were outstanding on all lines of credit.

Interest
rates on these borrowings are determined by a pricing matrix, based on the
Companys long-term debt ratings, assigned by Standard and Poors Ratings Group
and Moodys Investors Service. Facility fees are payable on the credit
facilities and are determined in the same manner as the interest rates.

As
of April 24, 2009, the Company has unused credit lines and commercial paper of
approximately $2.799 billion.

58

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

Maturities
of long-term debt, including capital leases, for the next five fiscal years are
as follows:

|                                         |  |            |       | 
|---------------------------------------- |  | ---------- | ----- | 
|(in
 millions)                           |  |            |      
|Fiscal
 Year                             |  | Obligation |      
|2010                                     |  | $          | 14    | 
|2011                                     |  |            | 2,616 | 
|2012                                     |  |            | 32    | 
|2013                                     |  |            | 2,220 | 
|2014                                     |  |            | 550   | 
|Thereafter                               |  |            | 1,300 | 
|Total
 long-term debt                    |  |            | 6,732 | 
|Less:
 Current portion of long-term debt |  |            | 14    | 
|Long-term
 portion of long-term debt     |  | $          | 6,718 | 

9.       Derivatives and Foreign Exchange Risk
Management

In the fourth quarter of fiscal year 2009, the Company adopted SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities.

The
Company uses operational and economic hedges, as well as forward exchange
derivative contracts to manage the impact of foreign exchange rate changes on
earnings and cash flows. In order to reduce the uncertainty of foreign exchange
rate movements, the Company enters into derivative instruments, primarily
forward exchange contracts, to manage its exposure related to foreign exchange
rate changes. These contracts are designed to hedge anticipated foreign
currency transactions and changes in the value of specific assets, liabilities,
net investments and probable commitments. At inception of the forward contract,
the derivative is designated as either a freestanding derivative, net
investment hedge or cash flow hedge. Principal currencies hedged are the Euro
and the Japanese Yen. The Company does not enter into forward exchange
derivative contracts for speculative purposes. The gross notional amount of
these contracts outstanding at April 24, 2009 and April 25, 2008 was $5.296
billion and $6.613 billion, respectively. The aggregate foreign currency gains/(losses) were $(53) million,
$(134) million and $22 million in fiscal years 2009, 2008 and 2007, respectively. These gains/(losses) represent the net impact
to the consolidated statements of earnings for the derivative instruments presented below offset by remeasurement
gains/(losses) on foreign currency denominated assets and liabilities.

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

Freestanding Derivative Forward Contracts

Freestanding
derivative forward contracts are used to offset the Companys exposure to the
change in value of certain foreign currency denominated assets and liabilities.
These derivatives are not designated as hedges, and, therefore, changes in the
value of these forward contracts are recognized currently in earnings, thereby
offsetting the current earnings effect of the related foreign currency
denominated assets and liabilities. The cash flows from these contracts are
reported as operating activities in the consolidated statements of cash flows.
The gross notional amount of these contracts, not designated as hedging
instruments, outstanding at April 24, 2009 was $1.162 billion.

The
amount of gains and location of the gains in the consolidated statement of
earnings related to derivative instruments not designated as hedging
instruments for the fiscal year ended April 24, 2009 were as follows:

|                                                                       |  |                    |  |        |    
|---------------------------------------------------------------------- |  | ------------------ |  | ------ | ---
|(in
 millions)                                                         |  |                    |  |        |    
|                                                                       |  |                    |  |       
|Derivatives
 Not Designated as Hedging Instruments under
 SFAS No. 133 |  | Location           |  | Amount
|Foreign
 exchange contracts                                            |  | Other expense, net |  | $      | 208

Net Investment Hedges

Net
investment hedges are used to hedge the long-term investment (equity) in
foreign operations. For hedges that meet effectiveness requirements, the net
gains/(losses) related to changes in the current rates, or spot rates, are
recorded as a cumulative translation adjustment, a component of accumulated other comprehensive (loss)/ income
(AOCI) on the consolidated balance sheets. Net gains/(losses) associated with
changes in forward rates of the contracts are reflected in other expense, net in the consolidated
statements of earnings. Recognition in earnings of amounts previously recorded
as a cumulative translation adjustment is limited to circumstances such as
complete or substantially complete liquidation of the long-term investment
(equity) in foreign operations. The cash flows from these contracts are
reported as investing activities in the consolidated statements of cash flows.
As of April 24, 2009, there were no open derivative contracts.

59

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

The
amount of gains and location of the gains in the consolidated statement of
earnings and AOCI related to derivative instruments designated as net
investment hedges for the fiscal year ended April 24, 2009 are presented in the
table below. There were no reclassifications of the effective portion of net
investment hedges out of AOCI into income for the fiscal year ended April 24,
2009.

|                                                                  |  |                                                                                            |    |                                                                                                                 |  |                    |  |   |   | 
|----------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------ | -- | --------------------------------------------------------------------------------------------------------------- |  | ------------------ |  | - | - | 
|(in
 millions)                                                    |  | Gain Recognized as Cumulative
 Translation within AOCI on Effective
 Portion of Derivative |    | Ineffective Portion of Gain Recognized in Income on
 Derivative and Amount Excluded from Effectiveness
 Testing
|                                                                  |  |                                                                                            |    |                                                                                                                 |  |                   
|Derivatives
 in SFAS No. 133 Net Investment Hedging Relationships |  | Amount                                                                                     |    | Location                                                                                                        |  | Amount            
|Foreign
 exchange contracts                                       |  | $                                                                                          | 27 |                                                                                                                 |  | Other expense, net |  | $ | 5 | 

Cash Flow Hedges

Forward
contracts designated as cash flow hedges are designed to hedge the variability
of cash flows associated with forecasted transactions, denominated in a foreign
currency that will take place in the future. For derivative instruments that
are designated and qualify as a cash flow hedge, the effective portion of the
gain or loss on the derivative is reported as a component of AOCI and reclassified into earnings in
the same period or periods during which the hedged transaction affects earnings. No gains
or losses relating to ineffectiveness of cash flow hedges were recognized in
earnings during fiscal years 2009, 2008 and 2007. No components of the hedge
contracts were excluded in the measurement of hedge ineffectiveness and no
hedges were derecognized or discontinued during fiscal years 2009, 2008 and
2007. The cash flows from these contracts are reported as operating activities
in the consolidated statements of cash flows. The gross notional amount of
these contracts, designated as cash flow hedges, outstanding at April 24, 2009
was $4.134 billion and will mature within the subsequent 36-month period.

The amount of
gains/(losses) and location of the gains/(losses) in the consolidated statement
of earnings and other comprehensive income (OCI) related to derivative
instruments designated as cash flow hedges for the fiscal year ended April 24,
2009 are as follows:

|                                                              |  |                                                                  |     |                                                                                |  |                       |  |   |     |  
|------------------------------------------------------------- |  | ---------------------------------------------------------------- | --- | ------------------------------------------------------------------------------ |  | --------------------- |  | - | --- | -
|(in
 millions)                                                |  | Gross Gain Recognized in OCI on Effective
 Portion of Derivative |     | Effective Portion of (Loss) on Derivative Reclassified from
 AOCI
 into Income | 
|                                                              |  |                                                                  |     |                                                                                |  |                       | 
|Derivatives
 in SFAS No. 133 Cash
 Flow Hedging Relationships |  | Amount                                                           |     | Location                                                                       |  | Amount                | 
|Foreign
 exchange contracts                                   |  | $                                                                | 814 |                                                                                |  | Other expense, net    |  | $ | (16 | )
|                                                              |  |                                                                  |     |                                                                                |  | Cost of products sold |  |   | (25 | )
|Total                                                         |  | $                                                                | 814 |                                                                                |  |                       |  | $ | (41 | )

As of
April 24, 2009, the Company had a balance of $228 million in after-tax net unrealized gains associated with
cash flow hedging instruments recorded in AOCI. The Company expects that $135 million of this balance will be reclassified into the
consolidated statement of earnings over the next twelve months.

Fair Value Hedges

Interest
rate derivative instruments designated as fair value hedges are designed to
manage the exposure to interest rate movements and to reduce borrowing costs by
converting fixed-rate debt into floating-rate debt. As of April 24, 2009, the
Company did not have any fair value hedges outstanding because, in December
2008, the Company terminated the existing interest rate swap agreements. At
that time, the contracts were in an asset position, resulting in cash receipts
of $62 million, which included $3 million of accrued interest. The $59 million
gain from terminating the interest rate swap agreements increased the
outstanding balance of the Senior Notes and is being amortized as a reduction
of interest expense over the remaining life of the Senior Notes. The cash flows
from the termination of these interest swap agreements are reported as
operating activities in the consolidated statements of cash flows.

60

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

During
fiscal years 2009, 2008 and 2007, the Company did not have any ineffective fair
value hedging instruments. In addition, the Company did not recognize any gains
or losses during fiscal years 2009, 2008 and 2007 on firm commitments that no
longer qualify as fair value hedges.

Balance Sheet Presentation

The
following table summarizes the location and fair value amounts of derivative
instruments reported in the consolidated balance sheet as of April 24, 2009.
The fair value amounts are presented on a gross basis and are segregated
between derivatives that are designated and qualify as hedging instruments
and those that are not, and are further segregated by type of contract within
those two categories.

|                                                         |  |                                            |  |                       |     |                         |                              |            |   |    |   |    | 
|-------------------------------------------------------- |  | ------------------------------------------ |  | --------------------- | --- | ----------------------- | ---------------------------- | ---------- | - | -- | - | -- | 
|                                                         |  | Asset Derivatives                          |  | Liability Derivatives |    
|(in
 millions)                                           |  | Balance Sheet
 Location                    |  | Fair Value            |     | Balance Sheet
 Location |                              | Fair Value |  
|Derivatives designated as hedging
 instruments           |  |                                            |  |                       |     |                         |                              |            |   |    |   |    | 
|Foreign exchange contracts                               |  | Prepaid
 expenses and other current assets |  | $                     | 249 |                         | Other
 accrued expenses      |            | $ | 27 |  
|Foreign exchange contracts                               |  | Other assets                               |  |                       | 187 |                         | Other
 long-term liabilities |            |   | 3  |  
|Total derivatives designated as hedging
 instruments     |  |                                            |  |                       | $   | 436                     |                              |            |   |    | $ | 30 | 
|                                                         |  |                                            |  |                       |     |                         |                              |            |   |    |   |    | 
|Derivatives not designated as hedging
 instruments       |  |                                            |  |                       |     |                         |                              |            |   |    |   |    | 
|                                                         |  |                                            |  |                       |     |                         |                              |            |   |    |  
|Foreign exchange contracts                               |  | Prepaid
 expenses and other current assets |  | $                     |    |                         | Other
 accrued expenses      |            | $ | 1  |  
|Total derivatives not designated as hedging
 instruments |  |                                            |  |                       | $   |                        |                              |            |   |    | $ | 1  | 
|                                                         |  |                                            |  |                       |     |                         |                              |            |   |    |   |    | 
|Total derivatives                                        |  |                                            |  |                       | $   | 436                     |                              |            |   |    | $ | 31 | 

Concentrations of Credit Risk

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

The
Company maintains cash and cash equivalents, investments and certain other
financial instruments (including forward exchange contracts) with various major
financial institutions. The Company performs periodic evaluations of the
relative credit standings of these financial institutions and limits the amount
of credit exposure with any one institution.

Concentrations
of credit risk with respect to trade accounts receivable are limited due to the
large number of customers and their dispersion across many geographic areas.
The Company monitors the creditworthiness of its customers to which it grants
credit terms in the normal course of business. However, a significant amount of
trade receivables are with national healthcare systems in many countries.
Although the Company does not currently foresee a credit risk associated with
these receivables, repayment is dependent upon the financial stability of the
economies of those countries. As of April 24, 2009 and April 25, 2008, no
customer represented more than 10 percent of the outstanding accounts
receivable.

61

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

|    |                               
|--- | ------------------------------
|10. | Interest Expense/(Income), net

Interest
income and interest expense for fiscal years 2009, 2008 and 2007 are as
follows:

|                                |  |             |      |      |   |      |   |   |      |  
|------------------------------- |  | ----------- | ---- | ---- | - | ---- | - | - | ---- | -
|                                |  | Fiscal Year |     
|(in
 millions)                  |  | 2009        |      | 2008 |   | 2007 |  
|Interest
 income                |  | $           | (188 | )    | $ | (364 | ) | $ | (382 | )
|Interest
 expense               |  |             | 217  |      |   | 255  |   |   | 228  |  
|Interest
 expense/(income), net |  | $           | 29   |      | $ | (109 | ) | $ | (154 | )

Interest
income includes interest earned on the Companys cash and cash equivalents,
short- and long-term investments and the net realized gains or losses on the
sale or impairment of AFS debt securities. See Note 5 for further discussion of
these items.

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

|    |                     
|--- | --------------------
|11. | Shareholders Equity

Repurchase of Common Stock In June 2007,
the Companys Board of Directors authorized the repurchase of up to 50 million
shares of the Companys stock. In addition, in April 2006, the Board of
Directors made a special authorization for the repurchase of up to
50 million shares in connection with the $4.400 billion Senior Convertible
Note offering (see Note 8 for further discussion). Shares are repurchased
from time to time to support the Companys stock-based compensation programs
and to take advantage of favorable market conditions. The Company repurchased
approximately 16.5 million and 30.7 million shares at an average price of
$45.94 and $50.28, respectively, during fiscal years 2009 and 2008. As of April
24, 2009, the Company has approximately 17.8 million shares remaining
under the buyback authorizations approved by the Board of Directors. The
Company accounts for repurchases of common stock using the par value method and
shares repurchased are cancelled.

Shareholder Rights Plan On October 26,
2000, the Companys Board of Directors adopted a Shareholder Rights Plan and
declared a dividend of one preferred share purchase right (a right) for each
outstanding share of common stock with a par value of $ 0 .10 per share. Each right
will allow the holder to purchase 1/5000 of a share of Series A Junior
Participating Preferred Stock at an exercise price of $400 per share, once the
rights become exercisable. The rights are not exercisable or transferable apart
from the common stock until 15 days after the public announcement that a
person or group (the Acquiring Person) has acquired 15 percent or more of the
Companys common stock or 15 business days after the announcement of a tender
offer which would increase the Acquiring Persons beneficial ownership to 15
percent or more of the Companys common stock. After any person or group has
become an Acquiring Person, each right entitles the holder (other than the
Acquiring Person) to purchase, at the exercise price, common stock of the
Company having a market price of two times the exercise price. If the Company
is acquired in a merger or other business combination transaction, each
exercisable right entitles the holder to purchase, at the exercise price,
common stock of the acquiring company or an affiliate having a market price of
two times the exercise price of the right.

The
Board of Directors may redeem the rights for $0.005 per right at any time
before any person or group becomes an Acquiring Person. The Board may also
reduce the threshold at which a person or group becomes an Acquiring Person
from 15 percent to no less than 10 percent of the outstanding common stock. The
rights expire on October 26, 2010.

|    |                               
|--- | ------------------------------
|12. | Stock Purchase and Award Plans

Effective
April 29, 2006, the Company adopted SFAS No. 123(R) which replaced SFAS No.
123, Accounting for Stock-Based Compensation (SFAS No. 123) and supersedes
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees (APB Opinion No. 25). 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 generally the vesting
period. The Company elected the modified-prospective method of adopting SFAS
No. 123(R), under which prior periods are not retroactively restated. The
provisions of SFAS No. 123(R) apply to awards granted after the April 29, 2006
effective date. Stock-based compensation expense for the non-vested portion of
awards granted prior to the effective date is being recognized over the
remaining service period using the fair-value based compensation cost estimated
for SFAS No. 123 pro forma disclosures.

62

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

Stock Options Stock option awards are
granted at exercise prices equal to the closing price of the Companys common
stock on the grant date. The majority of the Companys stock option awards are
non-qualified stock options with a 10-year life and a four-year ratable
vesting term. In fiscal year 2009, the Company granted stock options under the
Medtronic, Inc. 2008 Stock Award and Incentive Plan (2008 Plan), the Medtronic,
Inc. 2003 Long-Term Incentive Plan (2003 Plan) and the Medtronic, Inc. 1998
Outside Directors Stock Compensation Plan (Directors Plan). The 2008 and 2003
Plans were approved by the Companys shareholders in August 2008 and August
2003, respectively, and provide for the grant of nonqualified and incentive
stock options, stock appreciation rights, restricted stock, performance awards,
and other stock and cash-based awards. The Directors Plan, a stock compensation
plan for outside directors, was adopted in fiscal year 1998 and replaced the
provisions in the 1994 stock award plan relating to awards granted to outside
directors. Upon adoption of the 2008 Plan, Medtronic no longer grants awards
from any prior plan. As of April 24, 2009, there were approximately 31 million
shares available for future grants under the 2008 Plan.

Restricted Stock Awards Restricted stock
and restricted stock units (collectively referred to as restricted stock
awards) are granted to officers and key employees. Restricted stock awards are
subject to forfeiture if employment terminates prior to the lapse of the
restrictions. The Company grants restricted stock awards that typically cliff
vest between three and five years. Restricted stock awards are expensed over
the vesting period. The Company also grants shares of performance-based
restricted stock that will cliff vest only if the Company has also achieved
certain performance objectives. Performance awards are expensed over the
performance period based on the probability of achieving the performance
objectives. Shares of restricted stock are considered issued and outstanding
shares of the Company at the grant date and have the same dividend and voting
rights as other common stock. Restricted stock units are not considered issued
or outstanding common stock of the Company. Dividend equivalent units are
accumulated on restricted stock units during the vesting period. In fiscal year
2009, the Company granted restricted stock awards under the 2008 Plan and the
2003 Plan.

Employee Stock Purchase Plan The Medtronic,
Inc. 2005 Employee Stock Purchase Plan (ESPP) allows participating employees to
purchase shares of the Companys common stock at a discount through payroll
deductions. Employees can contribute up to the lesser of 10 percent of their
wages or the statutory limit under the U.S. Internal Revenue Code toward the
purchase of the Companys common stock at 85 percent of its market value at the
end of the calendar quarter purchase period. Employees purchased 3 million
shares at an average price of $33.05 per share in the fiscal year ended April
24, 2009. As of April 24, 2009, plan participants have had approximately $6
million withheld to purchase Company common stock at 85 percent of its market
value on June 30, 2009, the last trading day before the end of the calendar
quarter purchase period. At April 24, 2009, approximately 2 million shares of
common stock were available for future purchase under the ESPP.

Valuation Assumptions The Company uses the
Black-Scholes option pricing model (Black-Scholes model) to determine the fair
value of stock options as of the grant date. The fair value of stock options
under the Black-Scholes model requires management to make assumptions regarding
projected employee stock option exercise behaviors, risk-free interest rates,
volatility of the Companys stock price and expected dividends.

The
expense recognized for shares purchased under the Companys ESPP is equal to
the 15 percent discount the employee receives at the end of the calendar
quarter purchase period. The expense recognized for restricted stock awards is
equal to the grant date fair value, which is equal to the closing stock price
on the date of grant.

The
following table provides the weighted average fair value of options granted to
employees and the related assumptions used in the Black-Scholes model:

|                                                |  |             |       |      |   |       |   |   |       |  
|----------------------------------------------- |  | ----------- | ----- | ---- | - | ----- | - | - | ----- | -
|                                                |  | Fiscal Year |      
|                                                |  | 2009        |       | 2008 |   | 2007  |  
|Weighted
 average fair value of options granted |  | $           | 8.96  |      | $ | 15.29 |   | $ | 11.72 |  
|Assumptions
 used:                              |  |             |       |      |   |       |   |   |       |  
|Expected
 life (years)(a)                       |  |             | 6.05  |      |   | 5.42  |   |   | 4.83  |  
|Risk-free
 interest rate (b)                    |  |             | 3.11  | %    |   | 4.02  | % |   | 4.66  | %
|Volatility (c)                                  |  |             | 25.64 | %    |   | 22.27 | % |   | 19.90 | %
|Dividend
 yield (d)                             |  |             | 2.03  | %    |   | 1.05  | % |   | 0.90  | %

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Expected life: The Company analyzes
 historical employee stock option exercise and termination data to estimate
 the expected life assumption. Beginning in the third quarter of fiscal year
 2008, the Company began to calculate the expected life assumption using the
 midpoint scenario, which combines historical exercise data with hypothetical
 exercise data, as the Company believes this data currently represents the
 best estimate of the expected life of a new employee option. Prior to the
 third quarter of fiscal year 2008, the Company calculated the expected life
 based solely on historical data. The Company also stratifies its employee
 population into two groups based upon distinctive exercise behavior patterns.
 Prior to adopting SFAS No. 123(R), the Company used one pool, the entire
 employee population, for estimating the expected life assumptions.

63

---

Medtronic,
Inc. 
Notes to Consolidated Financial Statements

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | Risk-free interest rate: The rate is based
 on the grant date yield of a zero-coupon U.S. Treasury bond whose maturity
 period equals or approximates the options expected term.                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(c) | Volatility: Beginning in the third quarter
 of fiscal year 2007, the expected volatility is based on a blend of
 historical volatility and an implied volatility of the Companys common
 stock. Implied volatility is based on market traded options of the Companys
 common stock. Prior to the third quarter of fiscal year 2007, the Company
 calculated the expected volatility based exclusively on historical
 volatility.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(d) | Dividend yield: The dividend yield rate is
 calculated by dividing the Companys annual dividend, based on the most
 recent quarterly dividend rate, by the closing stock price on the grant date.                                                                                                                                                                                                                                

Stock-Based Compensation Expense Upon the
adoption of SFAS No. 123(R), the Company changed its method of recognition and
now recognizes stock-based compensation expense based on the substantive
vesting period for all new awards. As a result, compensation expense related to
stock options granted prior to fiscal year 2007 is being recognized over the
stated vesting term of the grant rather than being accelerated upon retirement
eligibility.

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 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 equal the fair value of awards that actually vest.

The
following table presents the components and classification of stock-based
compensation expense, for options, restricted stock awards and ESPP recognized
for fiscal years 2009, 2008 and 2007:

|                                                    |  |      |     |      |   |      |   |   |     |  
|--------------------------------------------------- |  | ---- | --- | ---- | - | ---- | - | - | --- | -
|(in
 millions)                                      |  | 2009 |     | 2008 |   | 2007 |  
|Stock options                                       |  | $    | 140 |      | $ | 138  |   | $ | 135 |  
|Restricted stock awards                             |  |      | 82  |      |   | 63   |   |   | 35  |  
|Employee stock purchase plan                        |  |      | 15  |      |   | 16   |   |   | 15  |  
|Total stock-based compensation expense              |  | $    | 237 |      | $ | 217  |   | $ | 185 |  
|                                                    |  |      |     |      |   |      |   |   |     |  
|Cost of products sold                               |  | $    | 28  |      | $ | 24   |   | $ | 19  |  
|Research and development expense                    |  |      | 58  |      |   | 52   |   |   | 39  |  
|Selling, general and administrative expense         |  |      | 151 |      |   | 141  |   |   | 127 |  
|Total stock-based compensation expense              |  | $    | 237 |      | $ | 217  |   | $ | 185 |  
|                                                    |  |      |     |      |   |      |   |   |     |  
|Income tax benefits                                 |  |      | (69 | )    |   | (64  | ) |   | (58 | )
|                                                    |  |      |     |      |   |      |   |   |     |  
|Total stock-based compensation expense, net
 of tax |  | $    | 168 |      | $ | 153  |   | $ | 127 |  

In
connection with the acquisition of Kyphon in November 2007, the Company assumed
Kyphons unvested stock-based awards. These awards are amortized over 2.5
years, which was their remaining weighted average vesting period at the time of
acquisition. For fiscal years 2009 and 2008, the Company recognized $21 million
and $24 million, respectively, of stock-based compensation expense associated
with the assumed Kyphon awards, which is included in the amounts presented
above.

64

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

Stock
Options The following table summarizes all stock
option activity, including activity from options assumed or issued as a result
of acquisitions, during fiscal years April 24, 2009, April 25, 2008 and April
27, 2007:

|                                |  |                        |   |                          |       |                        |        |                          |   |                        |  |                          |   |   |       | 
|------------------------------- |  | ---------------------- | - | ------------------------ | ----- | ---------------------- | ------ | ------------------------ | - | ---------------------- |  | ------------------------ | - | - | ----- | 
|                                |  | Fiscal Year            |  
|                                |  | 2009                   |   | 2008                     |       | 2007                   |       
|                                |  | Options (in thousands) |   | Wtd. Avg. Exercise Price |       | Options (in thousands) |        | Wtd. Avg. Exercise Price |   | Options (in thousands) |  | Wtd. Avg. Exercise Price |  
|Beginning balance               |  | 92,444                 |   | $                        | 47.21 |                        | 90,906 |                          | $ | 46.99                  |  | 88,838                   |   | $ | 46.23 | 
|Granted                         |  | 12,447                 |   |                          | 37.25 |                        | 9,436  |                          |   | 48.13                  |  | 10,529                   |   |   | 48.64 | 
|Assumed from Kyphon acquisition |  |                       |   |                          |      |                        | 3,486  |                          |   | 27.73                  |  |                         |   |   |      | 
|Exercised                       |  | (8,046                 | ) |                          | 39.01 |                        | (9,111 | )                        |   | 37.80                  |  | (6,089                   | ) |   | 37.37 | 
|Canceled                        |  | (3,451                 | ) |                          | 47.59 |                        | (2,273 | )                        |   | 50.18                  |  | (2,372                   | ) |   | 50.22 | 
|Outstanding at year-end         |  | 93,394                 |   | $                        | 46.57 |                        | 92,444 |                          | $ | 47.21                  |  | 90,906                   |   | $ | 46.99 | 
|Exercisable at year-end         |  | 67,795                 |   | $                        | 47.78 |                        | 67,741 |                          | $ | 46.80                  |  | 67,017                   |   | $ | 45.47 | 

For
options outstanding and exercisable at April 24, 2009, the weighted average
remaining contractual life was 5.41 years and 4.20 years, respectively. The
total intrinsic value, calculated as the closing stock price at year-end less
the option exercise price, of options exercised during fiscal years 2009, 2008
and 2007 was $105 million, $138 million and $88 million, respectively. For
options outstanding and exercisable at April 24, 2009, the total intrinsic
value of in-the-money options was $7 million and $6 million, respectively. The
Company issues new shares when stock option awards are exercised. Cash received
from the exercise of stock options for the fiscal year ended April 24, 2009 was
$305 million. The Companys tax deductions
related to the exercise of stock options for fiscal year 2009 were $33 million.
Unrecognized compensation expense related to outstanding stock options as of
April 24, 2009 was $200 million and is expected to be recognized over a
weighted average period of 2.5 years and will be adjusted for any future
changes in estimated forfeitures.

Restricted Stock Awards The following table
summarizes restricted stock award activity during fiscal years 2009, 2008 and
2007:

|                                |  |                       |   |                       |       |                       |       |                       |   |                       |  |                       |   |   |       | 
|------------------------------- |  | --------------------- | - | --------------------- | ----- | --------------------- | ----- | --------------------- | - | --------------------- |  | --------------------- | - | - | ----- | 
|                                |  | Fiscal Year           |  
|                                |  | 2009                  |   | 2008                  |       | 2007                  |      
|                                |  | Awards (in thousands) |   | Wtd. Avg. Grant Price |       | Awards (in thousands) |       | Wtd. Avg. Grant Price |   | Awards (in thousands) |  | Wtd. Avg. Grant Price |  
|Nonvested, beginning balance    |  | 5,789                 |   | $                     | 49.24 |                       | 3,982 |                       | $ | 50.16                 |  | 2,008                 |   | $ | 51.64 | 
|Granted                         |  | 3,520                 |   |                       | 36.47 |                       | 2,204 |                       |   | 47.74                 |  | 2,192                 |   |   | 48.19 | 
|Assumed from Kyphon acquisition |  |                      |   |                       |      |                       | 402   |                       |   | 46.88                 |  |                      |   |   |      | 
|Vested                          |  | (564                  | ) |                       | 47.42 |                       | (492  | )                     |   | 47.60                 |  | (112                  | ) |   | 47.57 | 
|Forfeited                       |  | (399                  | ) |                       | 51.17 |                       | (307  | )                     |   | 49.88                 |  | (106                  | ) |   | 51.16 | 
|Nonvested at year-end           |  | 8,346                 |   | $                     | 43.88 |                       | 5,789 |                       | $ | 49.24                 |  | 3,982                 |   | $ | 50.16 | 

Unrecognized
compensation expense related to restricted stock awards as of April 24, 2009
was $173 million and is expected to be recognized over a weighted average
period of 2.8 years and will be adjusted for any future changes in estimated
forfeitures.

|    |             
|--- | ------------
|13. | Income Taxes

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

|                             |  |             |       |      |   |       |  |   |       | 
|---------------------------- |  | ----------- | ----- | ---- | - | ----- |  | - | ----- | 
|                             |  | Fiscal Year |      
|(in
 millions)               |  | 2009        |       | 2008 |   | 2007  | 
|U.S.                         |  | $           | 1,138 |      | $ | 713   |  | $ | 1,579 | 
|International                |  |             | 1,456 |      |   | 2,172 |  |   | 1,936 | 
|Earnings before income taxes |  | $           | 2,594 |      | $ | 2,885 |  | $ | 3,515 | 

65

---

Medtronic,
Inc. 
Notes to Consolidated Financial Statements

|                                             |  |             |      |      |   |      |   |   |      |  
|-------------------------------------------- |  | ----------- | ---- | ---- | - | ---- | - | - | ---- | -
|The provision
 for income taxes consists of: |  |             |      |      |   |     
|                                             |  |             |      |      |   |      |   |   |      |  
|                                             |  | Fiscal Year |     
|(in
 millions)                               |  | 2009        |      | 2008 |   | 2007 |  
|Current tax
 expense:                        |  |             |      |      |   |      |   |   |      |  
|U.S.                                         |  | $           | 264  |      | $ | 458  |   | $ | 712  |  
|International                                |  |             | 291  |      |   | 267  |   |   | 239  |  
|Total current
 tax expense                   |  |             | 555  |      |   | 725  |   |   | 951  |  
|Deferred tax expense (benefit):              |  |             |      |      |   |      |   |   |      |  
|U.S.                                         |  |             | 4    |      |   | (40  | ) |   | (216 | )
|International                                |  |             | (134 | )    |   | (31  | ) |   | (22  | )
|Net deferred
 tax expense (benefit)          |  |             | (130 | )    |   | (71  | ) |   | (238 | )
|Total provision for income taxes             |  | $           | 425  |      | $ | 654  |   | $ | 713  |  

Deferred
taxes arise because of the different treatment of transactions for financial
statement accounting and income tax accounting, known as temporary
differences. The Company records the tax effect of these temporary differences
as deferred tax assets and deferred tax liabilities. Deferred tax assets
generally represent items that can be used as a tax deduction or credit in a
tax return in future years for which the Company has already recorded the tax
benefit in the consolidated statements of earnings. The Company establishes
valuation allowances for deferred tax assets when the amount of expected future
taxable income is not likely to support the use of the deduction or credit. The
Company has established valuation allowances for federal, state and foreign net
operating losses, credit carryforwards, capital loss carryforwards and deferred
tax assets which are capital in nature in the amount of $234 million and $177
million at April 24, 2009 and April 25, 2008, respectively. These carryover
attributes expire at various points in time, from within a year to no
expiration date. These valuation allowances would result in a reduction to the provision for income taxes in the consolidated
statement of earnings, if they are ultimately not required. Deferred tax
liabilities generally represent tax expense recognized in the consolidated
financial statements for which payment has been deferred or expense has already
been taken as a deduction on the Companys tax return but has not yet been
recognized as an expense in the consolidated statements of earnings. Deferred
tax assets/(liabilities) are comprised of the following:

|                                                                                       |  |                |       |                |   |       |  
|-------------------------------------------------------------------------------------- |  | -------------- | ----- | -------------- | - | ----- | -
|(in millions)                                                                          |  | April 24, 2009 |       | April 25, 2008 |  
|Deferred tax assets:                                                                   |  |                |       |                |   |       |  
|Inventory (intercompany profit in inventory
 and excess of tax over book valuation)    |  | $              | 315   |                | $ | 265   |  
|Convertible debt interest                                                              |  |                | 215   |                |   | 254   |  
|Unrealized loss on available for sale
 securities and derivative financial instruments |  |                |      |                |   | 186   |  
|Stock-based compensation                                                               |  |                | 185   |                |   | 130   |  
|Accrued liabilities                                                                    |  |                | 143   |                |   | 128   |  
|Federal and state benefit on uncertain tax
 positions                                  |  |                | 111   |                |   | 112   |  
|Accrued legal reserves                                                                 |  |                | 156   |                |   | 90    |  
|Net operating loss and credit carryforwards                                            |  |                | 136   |                |   | 15    |  
|Pension and post-retirement benefits                                                   |  |                | 76    |                |   |      |  
|Unrealized currency loss                                                               |  |                | 43    |                |   | 6     |  
|Allowance for doubtful accounts                                                        |  |                | 12    |                |   | 24    |  
|Unrealized loss on equity investments                                                  |  |                | 15    |                |   | 14    |  
|Warranty reserves                                                                      |  |                | 7     |                |   | 15    |  
|Other                                                                                  |  |                | 113   |                |   | 98    |  
|Total deferred tax assets (net of valuation
 allowance)                                |  |                | 1,527 |                |   | 1,337 |  
|                                                                                       |  |                |       |                |   |       |  
|Deferred tax liabilities:                                                              |  |                |       |                |   |       |  
|Intangible assets                                                                      |  |                | (595  | )              |   | (488  | )
|Realized loss on derivative financial
 instruments                                     |  |                | (113  | )              |   | (103  | )
|Unrealized gain on available for sale
 securities and derivative financial instruments |  |                | (100  | )              |   |      |  
|Accumulated depreciation                                                               |  |                | (28   | )              |   | (8    | )
|Pension and post-retirement benefits                                                   |  |                |      |                |   | (8    | )
|Other                                                                                  |  |                | (21   | )              |   | (27   | )
|Total deferred tax liabilities                                                         |  |                | (857  | )              |   | (634  | )
|                                                                                       |  |                |       |                |   |       |  
|Deferred tax assets, net                                                               |  | $              | 670   |                | $ | 703   |  

66

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

The Companys effective income tax rate varied from the U.S.
Federal statutory tax rate as follows:

|                                                                        |  |             |       |      |  |       |   |  |       |  
|----------------------------------------------------------------------- |  | ----------- | ----- | ---- |  | ----- | - |  | ----- | -
|                                                                        |  | Fiscal Year |      
|                                                                        |  | 2009        |       | 2008 |  | 2007  |  
|U.S. Federal statutory tax rate                                         |  |             | 35.0  | %    |  | 35.0  | % |  | 35.0  | %
|Increase (decrease) in tax rate resulting
 from:                        |  |             |       |      |  |       |   |  |       |  
|U.S. state taxes, net of Federal tax
 benefit                           |  |             | 0.6   |      |  | 1.1   |   |  | 1.2   |  
|Research and development credit                                         |  |             | (1.5  | )    |  | (0.6  | ) |  | (0.4  | )
|Domestic production activities                                          |  |             | (0.5  | )    |  | (0.4  | ) |  | (0.2  | )
|International                                                           |  |             | (19.5 | )    |  | (18.3 | ) |  | (12.9 | )
|                                                                        |  |             |       |      |  |       |   |  |       |  
|Impact of special, restructuring, certain litigation
 and IPR&D charges |  |             | 9.0   |      |  | 5.9   |   |  | 0.3   |  
|Reversal of excess tax accruals                                         |  |             | (5.1  | )    |  |      |   |  | (3.7  | )
|Other, net                                                              |  |             | (1.6  | )    |  |      |   |  | 1.0   |  
|                                                                        |  |             |       |      |  |       |   |  |       |  
|Effective tax rate                                                      |  |             | 16.4  | %    |  | 22.7  | % |  | 20.3  | %

In
fiscal year 2009, the Company recorded a $132 million certain tax benefit
associated with the reversal of excess tax accruals in connection with the
settlement of certain issues reached with the U.S. Internal Revenue Service
(IRS) involving the review of the Companys fiscal year 2005 and fiscal year
2006 domestic income tax returns, the resolution of various state audit
proceedings covering fiscal years 1997 through 2007 and the completion of
foreign audits covering various years. The $132 million certain tax benefit was
recorded in the provision for income taxesin
the consolidated statement of earnings for fiscal year 2009.

In
fiscal year 2007, the Company recorded a $129 million certain tax benefit
associated with the reversal of excess tax accruals in connection with the
settlement reached with the IRS involving the review of the Companys fiscal
year 2003 and fiscal year 2004 domestic income tax returns, and the resolution
of competent authority issues for fiscal year 1992 through fiscal year 2000.
The $129 million certain tax benefit was recorded in the provision for income taxes in the
consolidated statement of earnings for fiscal year 2007.

The
Company has not provided U.S. income taxes on certain of its non-U.S.
subsidiaries undistributed earnings as such amounts are permanently reinvested
outside the U.S. At April 24, 2009 and April 25, 2008, such earnings were
approximately $9.738 billion and $8.338 billion, respectively. Currently, the
Companys operations in Puerto Rico, Switzerland and Ireland have various tax
incentive grants. Unless these grants are extended, they will expire between
fiscal years 2010 and 2027.

As
a result of the implementation of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN No. 48), effective April 28, 2007, the
Company recognized a $1 million decrease in its existing liabilities for
uncertain tax positions which has been recorded as an increase to the opening
balance of retained earnings for fiscal year 2008. The Company had $431 million
and $455 million of gross unrecognized tax benefits as of April 24, 2009 and
April 25, 2008, respectively. A reconciliation of the beginning and ending
amount of unrecognized tax benefits for fiscal years 2009 and 2008 is as
follows:

|                                                             |  |               |      |      |   |     |  
|------------------------------------------------------------ |  | ------------- | ---- | ---- | - | --- | -
|                                                             |  | Fiscal
 Years |     
|(in millions)                                                |  | 2009          |      | 2008
|Gross
 unrecognized tax benefits at beginning of fiscal year |  | $             | 455  |      | $ | 408 |  
|Gross
 increases:                                            |  |               |      |      |   |     |  
|Prior year
 tax positions                                    |  |               | 3    |      |   | 21  |  
|Current year
 tax positions                                  |  |               | 106  |      |   | 51  |  
|Gross
 decreases:                                            |  |               |      |      |   |     |  
|Prior year
 tax positions                                    |  |               | (116 | )    |   | (23 | )
|Settlements                                                  |  |               | (15  | )    |   | (2  | )
|Statute of
 limitation lapses                                |  |               | (2   | )    |   |    |  
|Gross
 unrecognized tax benefits at end of fiscal year       |  | $             | 431  |      | $ | 455 |  

67

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

If
all of the Companys unrecognized tax benefits as of April 24, 2009 and April
25, 2008 were recognized, $360 million and $370 million would impact the
Companys effective tax rate, respectively. Although the Company believes that
it has adequately provided for liabilities resulting from tax assessments by
taxing authorities, positions taken by these tax authorities could have a
material impact on the Companys effective tax rate in future periods. The
Company has recorded the FIN No. 48 liability as a long-term liability, as it
does not expect significant payments to occur or the total amount of
unrecognized tax benefits to change significantly over the next 12 months.
Prior to the adoption of FIN No. 48, the Company classified uncertain tax
positions in current accrued income taxes
on the consolidated balance sheet.

The
Company recognizes interest and penalties related to income tax matters in the provision for income taxes in the
consolidated statement of earnings and records the liability in the current or
long-term income taxes payable, as appropriate. The Company had $114 million
and $126 million of accrued gross interest and penalties as of April 24, 2009
and April 25, 2008, respectively. During the fiscal year ended April 24, 2009,
the Company recognized interest expense, net of tax benefit, of approximately
$18 million in the provision for income
taxes in the consolidated statement of earnings.

Tax
audits associated with the allocation of income, and other complex issues, may
require an extended period of time to resolve and may result in income tax
adjustments if changes to the Companys allocation are required between
jurisdictions with different tax rates. Tax authorities periodically review the
Companys tax returns and propose adjustments to the Companys tax filings. The
IRS has settled its audits with the Company for all years through fiscal year
1996. Tax years settled with the IRS may remain open for foreign tax audits and
competent authority proceedings. Competent authority proceedings are a means to
resolve intercompany pricing disagreements between countries.

In
August 2003, the IRS proposed adjustments arising out of its audit of the
fiscal years 1997, 1998 and 1999 tax returns. The Company initiated defense of
these adjustments at the IRS appellate level and in the second quarter of
fiscal year 2006 the Company reached settlement on most, but not all matters. The
remaining issue relates to the allocation of income between Medtronic, Inc.,
and its wholly owned subsidiary in Switzerland. On April 16, 2008, the IRS
issued a statutory notice of deficiency with respect to this remaining issue.
The Company filed a Petition with the U.S. Tax Court on July 14, 2008 objecting
to the deficiency and intends to defend its position vigorously.

In
September 2005, the IRS issued its audit report for fiscal years 2000, 2001 and
2002. In addition, the IRS issued its audit report for fiscal years 2003 and
2004 in March 2007. The Company has reached agreement with the IRS on
substantially all of the proposed adjustments for these fiscal years 2000
through 2004. The only item of significance that remains open for these years
relates to the carryover impact of the allocation of income issue proposed for
fiscal years 1997 through 1999.

In
March 2009, the IRS issued its audit report for fiscal years 2005 and 2006. The
Company has reached agreement with the IRS on many, but not all, of the
proposed adjustments for fiscal years 2005 and 2006. The significant issues
that remain unresolved relate to the allocation of income between Medtronic,
Inc. and its wholly owned subsidiaries and the timing of the deductibility of a
settlement payment. For the proposed adjustments that the Company does not agree with, the Company has filed its protest with the IRS.

The
Companys reserve for the uncertain tax positions related to these significant
unresolved matters with the IRS, described above, is subject to a high degree
of estimation and management judgment. Resolution of these significant
unresolved matters, or positions taken by the IRS or foreign tax authorities
during future tax audits, could have a material impact on the Companys
financial results in future periods. The Company continues to believe that its
reserves for uncertain tax positions are appropriate and has meritorious
defenses for its tax filings and will vigorously defend them during the audit
process, appellate process and through litigation in courts, as necessary.

14.     Retirement Benefit Plans

The
Company sponsors various retirement benefit plans, including defined benefit
pension plans (pension benefits), post-retirement medical plans
(post-retirement benefits), defined contribution savings plans and termination
indemnity plans, covering substantially all U.S. employees and many employees
outside the U.S. The cost of these plans was $223 million, $222 million and
$184 million in fiscal years 2009, 2008 and 2007, respectively. The Company
adopted the measurement date provisions of SFAS No. 158 effective April 26,
2008. The U.S. plans and some plans outside the U.S. previously had a
measurement date of January 31. All plans now measure their funded status as of
the Companys year end. The adoption of the measurement date provisions of SFAS
No. 158 resulted in an after-tax decrease to shareholders equity of $13
million, a decrease to other long-term assets of $5 million and an increase to
long-term accrued compensation and retirement benefits of $8 million.

68

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

In
the U.S., the Company maintains a qualified pension plan designed to provide
guaranteed minimum retirement benefits to all eligible U.S. employees. Pension
coverage for non-U.S. employees of the Company is provided, to the extent
deemed appropriate, through separate plans. In addition, U.S. and Puerto Rico
employees of the Company are also eligible to receive specified Company paid
healthcare and life insurance benefits through the Companys post-retirement
medical plans. In addition to the benefits provided under the qualified pension
plan, retirement benefits associated with wages in excess of the IRS allowable
limits are provided to certain employees under a non-qualified plan.

As
of April 24, 2009 and 2008, the net (underfunded)/overfunded status of the
Companys benefit plans was $(157) million and $90 million, respectively.

The
change in benefit obligation and funded status of the Companys employee
retirement plans follow:

|                                                                        |  |                        |       |                            |   |                           |   |      |     |      |   |      |   |   |     |   |   |     |  
|----------------------------------------------------------------------- |  | ---------------------- | ----- | -------------------------- | - | ------------------------- | - | ---- | --- | ---- | - | ---- | - | - | --- | - | - | --- | -
|                                                                        |  | U.S.
 Pension Benefits |       | Non-U.S.
 Pension Benefits |   | Post-Retirement
 Benefits |  
|                                                                        |  | Fiscal Year            |       | Fiscal Year                |   | Fiscal Year               |  
|(in millions)                                                           |  | 2009                   |       | 2008                       |   | 2009                      |   | 2008 |     | 2009 |   | 2008 |  
|                                                                       
|Accumulated benefit obligation at end of
 year:                         |  | $                      | 759   |                            | $ | 751                       |   | $    | 308 |      | $ | 324  |   | $ | 174 |   | $ | 184 |  
|                                                                        |  |                        |       |                            |   |                           |   |      |     |      |   |      |   |   |     |   |   |     |  
|Change in projected benefit obligation:                                 |  |                        |       |                            |   |                           |   |      |     |      |   |      |   |   |     |   |   |     |  
|Projected benefit obligation at beginning
 of year                      |  | $                      | 902   |                            | $ | 868                       |   | $    | 400 |      | $ | 353  |   | $ | 184 |   | $ | 196 |  
|Adjustment due to adoption of SFAS No. 158
 measurement date provisions |  |                        | 34    |                            |   |                          |   |      | 4   |      |   |     |   |   | 6   |   |   |    |  
|Service cost                                                            |  |                        | 74    |                            |   | 72                        |   |      | 29  |      |   | 32   |   |   | 14  |   |   | 16  |  
|Interest cost                                                           |  |                        | 60    |                            |   | 52                        |   |      | 19  |      |   | 16   |   |   | 12  |   |   | 12  |  
|Employee contributions                                                  |  |                        |      |                            |   |                          |   |      | 10  |      |   | 9    |   |   | 5   |   |   | 4   |  
|Plan amendments                                                         |  |                        |      |                            |   | 1                         |   |      |    |      |   | 1    |   |   |    |   |   |    |  
|Actuarial gain                                                          |  |                        | (199  | )                          |   | (70                       | ) |      | (8  | )    |   | (49  | ) |   | (36 | ) |   | (35 | )
|Benefits paid                                                           |  |                        | (29   | )                          |   | (24                       | ) |      | (8  | )    |   | (14  | ) |   | (12 | ) |   | (10 | )
|Medicare Part D reimbursements                                          |  |                        |      |                            |   |                          |   |      |    |      |   |     |   |   | 1   |   |   |    |  
|Special termination benefits                                            |  |                        |      |                            |   | 3                         |   |      |    |      |   |     |   |   |    |   |   | 1   |  
|Foreign currency exchange rate changes                                  |  |                        |      |                            |   |                          |   |      | (73 | )    |   | 52   |   |   |    |   |   |    |  
|Projected benefit obligation at end of year                             |  |                        | 842   |                            |   | 902                       |   |      | 373 |      |   | 400  |   |   | 174 |   |   | 184 |  
|                                                                        |  |                        |       |                            |   |                           |   |      |     |      |   |      |   |   |     |   |   |     |  
|Change in plan assets:                                                  |  |                        |       |                            |   |                           |   |      |     |      |   |      |   |   |     |   |   |     |  
|Fair value of plan assets at beginning of
 year                         |  |                        | 1,100 |                            |   | 1,008                     |   |      | 335 |      |   | 280  |   |   | 141 |   |   | 127 |  
|Adjustment due to adoption of SFAS No. 158
 measurement date provisions |  |                        | (25   | )                          |   |                          |   |      | 1   |      |   |     |   |   | (3  | ) |   |    |  
|Actual (loss)/return on plan assets                                     |  |                        | (302  | )                          |   | 31                        |   |      | (49 | )    |   | (26  | ) |   | (41 | ) |   | 1   |  
|Employer contributions                                                  |  |                        | 89    |                            |   | 85                        |   |      | 66  |      |   | 42   |   |   | 18  |   |   | 19  |  
|Employee contributions                                                  |  |                        |      |                            |   |                          |   |      | 10  |      |   | 9    |   |   | 5   |   |   | 4   |  
|Benefits paid                                                           |  |                        | (29   | )                          |   | (24                       | ) |      | (8  | )    |   | (14  | ) |   | (12 | ) |   | (10 | )
|Foreign currency exchange rate changes                                  |  |                        |      |                            |   |                          |   |      | (64 | )    |   | 44   |   |   |    |   |   |    |  
|Fair value of plan assets at end of year                                |  |                        | 833   |                            |   | 1,100                     |   |      | 291 |      |   | 335  |   |   | 108 |   |   | 141 |  
|                                                                        |  |                        |       |                            |   |                           |   |      |     |      |   |      |   |   |     |   |   |     |  
|Funded status at end of year:                                           |  |                        |       |                            |   |                           |   |      |     |      |   |      |   |   |     |   |   |     |  
|Fair value of plan assets                                               |  |                        | 833   |                            |   | 1,100                     |   |      | 291 |      |   | 335  |   |   | 108 |   |   | 141 |  
|Benefit obligations                                                     |  |                        | 842   |                            |   | 902                       |   |      | 373 |      |   | 400  |   |   | 174 |   |   | 184 |  
|Overfunded/(underfunded) status of the plan                             |  |                        | (9    | )                          |   | 198                       |   |      | (82 | )    |   | (65  | ) |   | (66 | ) |   | (43 | )
|Recognized asset (liability)                                            |  | $                      | (9    | )                          | $ | 198                       |   | $    | (82 | )    | $ | (65  | ) | $ | (66 | ) | $ | (43 | )
|                                                                        |  |                        |       |                            |   |                           |   |      |     |      |   |      |   |   |     |   |   |     |  
|Amounts recognized on the consolidated
 balance sheet consist of:       |  |                        |       |                            |   |                           |   |      |     |      |   |      |   |   |     |   |   |     |  
|Non-current assets                                                      |  | $                      | 82    |                            | $ | 300                       |   | $    | 1   |      | $ | 2    |   | $ |    |   | $ |    |  
|Current liabilities                                                     |  |                        | (5    | )                          |   | (5                        | ) |      | (1  | )    |   | (2   | ) |   |    |   |   |    |  
|Non-current liabilities                                                 |  |                        | (86   | )                          |   | (97                       | ) |      | (82 | )    |   | (65  | ) |   | (66 | ) |   | (43 | )
|                                                                        |  |                        |       |                            |   |                           |   |      |     |      |   |      |   |   |     |   |   |     |  
|Recognized asset (liability)                                            |  | $                      | (9    | )                          | $ | 198                       |   | $    | (82 | )    | $ | (65  | ) | $ | (66 | ) | $ | (43 | )
|                                                                        |  |                        |       |                            |   |                           |   |      |     |      |   |      |   |   |     |   |   |     |  
|Amounts recognized in accumulated other
 comprehensive (loss)/income:   |  |                        |       |                            |   |                           |   |      |     |      |   |      |   |   |     |   |   |     |  
|                                                                       
|Prior service (benefit)/cost                                            |  | $                      | (7    | )                          | $ | (9                        | ) | $    | 7   |      | $ | 9    |   | $ | 2   |   | $ | 3   |  
|Net actuarial loss                                                      |  |                        | 465   |                            |   | 221                       |   |      | 90  |      |   | 41   |   |   | 44  |   |   | 19  |  
|Ending balance                                                          |  | $                      | 458   |                            | $ | 212                       |   | $    | 97  |      | $ | 50   |   | $ | 46  |   | $ | 22  |  

69

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

In
certain countries outside the U.S., fully funding pension plans is not a common
practice, as funding provides no income tax benefit. Consequently, certain
pension plans were partially funded as of April 24, 2009 and April 25, 2008.
U.S. and non-U.S. plans with accumulated benefit obligations in excess of plan
assets consist of the following:

|                                |  |              |     |      |   |     | 
|------------------------------- |  | ------------ | --- | ---- | - | --- | 
|                                |  | Fiscal
 Year |    
|(in millions)                   |  | 2009         |     | 2008 |  
|Accumulated
 benefit obligation |  | $            | 239 |      | $ | 129 | 
|Projected
 benefit obligation   |  |              | 256 |      |   | 159 | 
|Plan assets
 at fair value      |  |              | 104 |      |   | 15  | 

Plans
with projected benefit obligations in excess of plan assets:

|                              |  |              |     |      |   |     | 
|----------------------------- |  | ------------ | --- | ---- | - | --- | 
|                              |  | Fiscal
 Year |    
|(in millions)                 |  | 2009         |     | 2008 |  
|Projected
 benefit obligation |  | $            | 432 |      | $ | 403 | 
|Plan assets
 at fair value    |  |              | 258 |      |   | 232 | 

The
net periodic benefit costs of the plans include the following components:

|                                    |  |                        |     |                            |   |                           |   |      |     |      |   |      |   |      |     |      |   |      |   |   |     |   |   |     |   |   |    |  
|----------------------------------- |  | ---------------------- | --- | -------------------------- | - | ------------------------- | - | ---- | --- | ---- | - | ---- | - | ---- | --- | ---- | - | ---- | - | - | --- | - | - | --- | - | - | -- | -
|                                    |  | U.S.
 Pension Benefits |     | Non-U.S.
 Pension Benefits |   | Post-Retirement
 Benefits |  
|                                    |  | Fiscal
 Year           |     | Fiscal
 Year               |   | Fiscal
 Year              |  
|(in
 millions)                      |  | 2009                   |     | 2008                       |   | 2007                      |   | 2009 |     | 2008 |   | 2007 |   | 2009 |     | 2008 |   | 2007 |  
|Service cost                        |  | $                      | 74  |                            | $ | 72                        |   | $    | 64  |      | $ | 29   |   | $    | 32  |      | $ | 27   |   | $ | 14  |   | $ | 16  |   | $ | 13 |  
|Interest cost                       |  |                        | 60  |                            |   | 52                        |   |      | 45  |      |   | 19   |   |      | 16  |      |   | 12   |   |   | 12  |   |   | 12  |   |   | 10 |  
|Expected return on plan assets      |  |                        | (99 | )                          |   | (87                       | ) |      | (74 | )    |   | (20  | ) |      | (18 | )    |   | (13  | ) |   | (12 | ) |   | (11 | ) |   | (9 | )
|Amortization of prior service costs |  |                        | (1  | )                          |   | (1                        | ) |      | (1  | )    |   | 1    |   |      | 1   |      |   | 1    |   |   |    |   |   |    |   |   |   |  
|Amortization of net actuarial loss  |  |                        | 6   |                            |   | 15                        |   |      | 15  |      |   |     |   |      | 2   |      |   | 2    |   |   |    |   |   | 2   |   |   | 2  |  
|Net periodic benefit cost           |  |                        | 40  |                            |   | 51                        |   |      | 49  |      |   | 29   |   |      | 33  |      |   | 29   |   |   | 14  |   |   | 19  |   |   | 16 |  
|Special termination benefits        |  |                        |    |                            |   | 3                         |   |      |    |      |   |     |   |      |    |      |   |     |   |   |    |   |   | 1   |   |   |   |  
|Total cost for period               |  | $                      | 40  |                            | $ | 54                        |   | $    | 49  |      | $ | 29   |   | $    | 33  |      | $ | 29   |   | $ | 14  |   | $ | 20  |   | $ | 16 |  

The
changes in the components of unrecognized benefit plan costs for fiscal year
2009 are as follows:

|                                                                        |  |                         |     |                             |   |                             |   |   |    | 
|----------------------------------------------------------------------- |  | ----------------------- | --- | --------------------------- | - | --------------------------- | - | - | -- | 
|(in millions)                                                           |  | U.S.
 Pension
 Benefits |     | Non-U.S.
 Pension
 Benefits |   | Post-
 Retirement
 Benefits |  
|Net actuarial loss                                                      |  | $                       | 250 |                             | $ | 60                          |   | $ | 24 | 
|Adjustment due to adoption of SFAS No. 158
 measurement date provisions |  |                         | 1   |                             |   | 1                           |   |   |   | 
|Amortization of prior service costs                                     |  |                         | 1   |                             |   | (1                          | ) |   |   | 
|Amortization of net actuarial loss                                      |  |                         | (6  | )                           |   |                            |   |   |   | 
|Effect of exchange rates                                                |  |                         |    |                             |   | (13                         | ) |   |   | 
|Changes in unrecognized benefit plan costs                              |  | $                       | 246 |                             | $ | 47                          |   | $ | 24 | 

The
estimated amounts that will be amortized from accumulated other comprehensive
(loss)/income into net periodic benefit cost, before tax, in fiscal year 2010
are as follows:

|                                   |  |                         |    |                             |   |                             |  |   |   | 
|---------------------------------- |  | ----------------------- | -- | --------------------------- | - | --------------------------- |  | - | - | 
|(in millions)                      |  | U.S.
 Pension
 Benefits |    | Non-U.S.
 Pension
 Benefits |   | Post-
 Retirement
 Benefits | 
|Amortization of prior service cost |  | $                       | (1 | )                           | $ |                            |  | $ |  | 
|Amortization of net actuarial loss |  |                         | 2  |                             |   | 1                           |  |   | 2 | 
|                                   |  | $                       | 1  |                             | $ | 1                           |  | $ | 2 | 

70

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

The
actuarial assumptions were as follows:

|                                                              |  |                       |      |                           |  |                          |   |      |      |      |  |      |   |      |      |      |  |      |   |  |      |   |  |       |   |  |       |  
|------------------------------------------------------------- |  | --------------------- | ---- | ------------------------- |  | ------------------------ | - | ---- | ---- | ---- |  | ---- | - | ---- | ---- | ---- |  | ---- | - |  | ---- | - |  | ----- | - |  | ----- | -
|                                                              |  | U.S. Pension Benefits |      | Non-U.S. Pension Benefits |  | Post-Retirement Benefits |  
|                                                              |  | Fiscal Year           |      | Fiscal Year               |  | Fiscal Year              |  
|                                                              |  | 2009                  |      | 2008                      |  | 2007                     |   | 2009 |      | 2008 |  | 2007 |   | 2009 |      | 2008 |  | 2007 |  
|Weighted average assumptions  projected
 benefit obligation: |  |                       |      |                           |  |                          |   |      |      |      |  |      |   |      |      |      |  |      |   |  |      |   |  |       |   |  |       |  
|Discount rate                                                 |  |                       | 8.25 | %                         |  | 6.75                     | % |      | 6.00 | %    |  | 5.41 | % |      | 5.37 | %    |  | 4.42 | % |  | 8.25 | % |  | 6.75  | % |  | 6.00  | %
|Rate of compensation increase                                 |  |                       | 4.00 | %                         |  | 4.24                     | % |      | 4.24 | %    |  | 2.90 | % |      | 3.10 | %    |  | 3.09 | % |  | N/A  |   |  | N/A   |   |  | N/A   |  
|Healthcare cost trend rate                                    |  |                       | N/A  |                           |  | N/A                      |   |      | N/A  |      |  | N/A  |   |      | N/A  |      |  | N/A  |   |  | 8.50 | % |  | 9.00  | % |  | 10.00 | %
|Weighted average assumptions  net periodic
 benefit cost:    |  |                       |      |                           |  |                          |   |      |      |      |  |      |   |      |      |      |  |      |   |  |      |   |  |       |   |  |       |  
|Discount rate                                                 |  |                       | 6.75 | %                         |  | 6.00                     | % |      | 6.00 | %    |  | 5.37 | % |      | 4.42 | %    |  | 4.34 | % |  | 6.75 | % |  | 6.00  | % |  | 6.00  | %
|Expected return on plan assets                                |  |                       | 8.75 | %                         |  | 8.75                     | % |      | 8.75 | %    |  | 5.97 | % |      | 5.76 | %    |  | 5.59 | % |  | 8.75 | % |  | 8.75  | % |  | 8.75  | %
|Rate of compensation increase                                 |  |                       | 4.24 | %                         |  | 4.24                     | % |      | 4.24 | %    |  | 3.10 | % |      | 3.09 | %    |  | 3.07 | % |  | N/A  |   |  | N/A   |   |  | N/A   |  
|Healthcare cost trend rate                                    |  |                       | N/A  |                           |  | N/A                      |   |      | N/A  |      |  | N/A  |   |      | N/A  |      |  | N/A  |   |  | 9.00 | % |  | 10.00 | % |  | 9.00  | %

The
Companys discount rates are determined by considering current yield curves
representing high quality, long-term fixed income instruments. The resulting
discount rates are consistent with the duration of plan liabilities.

The
expected long-term rate of return on plan assets assumptions is determined
using a building block approach, considering historical averages and real
returns of each asset class. In certain countries, where historical returns are
not meaningful, consideration is given to local market expectations of
long-term returns.

Retirement Benefit Plan Investment Strategy
The Company has an account that holds the assets for both the U.S. pension plan
and other post-retirement benefits, primarily retiree medical. For investment
purposes, the plans are managed in an identical way, as their objectives are
similar.

71

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

The
Company has a Qualified Plan Committee (the Plan Committee) that sets
investment guidelines with the assistance of an external consultant. These
guidelines are established based on market conditions, risk tolerance, funding
requirements and expected benefit payments. The Plan Committee also oversees
the investment allocation process, selects the investment managers and monitors asset
performance. As pension liabilities are long-term in nature, the Company
employs a long-term total return approach to maximize the long-term rate of
return on plan assets for a prudent level of risk. An annual analysis on the
risk versus the return of the investment portfolio is conducted to justify the
expected long-term rate of return assumption.

The
investment portfolio contains a diversified portfolio of investment categories,
including equities, fixed income securities, hedge funds and private equity.
Securities are also diversified in terms of domestic and international
securities, short- and long-term securities, growth and value styles, large cap
and small cap stocks, active and passive management and derivative-based
styles. The Plan Committee believes with prudent risk tolerance and asset
diversification, the account should be able to meet its pension and other
post-retirement obligations in the future.

Plan
assets also include investments in the Companys common stock of $38 million
and $62 million at April 24, 2009 and April 25, 2008, respectively.

The
Companys pension plan weighted average asset allocations and the target
allocations at April 24, 2009 and April 25, 2008, by asset category, is as
follows:

U.S. Plans

|                   |  |                              |   |                    |     |      |  |      |   |  |     |   | 
|------------------ |  | ---------------------------- | - | ------------------ | --- | ---- |  | ---- | - |  | --- | - | 
|                   |  | Pension
 Benefits Allocation |   | Target
 Allocation |    
|                   |  | 2009                         |   | 2008               |     | 2009 |  | 2008 |  
|Asset Category     |  |                              |   |                    |     |      |  |      |   |  |     |   | 
|Equity
 securities |  | 46                           | % |                    | 53  | %    |  | 60   | % |  | 60  | % | 
|Debt securities    |  | 19                           |   |                    | 11  |      |  | 10   |   |  | 10  |   | 
|Other              |  | 35                           |   |                    | 36  |      |  | 30   |   |  | 30  |   | 
|Total              |  | 100                          | % |                    | 100 | %    |  | 100  | % |  | 100 | % | 
|                   |  |                              |   |                    |     |      |  |      |   |  |     |   | 
|Non-U.S. Plans     |  |                              |   |                    |     |      |  |      |   |  |     |   | 
|                   |  |                              |   |                    |     |      |  |      |   |  |     |   | 
|                   |  | Pension
 Benefits Allocation |   | Target
 Allocation |    
|                   |  | 2009                         |   | 2008               |     | 2009 |  | 2008 |  
|Asset Category     |  |                              |   |                    |     |      |  |      |   |  |     |   | 
|Equity
 securities |  | 36                           | % |                    | 41  | %    |  | 37   | % |  | 41  | % | 
|Debt
 securities   |  | 16                           |   |                    | 12  |      |  | 15   |   |  | 14  |   | 
|Cash               |  | 4                            |   |                    | 1   |      |  |     |   |  |    |   | 
|Other              |  | 44                           |   |                    | 46  |      |  | 48   |   |  | 45  |   | 
|Total              |  | 100                          | % |                    | 100 | %    |  | 100  | % |  | 100 | % | 

It
is the Companys policy to fund retirement costs within the limits of allowable
tax deductions. During fiscal year 2009, the Company made discretionary
contributions of approximately $89 million to the U.S. pension plan and
approximately $18 million to fund post-retirement benefits. Internationally,
the Company contributed approximately $66 million for pension benefits during
fiscal year 2009. During fiscal year 2010, the Company anticipates that its
contribution for pension benefits and post-retirement benefits will be
consistent with those contributions made during fiscal year 2009. Based on the
guidelines under the U.S. Employee Retirement Income Security Act (ERISA) and
the various guidelines which govern the plans outside the U.S., the majority of
anticipated fiscal year 2010 contributions will be discretionary.

Retiree
benefit payments, which reflect expected future service, are anticipated to be
paid as follows:

|              |  |                         |     |                              |   |                           |  |                                   |     |  |   |    | 
|------------- |  | ----------------------- | --- | ---------------------------- | - | ------------------------- |  | --------------------------------- | --- |  | - | -- | 
|(in millions) |  | U.S. 
 Pension Benefits |     | Non-U.S.
 
 Pension Benefits |   | Post-Retirement
 Benefits | 
|Fiscal Year   |  | Gross
 Payments         |     | Gross
 Payments              |   | Gross
 Payments           |  | Gross
 Medicare 
 Part D Receipts |    
|2010          |  | $                       | 32  |                              | $ | 12                        |  | $                                 | 8   |  | $ | 1  | 
|2011          |  |                         | 36  |                              |   | 14                        |  |                                   | 9   |  |   | 1  | 
|2012          |  |                         | 41  |                              |   | 15                        |  |                                   | 10  |  |   | 1  | 
|2013          |  |                         | 46  |                              |   | 16                        |  |                                   | 11  |  |   | 1  | 
|2014          |  |                         | 52  |                              |   | 17                        |  |                                   | 13  |  |   | 1  | 
|2015  2019   |  |                         | 377 |                              |   | 105                       |  |                                   | 96  |  |   | 13 | 
|Total         |  | $                       | 584 |                              | $ | 179                       |  | $                                 | 147 |  | $ | 18 | 

72

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

In
August 2006, the Pension Protection Act was signed into law in the U.S. The
Pension Protection Act replaces the funding requirements for defined benefit
pension plans by subjecting defined benefit plans to 100 percent of the current
liability funding target. Defined benefit plans with a funding status of less
than 80 percent of the current liability are defined as being at risk. The
Pension Protection Act was effective for the 2008 plan year. The Companys U.S.
qualified defined benefit plans are funded in excess of 80 percent, and
therefore the Company expects that the plans will not be subject to the at
risk funding requirements of the Pension Protection Act and that the law will
not have a material impact on future contributions.

The
healthcare cost trend rate for post-retirement benefit plans was 8.5 percent at
April 24, 2009. The trend rate is expected to decline to 5.0 percent over a
five-year period. Assumed healthcare cost trend rates have a significant effect
on the amounts reported for the healthcare plans. A one-percentage-point change
in assumed healthcare cost trend rates would have the following effects:

|                                              |  |                                  |   |                                  |   |    |  
|--------------------------------------------- |  | -------------------------------- | - | -------------------------------- | - | -- | -
|(in millions)                                 |  | One-Percentage
 
 Point Increase |   | One-Percentage
 
 Point Decrease |  
|Effect on
 post-retirement benefit cost       |  | $                                | 2 |                                  | $ | (2 | )
|Effect on
 post-retirement benefit obligation |  |                                  | 9 |                                  |   | (9 | )

Defined
Contribution Savings Plans The Company has defined contribution savings plans
that cover substantially all U.S. employees and certain non-U.S. employees. The
general purpose of these plans is to provide additional financial security
during retirement by providing employees with an incentive to make regular
savings. Company contributions to the plans are based on employee contributions
and Company performance and starting in fiscal year 2006 the entire match is
made in cash. Expense under these plans was $103 million, $85 million and $64
million in fiscal years 2009, 2008 and 2007, respectively.

Effective
May 1, 2005, the Company froze participation in the existing defined benefit
pension plan in the U.S. and implemented two new plans including an additional
defined benefit pension plan and a new defined contribution pension plan,
respectively: the Personal Pension Account (PPA) and the Personal Investment
Account (PIA). Employees in the U.S. hired on or after May 1, 2005 have the
option to participate in either the PPA or the PIA. Participants in the PPA
receive an annual allocation of their salary and bonus on which they will
receive an annual guaranteed rate of return which is based on the 10-year
Treasury bond rate. Participants in the PIA also receive an annual allocation
of their salary and bonus; however, they are allowed to determine how to invest
their funds among identified fund alternatives. The cost associated with the
PPA is included in the U.S. Pension Benefits in the tables presented earlier.
The defined contribution cost associated with the PIA was approximately $37
million, $30 million and $25 million in fiscal years 2009, 2008 and 2007,
respectively.

15.     Leases

The
Company leases office, manufacturing and research facilities and warehouses, as
well as transportation, data processing and other equipment under capital and
operating leases. A substantial number of these leases contain options that
allow the Company to renew at the fair rental value on the date of renewal.

Future
minimum payments under capitalized leases and non-cancelable operating leases
at April 24, 2009 are:

|                                            |  |                       |    |                     |   |     | 
|------------------------------------------- |  | --------------------- | -- | ------------------- | - | --- | 
|                                            |  |                       |    |                     |   |     | 
|(in millions)
 Fiscal Year                  |  | Capitalized
 
 Leases |    | Operating
 
 Leases |  
|2010                                        |  | $                     | 17 |                     | $ | 77  | 
|2011                                        |  |                       | 19 |                     |   | 50  | 
|2012                                        |  |                       | 19 |                     |   | 31  | 
|2013                                        |  |                       | 21 |                     |   | 23  | 
|2014                                        |  |                       |   |                     |   | 21  | 
|2015 and thereafter                         |  |                       |   |                     |   | 35  | 
|Total minimum lease payments                |  | $                     | 76 |                     | $ | 237 | 
|Less amounts representing interest          |  |                       | (9 | )                   |   | N/A | 
|Present value of net minimum lease payments |  | $                     | 67 |                     |   | N/A | 

73

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

Rent
expense for all operating leases was $150 million, $135 million and $112
million in fiscal years 2009, 2008 and 2007, respectively.

In
April 2006, the Company entered into a sale-leaseback agreement with a
financial institution whereby certain manufacturing equipment was sold to the
financial institution and is being leased by the Company over a seven year
period. The transaction has been recorded as a capital lease and included in
the preceding table. Payments for the remaining balance of the sale-leaseback
agreement are due semi-annually. The lease provides for an early buyout option
whereby the Company, at its option, could repurchase the equipment at a
predetermined fair market value in calendar year 2009.

16.     Contingencies

The
Company is involved in a number of legal actions. The outcomes of these legal
actions are not within the Companys complete control and may not be known for
prolonged periods of time. In some actions, the claimants seek damages, as well
as other relief, including injunctions barring the sale of products that are
the subject of the lawsuit, that could require significant expenditures or
result in lost revenues. In accordance with SFAS No. 5, the Company records a liability in the
consolidated financial statements for these actions when a loss is known or
considered probable and the amount can be reasonably estimated. If the
reasonable estimate of a known or probable loss is a range, and no amount
within the range is a better estimate than any other, the minimum amount of the
range is accrued. If a loss is possible but not known or probable, and can be
reasonably estimated, the estimated loss or range of loss is disclosed. In most
cases, significant judgment is required to estimate the amount and timing of a
loss to be recorded. While it is not possible to predict the outcome for most
of the matters discussed, the Company believes it is possible that costs
associated with them could have a material adverse impact on the Companys
consolidated earnings, financial position or cash flows.

Litigation with Wyeth and Cordis Corporation

On
February 22, 2008, Wyeth and Cordis filed a lawsuit against the Company and its
subsidiary, Medtronic AVE, Inc., in U.S. District Court for the District of New
Jersey, alleging that Medtronics Endeavor drug-eluting stent infringes three
U.S. Morris patents alleged to be owned by Wyeth and exclusively licensed to
Cordis. The Company believes it is indemnified for the claims made by Wyeth and
Cordis. The Company has not recorded an expense related to damages in
connection with these matters because any potential loss is not currently
probable or reasonably estimable under SFAS No. 5.

Litigation with Johnson & Johnson and
Cordis Corporation

On
February 20, 2006, an arbitration panel issued a final, non-appealable award
concluding that Medtronic Vasculars S670, S660, S540, S7 and Driver stents,
which were formerly the subject of a patent infringement dispute between
J&J and Cordis and Medtronic Vascular, are licensed under a 1997 agreement
between the two companies and subject to a covenant not to sue contained within
a 1998 amendment to the 1997 agreement. Cordis since initiated six arbitration
proceedings against Medtronic Vascular alleging that certain of the products
infringe certain patents of J&J and Cordis, and is seeking royalties for
such infringement, if any. On May 8, 2009, the parties settled the six
arbitrations, including all current and potential disputes between the two
parties under their 1997 agreement relating to coronary angioplasty stent
design and balloon material patents. As consideration for the settlement,
Medtronic paid J&J and Cordis a lump sum of $270 million on May 8, 2009,
and recorded an expense of $270 million in the matter.

Litigation with Abbott Cardiovascular Systems
Inc.

On
December 24, 1997, Abbott Cardiovascular Systems Inc. (ACS), a subsidiary of
Abbott Laboratories (Abbott), sued Medtronic Vascular in U.S. District Court
for the Northern District of California alleging that certain models of
Medtronic Vasculars bare metal stents infringe the Lau stent patents held by
ACS, and seeking injunctive relief and monetary damages. In February 2005,
following trial in Delaware federal district court, a jury determined that the
ACS Lau stent patents were valid and that Medtronics Driver, GFX, MicroStent,
S540, S660, S670, Bestent2 and S7 stents (the bare metal stents) infringe those
patents. Medtronic Vascular made numerous post-trial motions challenging the
jurys verdict of infringement and validity. In August 2005, the Court issued
an order continuing a stay of any further proceedings on the questions of
damages or willful infringement.

74

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

On
March 30, 2007, the District Court denied Medtronics post-trial motions, and on
April 24, 2007, the District Court ruled that the patents were enforceable. In
May 2007, the District Court entered judgment in favor of ACS and against
Medtronic Vascular on the issues of validity, infringement and enforceability
of the Lau patents. On May 18, 2007, the District Court confirmed that a trial
on issues of damages or willful infringement would be deferred pending the U.S.
Court of Appeals for the Federal Circuit review of the liability issues
concerning alleged infringement, invalidity and inequitable conduct.

ACS
filed a motion for injunction in the District Court on June 29, 2007 on both
the bare metal stents and the Endeavor drug-eluting stent, which had never
previously been named as an accused product in the lawsuit. On July 6, 2007,
Medtronic filed its motion to stay ACSs June 29, 2007 motion for a permanent
injunction pending arbitration under a 2002 agreement with Abbott providing
Medtronic with a license that Medtronic asserted precluded the ACS injunction
motion.

On
August 6, 2007, the Delaware District Court granted Medtronics July 6, 2007
motion to stay, in part, permitting arbitration to proceed on Medtronics
assertion that it has a license to practice the U.S. Lau patents in its
Endeavor stent. On February 26, 2008, an arbitrator concluded that the Company
was not licensed to practice the U.S. Lau patents in its Endeavor stent and ACS
filed a sealed motion with the District Court seeking to lift the July 6, 2007
stay of proceedings on ACSs motion for an injunction as to Endeavor. On
September 29, 2008, the Delaware District Court granted ACSs motion to lift
the stay of proceedings with regard to Endeavor and then denied ACSs motion
for a permanent injunction with respect to both Driver and Endeavor. On October
2, 2008, Medtronic filed its Notice of Appeal to the U.S. Court of Appeals for
the Federal Circuit with respect to the May 2007 judgment in favor of ACS, and
all other adverse rulings to Medtronic. On October 15, 2008, ACS appealed from
the District Courts September 29, 2008 order denying ACSs request for a
permanent injunction. Medtronic filed its principal brief in the appeal on
January 26, 2009. Briefing is expected to be completed by early June 2009,
after which the U.S. Court of Appeals for the Federal Circuit will set a date
for hearing oral argument.

On
June 18, 2008, Abbott initiated legal proceedings in the Netherlands against
Medtronic BV, Medtronic Trading NL BV and BV Medtronic FSC asserting that
certain of Medtronics Driver, Endeavor and Endeavor Resolute large vessel
diameter stents infringe an Abbott European Lau patent issued on June 18, 2008.
On August 28, 2008, a judge of the district court granted Abbott a preliminary
injunction against Medtronic prohibiting Medtronic from making, selling and
distributing certain large vessel diameter Medtronic stents in the Netherlands.
On March 11, 2009 the three judge Netherlands trial court issued an opinion in
favor of Medtronic, finding that the accused large vessel stents did not
infringe Abbotts European Lau patent and permitting Medtronic to seek damages
for the time during which the preliminary injunction was in effect. The court
did not decide whether the European Lau patent was valid, but deferred ruling
until the European Patent Office ruled on pending oppositions to the patent.
The European Lau patent remains subject to challenges to the patents validity
in opposition proceedings in the European patent office. Abbott has filed
similar lawsuits against Medtronics large vessel bare metal stents in France,
Germany and Japan. In the German proceeding, a trial date is set for August 20,
2009. In France, a trial is scheduled for November 30, 2009. In Japan, a series of
hearings are being held throughout 2009. The first hearing was on February 2,
2009 , and the next will be on July 15, 2009.

In
response to Medtronics Request for Reexamination for each of the four Lau
patents, in December 2006, the United States Patent and Trademark Office (USPTO) issued an initial office action finding
that the claims which Medtronic products were previously found to have
infringed were not patentable. The USPTO granted a second petition to reexamine
each of the four Lau patents in 2007. On June 30, 2008, the USPTO determined
for a second time that all of the claims of the earliest Lau patent (US
5,514,154) that Medtronic was found to infringe were invalid. After granting a
third petition to reexamine two of the other four Lau patents (US 6,066,167 and
6,066,168) in 2008, on September 30, 2008, the USPTO again determined that all
claims of those two Lau patents that Medtronic was found to have infringed were
invalid. Finally, with respect to the fourth and latest issued Lau patent (US
6,432,133), on March 3, 2008, the USPTO again determined that all claims of
this Lau patent that Medtronic was found to infringe were invalid with the
exception of a single claim. This latest issued Lau patent is involved in a
reexamination proceeding, which allows Medtronic to participate in the USPTO
proceedings. Responses to the USPTOs rejection of the claims of this patent
were filed by both parties in October 2008. The patent holder will have an
opportunity to challenge the USPTOs determinations in further proceedings in
the reexaminations. Until these reexaminations are concluded, their potential
impact upon the claims relating to the Lau patents in the above proceeding
remains unknown.

The
Company has not recorded an expense related to damages in this matter because
any potential loss is not currently probable or reasonably estimable under SFAS
No. 5.

75

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

Litigation with DePuy Spine

On January 26,
2001, DePuy Spine (formerly DePuy/AcroMed), a subsidiary of J&J, and
Biedermann Motech GmbH (collectively, DePuy) filed suit in U.S. District Court
for the District of Massachusetts alleging that Medtronics subsidiary,
Medtronic Sofamor Danek USA, Inc. (MSD), was infringing a patent relating to a
design for a thoracolumbar multi-axial screw (MAS). DePuy subsequently
supplemented its allegations to claim that MSDs M10, M8 and Vertex screws
infringe the patent. On April 17, 2003 and February 26, 2004, the District
Court ruled on summary judgment that the M10, M8 and Vertex screws do not
infringe. On October 1, 2004, a jury found that MAS screws, which MSD no longer
sells in the U.S., infringe under the doctrine of equivalents. The jury awarded
damages of $21 million and on February 9, 2005, the Court entered judgment
against MSD, including prejudgment interest, in the aggregate amount of $24
million. In the third quarter of fiscal year 2005, the Company recorded an
expense equal to the $24 million judgment in the matter. DePuy appealed the
Courts decisions that the M10, M8 and Vertex screws do not infringe, and MSD
appealed the jurys verdict that the MAS screws infringe valid claims of the
patent. On November 20, 2006, the U.S. Court of Appeals for the Federal Circuit
affirmed the decision of the District Court that the M10 and M8 screws do not
infringe, affirmed the jurys verdict and damage award on the MAS screws,
affirmed the decision that the Vertex screws do not literally infringe, but
remanded the case, ruling that there is a triable issue of fact as to whether
the Vertex screws infringe under the doctrine of equivalents. On remand, DePuy
further supplemented its allegations to claim that an additional product, the
Vertex Max screws, also infringe. On March 20, 2007, the District Court declined
to stay execution of the judgment relating to the MAS product. On March 30,
2007, the judgment plus accrued interest was paid under protest. On September
27, 2007, a jury found that the Vertex and Vertex Max screws infringe under the
doctrine of equivalents and awarded $226 million in damages to DePuy, and the
District Court entered judgment against Medtronic on December 12, 2007.
Thereafter, the District Court ruled on all post-trial motions, increasing the
award to DePuy to an estimated amount of $272 million. The District Court also
granted a permanent injunction against Medtronic that prohibits Medtronic from
making, using and selling Vertex and Vertex Max polyaxial screws in the U.S.;
however, Medtronics Vertex Select multi-axial screw is not affected by the
injunction. Medtronic appealed to the U.S. Court of Appeals for the Federal
Circuit. DePuy cross-appealed. On June 1, 2009, the Court of Appeals for the
Federal Circuit affirmed the determination of infringement and award of lost
profits, but reversed the remaining elements of the damages awarded. The court
remanded the case to the District Court for the calculation of post-judgment
interest on damages of $149 million. The final judgment will also include
pre-judgment interest. In the fourth quarter of fiscal year 2009, the Company
recorded an expense in the amount of $178 million relating to the matter.

Marquis/Maximo/InSync Matters

On
February 10, 2005, Medtronic voluntarily began to advise physicians about the
possibility that a specific battery shorting mechanism might manifest itself in
a subset of ICDs and cardiac resynchronization therapy-defibrillators (CRT-Ds).
These included certain Marquis VR/DR and Maximo VR/DR ICDs and certain InSync
I/II/III CRT-D devices. Subsequent to this voluntary field action, a number of
lawsuits were filed against the Company alleging a variety of claims, including
individuals asserting claims of personal injury and third party payors alleging
entitlement to reimbursement. Many of these lawsuits were settled, and in the
third quarter of fiscal year 2008, the Company recorded an expense of $123
million relating to the settlement in accordance with SFAS No. 5 as the
potential loss was both probable and reasonably estimable. The Company paid
substantially all of the $123 million in the first quarter of fiscal year 2009.
O ne third party payor , Kinetic Knife, dismissed its original action without prejudice and subsequently filed a putative class action relating to the same subject
matter. Medtronic removed the action to federal court in the District of
Minnesota and filed a motion to dismiss, which is pending. In addition,
class action product liability suits pending in Canada are consolidated in the
Ontario Superior Court of Justice. That court certified a class proceeding on
December 6, 2007 and denied Medtronics leave to appeal certification on
May 15, 2008. The class was certified to include individual implant recipients
and their family members. In addition, the subrogated claims of the provincial
health insurers to recover costs incurred in providing medical services to the
implant class are claimed in the class proceeding. Pretrial proceedings are
underway. The Company has not
recorded an expense related to damages for the remaining suits because any
potential loss is not currently probable or reasonably estimable under SFAS No.
5.

Sprint Fidelis Product Liability Matters

On
October 15, 2007, the Company voluntarily suspended worldwide distribution of
its Sprint Fidelis (Fidelis) family of defibrillation leads. The leads are used
to deliver therapy in patients with ICDs, but are generally not used in
pacemaker patients. The U.S. Food and Drug Administration (FDA) subsequently
classified the Companys action as a Class I recall. As of June 15 , 2009,
approximately 1,250 lawsuits regarding the Fidelis leads have been filed
against the Company, including approximately 37 putative class action suits
reflecting a total of approximately 2,300 individual personal injury cases. In
general, the suits allege claims of product liability, warranty, negligence,
unjust enrichment, emotional distress and consumer protection violations. One
lawsuit includes a claim by an individual purporting to act as a surrogate for
the Center for Medicare and Medicaid Services, and one lawsuit has been brought
by a third party payor as a putative class action suit. In addition, one
putative class action has been filed in the Ontario Superior Court of Justice
in Canada. Approximately 400 of the lawsuits have been filed in state court,
generally alleging similar causes of action. Of those state court actions,
approximately 380 are consolidated before a single judge in Hennepin County
District Court in the state of Minnesota. That judge has scheduled a hearing on Medtronics motion to dismiss the Minnesota cases for September 4, 2009, and discovery continues to be stayed. The federal court cases have been
consolidated for pretrial proceedings before a single federal judge in the U.S.
District Court for the District of Minnesota pursuant to the Multi-District
Litigation (MDL) rules. On January 5, 2009, the MDL court entered an order
dismissing with prejudice the master consolidated complaint for individuals and
the master consolidated complaint for third party payors on grounds of federal
preemption. On May 12, 2009, the MDL court denied plaintiffs request to file a
motion for reconsideration of the dismissals and plaintiffs motion seeking
permission to amend the master consolidated complaint. The court dismissed with
prejudice 229 cases that adopted the master consolidated complaint and stayed
all other cases pending further order of the court. Plaintiffs in the 229 cases
filed a notice of appeal to the Eighth Circuit Court of Appeals on May 29,
2009. Oral argument in the Court of Appeals is anticipated in December 2009. Discovery in the Minnesota state court continues to be stayed .

76

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

The
Company has not recorded an expense related to damages in connection with the
matter because any potential loss is not currently probable or reasonably
estimable under SFAS No. 5.

Shareholder Related Matters

On
November 8, 2007, Stanley Kurzweil filed a putative class action complaint against the
Company and certain of its officers in the U.S. District Court for the District
of Minnesota, alleging violations of Section 10(b) of the Securities Exchange
Act of 1934 (the Exchange Act) and Rule 10b-5 thereunder. The complaint is
brought on behalf of persons or entities who purchased securities of Medtronic
during the period of June 25, 2007 through October 15, 2007. The complaint
alleges that materially false and misleading representations were made as to
the market acceptance and use of the Fidelis defibrillator leads to
artificially inflate Medtronics stock price. Pursuant to court order, the
caption of the case was changed to Medtronic, Inc., Securities Litigation, and
a consolidated putative class action complaint was filed on April 18, 2008. On
March 10, 2009, the court entered an order dismissing the complaint with
prejudice and denying plaintiffs leave to amend. Plaintiffs have filed a motion
to alter the judgment, which was denied on May 29, 2009.

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

Similarly,
on January 9, 2008, Iris Markewich filed a shareholder derivative action
against both the Company and certain of its officers, directors, and employees
(the defendants) in the U.S. District Court for the District of Minnesota,
alleging breach of fiduciary duty, waste of corporate assets and other claims
arising from the same subject matter as the consolidated class action
complaint. After the defendants moved to dismiss the complaint, the plaintiffs
amended their complaint to add similar allegations relating to alleged
off-label promotion of INFUSE Bone Graft. On May 11, 2009, the court granted the
defendants motion to dismiss without prejudice.

On
January 9, 2009, Richard Gulbrandsen filed a similar shareholder derivative
action against both the Company and certain of its officers, directors and
employees in Hennepin County District Court in the state of Minnesota, alleging
breach of fiduciary duty and other claims arising from the same subject matter
as the Markewich putative class action complaint. On April 9, 2009, the court
stayed the action until resolution of the Markewich matter pursuant to a
stipulation of the parties.

In
addition, on August 11, 2008, Mark Brown filed a complaint against the Company
and certain directors, officers and other company personnel in the U.S.
District Court for the District of Minnesota, alleging violations of the
Employee Retirement Income Security Act arising from the same subject matter as
the consolidated putative class complaint. The complaint was filed on behalf of
a putative class of participants in and beneficiaries of the Medtronic Inc.
Saving and Investment Plan whose individual accounts hold shares of company
stock at any time from February 15, 2007 to November 19, 2007. On December 29,
2008, the plaintiff amended the complaint to add similar allegations relating
to alleged off-label promotion of INFUSE Bone Graft and to amend the class to
include participants in the plan from February 15, 2007 to December 12, 2008.
The defendants motion to dismiss was granted on May 26, 2009.

On
December 11, 2008, the Minneapolis Firefighters Relief Association filed a
putative class action complaint against the Company and two of its officers in
the U.S. District Court for the District of Minnesota, alleging violations of
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The complaint is
brought on behalf of persons or entities who purchased securities of Medtronic
from November 19, 2007 through November 17, 2008. The complaint alleges that
the defendants made false and misleading public statements concerning the
INFUSE Bone Graft product which artificially inflated Medtronics stock price
during the period. On May 28, 2009, the court order appointed a lead plaintiff
and lead counsel.

77

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

On
February 24, 2009, Christin Wright filed a complaint against the Company and
certain directors, officers and other company personnel in the United States
District Court for the District of Minnesota, alleging violations of the
Employee Retirement Income Security Act. The complaint was filed purportedly on
behalf of a putative class comprised of participants and beneficiaries of the
Medtronic Savings and Investment Plan whose individual accounts held shares of
company stock at any time from June 28, 2006 to November 18, 2008. The
plaintiff claims the defendants breached fiduciary duties by allegedly failing
to properly disclose the September 2008 settlement of the Fastenetix litigation
and the October 2008 settlement of the Cordis litigation.

The
Company has not recorded an expense related to damages in connection with these
shareholder related matters because any potential loss is not currently
probable or reasonably estimable under SFAS No. 5.

Mirowski

Medtronic
is a licensee to the RE 38,119 patent (119 Patent) and RE 38,897 patent (897
Patent) owned by Mirowski Family Ventures, LLC (Mirowski) relating to the
treatment of hemodynamic dysfunction. Medtronic and Mirowski dispute the
application of the 119 and 897 Patents to certain Medtronic cardiac
resynchronization products. The parties entered into a tolling agreement
deferring and conditioning any litigation of the dispute upon conditions
precedent. The tolling agreement expired on October 1, 2007. In subsequent
notices, Mirowski identified certain claims of the two patents that Mirowski
asserts Medtronic is using. On December 17, 2007, Medtronic filed an action in
U.S. District Court in Delaware seeking a declaration that none of its products
infringe any valid claims of either the 119 or 897 Patents. If certain
conditions are fulfilled, the 119 and/or 897 Patents are determined to be
valid and the Medtronic products are found to infringe the 119 and/or 897
Patents, Medtronic will be obligated to pay royalties to Mirowski based upon
sales of certain CRT-D products. A trial date has not been set. As of April 24,
2009, the amount of disputed royalties and interest related to CRT-D products
is $103 million. This amount has not been accrued because the outcome is not
currently probable under SFAS No. 5.

In
addition, Medtronic is a licensee to the 4,407,288 Patent (288 Patent) owned
by Mirowski relating to ICDs. Until November 2001, Medtronic accrued and paid
royalties under the license based on a percentage of ICD sales. Medtronic and
Mirowski dispute the application of the 288 Patent to certain Medtronic ICD
products. In November 2001, Medtronic ceased paying royalties and entered into
an agreement with Mirowski to pay putative royalties into an interest-bearing
escrow account through the expiration of the 288 Patent in December of 2003.
As of April 24, 2009, the current balance in the interest-bearing escrow
account is $85 million. The parties also entered into a tolling agreement
deferring and conditioning any litigation of the obligation to pay royalties
upon certain conditions precedent. If these conditions are fulfilled and the
patent determined to be invalid or Medtronics products found not to infringe,
the escrowed funds will be released to Medtronic.

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

17.     Quarterly Financial Data (unaudited)

|                           |  |                |       |                 |   |                |  |                 |       |              |   |       |  |   |        | 
|-------------------------- |  | -------------- | ----- | --------------- | - | -------------- |  | --------------- | ----- | ------------ | - | ----- |  | - | ------ | 
|(in
 millions)             |  | First
 Quarter |       | Second
 Quarter |   | Third
 Quarter |  | Fourth
 Quarter |       | Fiscal
 Year |  
|Net Sales                  |  |                |       |                 |   |                |  |                 |       |              |   |       |  |   |        | 
|2009                       |  | $              | 3,706 |                 | $ | 3,570          |  | $               | 3,494 |              | $ | 3,829 |  | $ | 14,599 | 
|2008                       |  |                | 3,127 |                 |   | 3,124          |  |                 | 3,405 |              |   | 3,860 |  |   | 13,515 | 
|                           |  |                |       |                 |   |                |  |                 |       |              |   |       |  |   |        | 
|Gross Profit               |  |                |       |                 |   |                |  |                 |       |              |   |       |  |   |        | 
|2009                       |  | $              | 2,851 |                 | $ | 2,687          |  | $               | 2,646 |              | $ | 2,897 |  | $ | 11,081 | 
|2008                       |  |                | 2,335 |                 |   | 2,284          |  |                 | 2,535 |              |   | 2,915 |  |   | 10,069 | 
|                           |  |                |       |                 |   |                |  |                 |       |              |   |       |  |   |        | 
|Net Earnings               |  |                |       |                 |   |                |  |                 |       |              |   |       |  |   |        | 
|2009                       |  | $              | 747   |                 | $ | 571            |  | $               | 723   |              | $ | 128   |  | $ | 2,169  | 
|2008                       |  |                | 675   |                 |   | 666            |  |                 | 77    |              |   | 812   |  |   | 2,231  | 
|                           |  |                |       |                 |   |                |  |                 |       |              |   |       |  |   |        | 
|Basic Earnings per Share   |  |                |       |                 |   |                |  |                 |       |              |   |       |  |   |        | 
|2009                       |  | $              | 0.67  |                 | $ | 0.51           |  | $               | 0.65  |              | $ | 0.11  |  | $ | 1.94   | 
|2008                       |  |                | 0.59  |                 |   | 0.59           |  |                 | 0.07  |              |   | 0.72  |  |   | 1.97   | 
|                           |  |                |       |                 |   |                |  |                 |       |              |   |       |  |   |        | 
|Diluted Earnings per Share |  |                |       |                 |   |                |  |                 |       |              |   |       |  |   |        | 
|2009                       |  | $              | 0.66  |                 | $ | 0.51           |  | $               | 0.65  |              | $ | 0.11  |  | $ | 1.93   | 
|2008                       |  |                | 0.59  |                 |   | 0.58           |  |                 | 0.07  |              |   | 0.72  |  |   | 1.95   | 

The data in the schedule above
has been intentionally rounded to the nearest million and therefore the
quarterly amounts may not sum to the fiscal year to date amounts.

78

---

Medtronic, Inc. 
Notes to Consolidated Financial Statements

18.     Segment and Geographic Information

The
Company functions in seven operating segments, consisting of CRDM, Spinal,
CardioVascular, Neuromodulation, Diabetes, Surgical Technologies and
Physio-Control.

Each
of the Companys operating segments has similar economic characteristics,
technology, manufacturing processes, customers, distribution and marketing
strategies, regulatory environments and shared infrastructures. Net sales by
operating segment are as follows:

|                                   |  |             |        |      |   |        |  |   |        | 
|---------------------------------- |  | ----------- | ------ | ---- | - | ------ |  | - | ------ | 
|                                   |  | Fiscal Year |       
|(in
 millions)                     |  | 2009        |        | 2008 |   | 2007   | 
|Cardiac
 Rhythm Disease Management |  | $           | 5,014  |      | $ | 4,963  |  | $ | 4,876  | 
|Spinal                             |  |             | 3,400  |      |   | 2,982  |  |   | 2,417  | 
|CardioVascular                     |  |             | 2,437  |      |   | 2,131  |  |   | 1,909  | 
|Neuromodulation                    |  |             | 1,434  |      |   | 1,311  |  |   | 1,183  | 
|Diabetes                           |  |             | 1,114  |      |   | 1,019  |  |   | 863    | 
|Surgical
 Technologies             |  |             | 857    |      |   | 780    |  |   | 666    | 
|Physio-Control                     |  |             | 343    |      |   | 329    |  |   | 385    | 
|Total Net Sales                    |  | $           | 14,599 |      | $ | 13,515 |  | $ | 12,299 | 

On
December 4, 2006, the Company announced its intention to pursue a spin-off of
Physio-Control into an independent, publicly traded company. However, as discussed
in the Other Matters section of the managements discussion and analysis, the
Company announced, in January 2007, a voluntary suspension of U.S. shipments of
Physio-Control products manufactured at its facility in Redmond, Washington in
order to address quality system issues. The Company continues to work with the
FDA to address the quality system issues that must be resolved in order to
resume unrestricted distribution of its external defibrillators. As a result of
this issue, the Companys plans to pursue a spin-off of Physio-Control are on
hold for at least the next twelve months. As additional information,
Physio-Controls (loss)/income before interest and income taxes for fiscal
years 2009, 2008 and 2007 is $(17) million, $(28) million and $7 million,
respectively.

Geographic Information

Net sales to
external customers by geography are as follows:

|                                 |  |              |       |        |   |             |  |                |       |              |   |     |  |   |        | 
|-------------------------------- |  | ------------ | ----- | ------ | - | ----------- |  | -------------- | ----- | ------------ | - | --- |  | - | ------ | 
|(in
 millions)                   |  | UnitedStates |       | Europe |   | AsiaPacific |  | Other
 Foreign |       | Consolidated |  
|Fiscal Year 2009                 |  |              |       |        |   |             |  |                |       |              |   |     |  |   |        | 
|Net sales to
 external customers |  | $            | 8,997 |        | $ | 3,564       |  | $              | 1,558 |              | $ | 480 |  | $ | 14,599 | 
|Long-lived
 assets*              |  | $            | 7,236 |        | $ | 5,660       |  | $              | 185   |              | $ | 286 |  | $ | 13,367 | 
|                                 |  |              |       |        |   |             |  |                |       |              |   |     |  |   |        | 
|Fiscal Year 2008                 |  |              |       |        |   |             |  |                |       |              |   |     |  |   |        | 
|Net sales to
 external customers |  | $            | 8,336 |        | $ | 3,288       |  | $              | 1,437 |              | $ | 454 |  | $ | 13,515 | 
|Long-lived
 assets*              |  | $            | 7,456 |        | $ | 4,791       |  | $              | 168   |              | $ | 36  |  | $ | 12,451 | 
|                                 |  |              |       |        |   |             |  |                |       |              |   |     |  |   |        | 
|Fiscal Year 2007                 |  |              |       |        |   |             |  |                |       |              |   |     |  |   |        | 
|Net sales to
 external customers |  | $            | 7,900 |        | $ | 2,811       |  | $              | 1,195 |              | $ | 393 |  | $ | 12,299 | 
|Long-lived
 assets*              |  | $            | 7,388 |        | $ | 604         |  | $              | 161   |              | $ | 34  |  | $ | 8,187  | 

|                                                                                                                            | 
|--------------------------------------------------------------------------------------------------------------------------- | 
|* Excludes
 other long-term financial instruments and long-term deferred tax assets, net,
 as applicable.                  
|                                                                                                                            | 
|No single customer represents over 10
 percent of the Companys consolidated net sales in fiscal years 2009, 2008
 or 2007.

79

---

|                                                       |  |             |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|------------------------------------------------------ |  | ----------- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|Selected Financial
 Data                               |  |             |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|                                                       |  | Fiscal Year |        
|                                                       |  |             |         |      |   |         |   |      |         |      |  
|                                                       |  | 2009        |         | 2008 |   | 2007    |   | 2006 |         | 2005 |  
|(in millions, except per
share data)                   |  |             |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Operating Results for the Fiscal Year:                 |  |             |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Net sales                                              |  | $           | 14,599  |      | $ | 13,515  |   | $    | 12,299  |      | $ | 11,292  |   | $ | 10,055  |  
|Cost of
 products sold                                 |  |             | 3,518   |      |   | 3,446   |   |      | 3,168   |      |   | 2,815   |   |   | 2,446   |  
|Gross margin
 percentage                               |  |             | 75.9    | %    |   | 74.5    | % |      | 74.2    | %    |   | 75.1    | % |   | 75.7    | %
|Research and
 development expense                      |  | $           | 1,355   |      | $ | 1,275   |   | $    | 1,239   |      | $ | 1,113   |   | $ | 951     |  
|Selling,
 general and administrative expense           |  |             | 5,152   |      |   | 4,707   |   |      | 4,153   |      |   | 3,659   |   |   | 3,214   |  
|Special
 charges                                       |  |             | 100     |      |   | 78      |   |      | 98      |      |   | 100     |   |   |        |  
|Restructuring
 charges                                 |  |             | 120     |      |   | 41      |   |      | 28      |      |   |        |   |   |        |  
|Certain
 litigation charges                            |  |             | 714     |      |   | 366     |   |      | 40      |      |   |        |   |   | 654     |  
|Purchased
 in-process research and development charges |  |             | 621     |      |   | 390     |   |      |        |      |   | 364     |   |   |        |  
|Other
 expense, net                                    |  |             | 396     |      |   | 436     |   |      | 212     |      |   | 167     |   |   | 291     |  
|Interest
 expense/(income)                             |  |             | 29      |      |   | (109    | ) |      | (154    | )    |   | (87     | ) |   | (45     | )
|Earnings
 before income taxes                          |  |             | 2,594   |      |   | 2,885   |   |      | 3,515   |      |   | 3,161   |   |   | 2,544   |  
|Provision
 for income taxes                            |  |             | 425     |      |   | 654     |   |      | 713     |      |   | 614     |   |   | 740     |  
|Net earnings                                           |  | $           | 2,169   |      | $ | 2,231   |   | $    | 2,802   |      | $ | 2,547   |   | $ | 1,804   |  
|                                                       |  |             |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Per Share of Common Stock:                             |  |             |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Basic
 earnings                                        |  | $           | 1.94    |      | $ | 1.97    |   | $    | 2.44    |      | $ | 2.11    |   | $ | 1.49    |  
|Diluted
 earnings                                      |  |             | 1.93    |      |   | 1.95    |   |      | 2.41    |      |   | 2.09    |   |   | 1.48    |  
|Cash
 dividends declared                               |  |             | 0.75    |      |   | 0.50    |   |      | 0.44    |      |   | 0.39    |   |   | 0.34    |  
|                                                       |  |             |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Financial Position at Fiscal Year-end:                 |  |             |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Working capital                                        |  | $           | 4,313   |      | $ | 3,787   |   | $    | 5,355   |      | $ | 5,971   |   | $ | 4,042   |  
|Current
 ratio                                         |  |             | 2.4:1.0 |      |   | 2.1:1.0 |   |      | 3.1:1.0 |      |   | 2.4:1.0 |   |   | 2.2:1.0 |  
|Total assets                                           |  | $           | 23,661  |      | $ | 22,198  |   | $    | 19,512  |      | $ | 19,665  |   | $ | 16,617  |  
|Long-term
 debt                                        |  |             | 6,772   |      |   | 5,802   |   |      | 5,578   |      |   | 5,486   |   |   | 1,973   |  
|Shareholders
 equity                                  |  |             | 12,851  |      |   | 11,536  |   |      | 10,977  |      |   | 9,383   |   |   | 10,450  |  
|                                                       |  |             |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Additional Information:                                |  |             |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Full-time
 employees at year-end                       |  |             | 37,665  |      |   | 36,484  |   |      | 34,554  |      |   | 32,280  |   |   | 29,835  |  
|Full-time
 equivalent employees at year-end            |  |             | 41,158  |      |   | 40,351  |   |      | 37,800  |      |   | 35,733  |   |   | 33,067  |  

Price Range of Medtronic Stock

|          |  |                |       |                |   |               |  |                |       |  |   |       | 
|--------- |  | -------------- | ----- | -------------- | - | ------------- |  | -------------- | ----- |  | - | ----- | 
|          |  | Fiscal Quarter |      
|          |  |                |       |                |   |               |  |                |      
|          |  | First Quarter  |       | Second Quarter |   | Third Quarter |  | Fourth Quarter |      
|2009 High |  | $              | 54.41 |                | $ | 56.55         |  | $              | 40.69 |  | $ | 34.56 | 
|2009 Low  |  |                | 46.98 |                |   | 37.81         |  |                | 28.67 |  |   | 24.38 | 
|2008 High |  |                | 54.05 |                |   | 57.86         |  |                | 51.21 |  |   | 50.44 | 
|2008 Low  |  |                | 50.57 |                |   | 47.00         |  |                | 45.25 |  |   | 46.19 | 

Prices
are closing quotations. On June 22, 2009, there were approximately 53,600
shareholders of record of the Companys common stock. The regular quarterly
cash dividend was 18.75 cents per share for fiscal year 2009 and 12.50 cents
per share for fiscal year 2008.

80

---