MEDTRONIC INC (Form: 10-Q, Received: 03/04/2008 17:12:31)

Individuals who, as of the date hereof, constitute the Board (the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board; provided , however , that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the Incumbent Directors then on the Boardshall be considered as though such individual was an Incumbent Director, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

Consummation of a reorganization, merger, statutory share exchange or consolidation (or similar corporate transaction) involving the Company or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of assets or stock of another entity by the Company or any of its subsidiaries (each, a “Business Combination”), in each case, unless, immediately following such Business Combination, (A) substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then-outstanding shares of common stock (or, for a non-corporate entity, equivalent securities) and the then-outstanding voting securities entitled to vote generally in the election of directors (or, for a non-corporate entity, equivalent governing body), as the case may be, of (1) the entity resulting from such Business Combination (the “Surviving Corporation”) or (2) if applicable, the ultimate parent entity that directly or indirectly has beneficial ownership of 80% or more of the voting securities eligible to elect directors of the Surviving Corporation (the “Parent Corporation”), in substantially the same proportion as their ownership, immediately prior to the Business Combination, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 30% or more of the outstanding shares of common stock and the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Business Combination; or

Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 25, 2008

Commission File Number 1-7707

MEDTRONIC, INC.

(Exact name of registrant as specified in its charter)

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

710 Medtronic Parkway

Minneapolis, Minnesota 55432

(Address of principal executive offices) (Zip Code)

(763) 514-4000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o

No x

Shares of common stock, $.10 par value, outstanding on February 28, 2008: 1,123,027,125

TABLE OF CONTENTS

Item	Description	Page

	PART I
1.	Financial Statements	3
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
3.	Quantitative and Qualitative Disclosures About Market Risk	46
4.	Controls and Procedures	46
	PART II
1.	Legal Proceedings	47
1A.	Risk Factors	47
2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
6.	Exhibits	48

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

MEDTRONIC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

	Three months ended						Nine months ended
	January 25, 2008			January 26, 2007			January 25, 2008			January 26, 2007
	(in millions, except per share data)
Net sales	$	3,405		$	3,048		$	9,655		$	9,019

Costs and expenses:
Cost of products sold		870			775			2,502			2,302
Research and development expense		329			293			927			912
Selling, general and administrative expense		1,207			1,038			3,410			3,058
Special charges		78			—			78			—
Restructuring charges		—			—			14			—
Certain litigation charges		366			—			366			40
Purchased in-process research and development (IPR&D) charges		310			—			343			—
Other expense, net		119			44			248			160
Interest income, net		(9	)		(36	)		(114	)		(113	)
Total costs and expenses		3,270			2,114			7,774			6,359

Earnings before income taxes		135			934			1,881			2,660

Provision for income taxes		58			224			463			670

Net earnings	$	77		$	710		$	1,418		$	1,990

Earnings per share:

Basic	$	0.07		$	0.62		$	1.25		$	1.73
Diluted	$	0.07		$	0.61		$	1.24		$	1.71

Weighted average shares outstanding:

Basic		1,126.9			1,149.0			1,132.9			1,150.8
Diluted		1,135.0			1,163.7			1,145.3			1,162.8

Cash dividends declared per common share	$	0.125		$	0.110		$	0.375		$	0.330

See accompanying notes to the condensed consolidated financial statements.

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MEDTRONIC, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	January 25, 2008			April 27, 2007
	(in millions, except per share data)
ASSETS

Current assets:
Cash and cash equivalents	$	729		$	1,256
Short-term investments		578			1,822
Accounts receivable, less allowances of $159 and $160, respectively		2,979			2,737
Inventories		1,307			1,215
Deferred tax assets, net		598			405
Prepaid expenses and other current assets		490			483

Total current assets		6,681			7,918

Property, plant and equipment		4,754			4,309
Accumulated depreciation		(2,526	)		(2,247	)
Property, plant and equipment, net		2,228			2,062

Goodwill		7,528			4,327
Other intangible assets, net		2,259			1,433
Long-term investments		2,252			3,203
Long-term deferred tax assets, net		—			204
Other assets		464			365

Total assets	$	21,412		$	19,512

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Short-term borrowings	$	1,318		$	509
Accounts payable		395			282
Accrued compensation		660			767
Accrued income taxes		71			350
Other accrued expenses		1,092			655

Total current liabilities		3,536			2,563

Long-term debt		5,656			5,578
Long-term accrued compensation		93			264
Long-term accrued income taxes		544			—
Long-term deferred tax liabilities, net		10			—
Other long-term liabilities		607			130

Total liabilities		10,446			8,535

Commitments and contingencies (Note 16)		—			—

Shareholders’ equity:
Preferred stock— par value $1.00		—			—
Common stock— par value $0.10		112			114
Retained earnings		10,973			10,925
Accumulated other comprehensive loss		(119	)		(62	)

Total shareholders’ equity		10,966			10,977

Total liabilities and shareholders’ equity	$	21,412		$	19,512

See accompanying notes to the condensed consolidated financial statements.

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MEDTRONIC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended
	January 25, 2008			January 26, 2007
	(in millions)
Operating Activities:
Net earnings	$	1,418		$	1,990
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		457			415
Special charges		78			—
IPR&D charges		343			—
Provision for doubtful accounts		23			32
Deferred income taxes		(144	)		(276	)
Stock-based compensation		163			139
Excess tax benefit from exercise of stock-based awards		(32	)		(24	)
Change in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		(159	)		(224	)
Inventories		(17	)		(141	)
Accounts payable and accrued liabilities		320			150
Other operating assets and liabilities		450			(7	)

Net cash provided by operating activities		2,900			2,054

Investing Activities:
Acquisitions, net of cash acquired		(4,179	)		(8	)
Purchase of intellectual property		(88	)		(96	)
Additions to property, plant and equipment		(423	)		(383	)
Purchases of marketable securities		(5,759	)		(9,888	)
Sales and maturities of marketable securities		7,991			9,786
Other investing activities, net		(228	)		(40	)

Net cash used in investing activities		(2,686	)		(629	)

Financing Activities:
Change in short-term borrowings, net		707			86
Issuance of long-term debt		300			—
Payments on long-term debt		(172	)		(1,881	)
Dividends to shareholders		(425	)		(380	)
Issuance of common stock		326			235
Excess tax benefit from exercise of stock-based awards		32			24
Repurchase of common stock		(1,464	)		(438	)

Net cash used in financing activities		(696	)		(2,354	)

Effect of exchange rate changes on cash and cash equivalents		(45	)		22

Net change in cash and cash equivalents		(527	)		(907	)

Cash and cash equivalents at beginning of period		1,256			2,994

Cash and cash equivalents at end of period	$	729		$	2,087

Supplemental Cash Flow Information
Cash Paid For:
Income taxes	$	427		$	873
Interest		168			135
Supplemental Noncash Investing and Financing Activities:
Reclassification of debentures from short-term to long-term debt	$	—		$	94
Reclassification of debentures from long-term to short-term debt		94			—

See accompanying notes to the condensed consolidated financial statements.

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MEDTRONIC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Dollars in millions, except per share data

Note 1 — Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S.) (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a fair presentation of results of operations, financial condition, and cash flows in conformity with accounting principles generally accepted in the U.S. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of Medtronic, Inc. and its subsidiaries (Medtronic or the Company) for the periods presented. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. The preparation of the financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended April 27, 2007.

Note 2 — New Accounting Pronouncements

Effective April 28, 2007, the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN No. 48), which is an interpretation of the Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes” (SFAS No. 109). FIN No. 48 clarifies the accounting for uncertainty in income taxes by prescribing that a benefit can not be recorded in the financial statements unless the tax position has a “more likely than not” chance of being sustained upon audit, based solely on the technical merits of the position. Once the “more likely than not” standard is met, the benefit is measured by determining the amount that is greater than 50 percent likely of being realized upon settlement, presuming that the tax position is examined by the appropriate taxing authority that has full knowledge of all relevant information. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. See Note 11 for further information concerning the impact of adoption of FIN No. 48.

In September 2006, the FASB issued 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. The Statement does not expand the use of fair value in any new circumstances. For certain types of financial instruments, SFAS No. 157 requires 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 157-2). FSP FAS 157-2 defers the implementation of SFAS No. 157 for certain nonfinancial assets and nonfinancial liabilities. The remainder of SFAS No. 157 is effective, for the Company, beginning in the first quarter of fiscal year 2009. The aspects that have been deferred by FSP FAS 157-2 will be effective for the Company beginning in the first quarter of fiscal year 2010. The Company is currently evaluating the impact that the adoption of SFAS No. 157 will have on the consolidated financial statements.

In September 2006, the FASB issued 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), which requires the recognition of an asset or liability for the funded status of defined benefit pension and other post-retirement benefit plans in the statement of financial position. The funded status recognition and certain disclosure provisions of SFAS No. 158 were adopted for the Company’s fiscal year ended April 27, 2007. See Notes 1 and 13 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended April 27, 2007 for the impact of this adoption. SFAS No. 158 also requires the consistent measurement of plan assets and benefit obligations as of the date of the Company’s fiscal year-end statement of financial position effective for the Company’s fiscal year ending April 25, 2008. A select number of the Company’s plans, including the U.S. plans, currently have a January 31 measurement date. This standard will require the Company to change that measurement date to match the date of the Company’s fiscal year-end in fiscal year 2008. The Company does not expect a material impact on the consolidated financial statements upon adoption of the requirement to measure the plan assets and benefit obligations as of the date of the balance sheet.

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In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 will be effective for the Company at the beginning of fiscal year 2009. The Company is currently evaluating the impact that the adoption of SFAS No. 159 will have, but does not believe it will be material to 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 change the accounting treatment for certain specific acquisition related items including: (1) accounting for acquired in process research and development 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; (4) including the fair value of contingent consideration at the date of an acquisition in the cost of an acquisition; and (5) recording at the date of an acquisition the fair value of contingent liabilities that are more likely than not to occur. SFAS No. 141(R) also includes a substantial number of new disclosure requirements. SFAS No. 141(R) will be effective for the Company’s fiscal year 2010 and must be applied prospectively to all new acquisitions closing on or after April 25, 2009. Early adoption of SFAS No. 141(R) is prohibited. 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.

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 (NCI) and classified as a component of equity. 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 Company is currently evaluating the impact that the adoption of SFAS No. 160 will have, but does not believe it will be material to the consolidated financial statements.

In June 2007, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received to Be Used in Future Research and Development Activities” (EITF No. 07-3). EITF No. 07-3 requires companies that are involved in research and development activities to defer nonrefundable advance payments for future research and development activities and to recognize those payments as goods and services are delivered. The Company will be required to assess on an ongoing basis whether or not the goods or services will be delivered and to expense the nonrefundable advance payments immediately if it is determined that delivery is unlikely. EITF No. 07-3 is effective for new arrangements entered into subsequent to the beginning of the Company’s fiscal year 2009. The Company is currently evaluating the impact that the adoption of EITF No. 07-3 will have, but does not believe it will be material to the consolidated financial statements.

Note 3 – Acquisitions and IPR&D Charges

When we acquire another company or a group of assets, the purchase price is allocated, as applicable, between in-process research and development (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.

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Kyphon Acquisition

On November 2, 2007, the Company consummated the acquisition of 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 into some of the fastest growing product segments of the spine market, 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 on July 27, 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, 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 cash on hand, the issuance of $600 short-term commercial paper and borrowing $300 through a new long-term unsecured revolving credit facility.

The Company has accounted for the acquisition of Kyphon as a purchase under U.S. GAAP. Under the purchase method of 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 break down of the estimated purchase price of Kyphon is as follows:


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
Estimated direct acquisition costs		28
Total purchase price	$	4,203

The purchase price allocation is based on preliminary estimates of the fair value of assets acquired and liabilities assumed. The Company is in the process of finalizing its valuation of certain assets and liabilities, primarily intangible assets, restructuring-related liabilities, and residual goodwill. The purchase price allocation will be finalized once the Company has all necessary information to complete its estimate, but no later than one year from the date of acquisition. The estimated purchase price has been preliminarily allocated as follows:


Current assets	$	357
Property, plant and equipment		39
In-process research and development		290
Other intangible assets		996
Goodwill		3,187
Other assets		7
Total assets acquired		4,876

Current liabilities		315
Deferred tax liabilities		323
Other long-term liabilities		35
Total liabilities assumed		673
Net assets acquired	$	4,203

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In connection with the acquisition, the Company acquired $996 of intangible assets that had a weighted average useful life of approximately 10.5 years. The intangible assets include $887 of technology-based assets and $109 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 and $3,187 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 Medtronic products 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 for the acquisition was assigned entirely to the Spinal operating segment and is not deductible for tax purposes.

The $290 IPR & D charge primarily relates to three projects; 1) future launch of the Balloon Kyphoplasty (Kyphoplasty) product 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.

As required, the Company recognized a $34 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 fair value adjustment was fully expensed through cost of products sold during the three months ended January 25, 2008, which reflects the estimated period 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, and the exit of certain facilities and the termination of certain contractual obligations. The preliminary purchase accounting liabilities recorded in connection with these activities were approximately $28. 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.

In connection with the acquisition, the Company assumed Kyphon’s unvested stock-based awards. These stock-based awards have an estimated fair value of approximately $83 which will be recognized as stock-based compensation expense by Medtronic over the remaining weighted average vesting period of 2.5 years.

The Company’s condensed 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 the nine months ended January 25, 2008 and for the three and nine months ended January 26, 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 nine month period ended January 25, 2008 is comprised of (i) Kyphon’s historical financial information for the six months ended September 30, 2007, (ii) Medtronic’s historical financial information for the six months ended October 27, 2007 and (iii) the Company’s actual results for the three months ended January 25, 2008. The unaudited pro forma results of operations for the three and nine month periods ended January 26, 2007 include the results of Medtronic’s historical financial information for these periods and the operations for Kyphon for the three and nine month periods ended December 31, 2006.

The pro forma information gives effect to actual operating results prior to the acquisition, adjustments to, among other things, reflect reduced interest income and additional intangible asset amortization and interest expense. Pro forma adjustments are tax-effected at the Company’s statutory tax rate. These adjustments are subject to change as these initial estimates are refined over time. 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.

	Three months ended		Nine months ended
	January 26, 2007		January 25, 2008		January 26, 2007
Net sales	$	3,161	$	9,944	$	9,336
Net earnings		481		1,281		1,685

Earnings per share:
Basic	$	0.42	$	1.13	$	1.46
Diluted	$	0.41	$	1.13	$	1.45

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The unaudited pro forma financial information for the nine months ended January 25, 2008 and the three and nine months ended January 26, 2007 include a $290 IPR & D charge and a $34 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

On November 1, 2007, the Company recorded an IPR & D charge of $20 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 (CES) technology in the treatment of cardiovascular disease. Total consideration for Setagon was approximately $20 in cash, subject to purchase price increases, which would be triggered by the achievement of certain milestones.

On June 25, 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 based in Littleton, Massachusetts. 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 within the Corporate Technologies and New Ventures business of the Company. Total consideration for Breakaway was approximately $26 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 of technology-based intangible assets that had an estimated useful life of 15 years at the time of acquisition, $1 of tangible assets, and $3 of goodwill. The goodwill was assigned entirely to the Corporate Technologies and New Ventures operating segment and 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 nine months ended January 25, 2008 or January 26, 2007.

Additionally, during the first quarter of fiscal year 2008, the Company recorded IPR&D charges of $25 related to a milestone payment under the existing terms of a royalty bearing, non-exclusive patent cross-licensing agreement with NeuroPace, Inc. and $8 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.

On September 15, 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, $74 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.

On July 25, 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 is expected to help further drive the acceptance of iMRI guidance in neurosurgery. The consideration for Odin was approximately $21, which included $6 in upfront cash and a $2 milestone payment made during the second quarter of fiscal year 2007. The $8 in net cash paid resulted from the $21 in consideration less the value of the Company’s prior investment in Odin and Odin’s then existing cash balance. In connection with the acquisition of Odin, the Company acquired $9 of technology-based intangible assets that had an estimated useful life of 12 years at the time of acquisition. Goodwill of $12 related to the acquisition was allocated between the Spinal and Corporate Technologies and New Ventures operating segments. This goodwill is deductible for tax purposes.

The results of operations related to Odin have been included in the Company’s condensed 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 nine months ended January 26, 2007.

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

There were no IPR&D charges during the three and nine months ended January 26, 2007.

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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 January 25, 2008, 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 $133. The milestones associated with the contingent consideration must be reached in future periods ranging from fiscal years 2009 to 2016 in order for the consideration to be paid.

Note 4 — Special and Certain Litigation Charges

Special Charges

During the three and nine months ended January 25, 2008, the Company recorded a special charge of $78 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.

During the three and nine months ended January 26, 2007, there were no special charges.

Certain Litigation Charges

The Company classifies settlements or judgments from material litigation as certain litigation charges. During the three and nine months ended January 25, 2008, the Company incurred certain litigation charges of $366. Of the amount recorded, $123 relates 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. The remainder of the charge, $243, relates to an estimated reserve established for litigation with Cordis Corporation (Cordis), a subsidiary of Johnson & Johnson (J&J). The Cordis litigation originated in October 1997 and pertains to a patent infringement claim on a previous generation of bare metal stents that are no longer on the market. See Note 16 for further discussion of these certain litigation charges.

During the three months ended January 26, 2007, there were no certain litigation charges.

During the nine months ended January 26, 2007, the Company reached a settlement agreement with the United States Department of Justice which requires the government to obtain dismissal of two qui tam civil suits 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. To resolve the matter, Medtronic has entered into a five-year corporate integrity agreement which will become effective when any appeals regarding those dismissals to the U.S. Court of Appeals for the Sixth Circuit become final. The corporate integrity agreement further strengthens the Company’s 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. Medtronic also agreed to pay $40 at the same time the corporate integrity agreement goes into effect, and recorded an expense in that amount in the first quarter of fiscal year 2007. Both qui tam suits have now been dismissed, and one of them is on appeal to the U.S. Court of Appeals for the Sixth Circuit, but no date has been set for a hearing. The other dismissal will not be appealed. As of January 25, 2008, this amount has not yet been paid.

Note 5 — Restructuring Charges

In the fourth quarter of fiscal year 2007, the Company recorded a $36 restructuring charge, which consisted of employee termination costs of $28 and asset write-downs of $8. As previously announced, 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 Cardiac Rhythm Disease Management (CRDM) business in response to market dynamics. The employee termination costs related to severance and the associated costs of continued medical benefits and outplacement services. The asset write-downs consisted of a $5 charge for inventory write-downs, and a $3 charge for non-inventory asset write-downs.

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As a continuation of our fiscal year 2007 initiatives, in the first quarter of fiscal year 2008 the Company incurred $14 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 restructuring charge is $4 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, see Note 15. The Company did not incur any additional charges related to the fiscal year 2007 restructuring initiative in the second or third quarters of fiscal year 2008.

When the restructuring initiative began in fiscal year 2007, the Company identified approximately 900 positions for elimination which will be achieved through early retirement packages offered to employees, voluntary separation, and involuntary separation. As previously announced, all potentially impacted employees have been notified. Of the positions identified, 759 have been eliminated as of January 25, 2008. The restructuring initiatives are scheduled to be substantially complete by the end of fiscal year 2008.

A summary of the activity related to the restructuring initiatives is presented below:

	Employee Termination Costs			Asset Write- downs			Total
Balance at April 28, 2006	$	—		$	—		$	—
Restructuring charges		28			8			36
Payments/write-downs		(5	)		(8	)		(13	)
Balance at April 27, 2007		23			—			23
Restructuring charges		10			—			10
Payments		(14	)		—			(14	)
Balance at July 27, 2007		19			—			19
Restructuring charges		—			—			—
Payments		(11	)		—			(11	)
Balance at October 26, 2007		8			—			8
Restructuring charges		—			—			—
Payments		(2	)		—			(2	)
Balance at January 25, 2008	$	6		$	—		$	6

There were no restructuring charges during the three and nine months ended January 26, 2007.

Note 6 — Financing Arrangements

Senior Convertible Notes

In April 2006, the Company issued $2,200 of 1.500 percent Senior Convertible Notes due 2011 and $2,200 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 of the net proceeds from these note issuances were used to repurchase common stock. In April 2007, 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 changed from 17.8113 to 17.8315, which correspondingly changed the conversion price per share for each of the Senior Convertible Notes from $56.14 to $56.08.

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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 ($699 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 and were recorded as an addition to shareholders’ equity. In April 2007, certain of the holders requested adjustment to the exercise price of the warrants from $76.56 per share to $76.47 per share pursuant to the provisions of the warrants relating to our 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 Medtronic. Based on the guidance from EITF No. 00-19 and SFAS No. 133, “Accounting for Derivative and Hedging Activities” (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 September 2005, the Company issued two tranches of Senior Notes with the aggregate face value of $1,000. The first tranche consisted of $400 of 4.375 percent Senior Notes due 2010 and the second tranche consisted of $600 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.

In November 2005, the Company entered into a five year interest rate swap agreement with a notional amount of $200. This interest rate swap agreement was designated as a fair value hedge of the changes in fair value of a portion of the Company’s fixed-rate $400 Senior Notes due 2010. The Company pays variable interest equal to the three-month London Interbank Offered Rate (LIBOR) minus 55 basis points and it receives a fixed interest rate of 4.375 percent. The outstanding market value of this swap agreement was a $12 unrealized gain and a $(1) unrealized loss at January 25, 2008 and April 27, 2007, respectively. The unrealized gain/(loss) of $12 and $(1) at January 25, 2008 and April 27, 2007, respectively, is recorded in long-term debt with the offset recorded in other assets on the condensed consolidated balance sheets.

In June 2007, the Company entered into an eight year interest rate swap agreement with a notional amount of $300. This interest rate swap agreement was designated as a fair value hedge of the changes in fair value of a portion of the Company’s fixed-rate $600 Senior Notes due 2015. The Company pays variable interest equal to the three-month London Interbank Offered Rate (LIBOR) minus 90 basis points and it receives a fixed interest rate of 4.750 percent. The outstanding market value of this swap agreement was a $38 unrealized gain at January 25, 2008. The unrealized gain of $38 at January 25, 2008 is recorded in long-term debt with the offset recorded in other assets on the condensed consolidated balance sheets.

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Contingent Convertible Debentures

In September 2001, the Company completed a $2,013 private placement of 1.250 percent Contingent Convertible Debentures due September 2021 (Old Debentures). Interest is payable semi-annually. Each Old Debenture is convertible into shares of common stock at an initial conversion price of $61.81 per share; however, the Old 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. In September 2002 and 2004, as a result of certain holders of the Old Debentures exercising their put options, the Company repurchased $39 and $1, respectively, of the Old Debentures for cash. On January 24, 2005, the Company completed an exchange offer whereby holders of approximately $1,930 of the total principal amount of the Old Debentures exchanged their existing securities for an equal principal amount of 1.250 percent Contingent Convertible Debentures, Series B due 2021 (New Debentures), as described below. Following the completion of the exchange offer, the Company repurchased approximately $2 of the Old Debentures for cash.

The terms of the New Debentures are consistent with the terms of the Old Debentures noted above, except that: (i) the New Debentures require the Company to settle all conversions for a combination of cash and shares of our common stock, if any, in lieu of only shares. Upon conversion of the New Debentures the Company will pay holders cash equal to the lesser of the principal amount of the New 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 New Debentures; and (ii) the New Debentures require the Company to pay only cash (in lieu of shares of the Company’s common stock or a combination of cash and shares of our common stock) when the Company repurchases the New Debentures at the option of the holder or when the Company repurchases the New Debentures in connection with a change of control.

In September 2006, as a result of certain holders of the New Debentures and Old Debentures exercising their put options, the Company repurchased $1,835 of the New Debentures for cash and $42 of the Old Debentures for cash. The Company may be required to repurchase the remaining debentures at the option of the holders in September 2008, 2011, or 2016. Twelve months prior to the put options becoming exercisable, the remaining balance of the New Debentures and the Old Debentures will be classified as short-term borrowings. At each balance sheet date without a put option within the subsequent four quarters, the remaining balance will be classified as long-term debt. Accordingly, during the second quarter of fiscal year 2008, $93 of New Debentures and $1 of the Old Debentures were reclassified from long-term debt to short-term borrowings due to the put option becoming exercisable in September 2008. For put options exercised by the holders of the New Debentures and the Old 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 (or, for the Old Debentures, in cash or stock at our option). As of January 25, 2008, approximately $93 aggregate principal amount of New Debentures remain outstanding and approximately $1 aggregate principal amount of Old Debentures remain outstanding. 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 in commercial paper outstanding, with maturities up to 364 days from the date of issuance. As of January 25, 2008 and April 27, 2007, outstanding commercial paper totaled $1,019 and $249, respectively. During the three and nine months ended January 25, 2008, the weighted average original maturity of the commercial paper outstanding was approximately 49 and 33 days, respectively, and the weighted average interest rate was 4.54 percent and 5.00 percent, respectively. The issuance of commercial paper reduces the amount of credit available under our existing lines of credit.

Lines of Credit

The Company has existing lines of credit of approximately $2,778 with various banks at January 25, 2008. The existing lines of credit include a five-year $1,750 syndicated credit facility dated December 20, 2006 (Credit Facility), which provides backup funding for our $2,250 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 at any time during the life of the five-year term of the agreement. The Company can also request the extension of the Credit Facility maturity date for one additional year on December 20, 2008, the second anniversary of the date of this facility.

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.

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On November 2, 2007, the Company 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 unsecured revolving credit facility (the “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. 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. The New Credit Agreement contains customary representations and warranties of the Company as well as affirmative covenants regarding the Company. Upon the occurrence of an event of default as defined under the New Credit Agreement, the New Lender could elect to declare all amounts outstanding under the New Facility to be immediately due and payable.

As of January 25, 2008 and April 27, 2007, $140 and $0, respectively, were outstanding on all available lines of credit.

Note 7 — 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:

	January 25, 2008		April 27, 2007
Finished goods	$	804	$	753
Work in process		234		209
Raw materials		269		253
Total	$	1,307	$	1,215

Note 8 — Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended January 25, 2008 are as follows:

	January 25, 2008
Balance at April 27, 2007	$	4,327
Goodwill as a result of acquisitions		3,190
Currency adjustment, net		11
Balance at January 25, 2008	$	7,528

Intangible assets, excluding goodwill, as of January 25, 2008 and April 27, 2007 are as follows:

	Purchased Technology and Patents			Trademarks and Tradenames			Other			Total
As of January 25, 2008:
Amortizable intangible assets
Original cost	$	2,674		$	374		$	243		$	3,291
Accumulated amortization		(702	)		(172	)		(158	)		(1,032	)
Carrying value	$	1,972		$	202		$	85		$	2,259

As of April 27, 2007:
Amortizable intangible assets
Original cost	$	1,754		$	265		$	217		$	2,236
Accumulated amortization		(519	)		(150	)		(134	)		(803	)
Carrying value	$	1,235		$	115		$	83		$	1,433

Amortization expense for the three and nine months ended January 25, 2008 was approximately $64 and $151, respectively, and for the three and nine months ended January 26, 2007 was approximately $46 and $136, respectively.

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

Fiscal Year	Amortization Expense
Remaining 2008	$	65
2009		265
2010		260
2011		246
2012		223
Thereafter		1,200
	$	2,259

Note 9 — 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.

Changes in the Company’s product warranties during the nine months ended January 25, 2008 and January 26, 2007 consisted of the following:

	Nine Months Ended
	January 25, 2008			January 26, 2007
Balance at the beginning of the period	$	34		$	41
Warranty claims provision		20			18
Settlements made		(16	)		(28	)
Balance at the end of the period	$	38		$	31

Note 10 — Interest Income, net

Interest income and interest expense for the three and nine months period ended January 25, 2008 and January 26, 2007 are as follows:

	Three months ended						Nine months ended
	January 25, 2008			January 26, 2007			January 25, 2008			January 26, 2007
Interest income	$	(84	)	$	(86	)	$	(307	)	$	(274	)
Interest expense		75			50			193			161
Interest income, net	$	(9	)	$	(36	)	$	(114	)	$	(113	)

Interest income includes interest earned on our cash and cash equivalents, short- and long-term investments and the net realized gains or losses on the sale of available-for-sale securities.

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

Note 11 — Income Taxes

During the three and nine months ended January 25, 2008, the Company recorded a $30 tax benefit associated with the finalization of the fiscal year 2007 U.S. Federal tax return, the finalization of certain foreign tax returns, and adjustments to uncertain tax position reserves for the settlement of certain tax audits. The $30 tax benefit is recorded in provision for income taxes on the condensed consolidated statements of earnings.

During the three and nine months ended January 26, 2007, the Company recorded a $12 tax benefit as a result of the retroactive renewal and extension of the research and development credit enacted by the Tax Relief and Health Act of 2006. The $12 tax benefit relates to the first ten months of calendar year 2006 and is recorded in provision for income taxes on the condensed consolidated statements of earnings.

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Effective April 28, 2007, the Company adopted the provisions of FIN No. 48. As a result of the implementation of FIN No. 48, the Company recognized a $1 decrease in our existing liabilities for uncertain tax positions which has been recorded as an increase to the opening balance of retained earnings. At the adoption date, the Company had $408 of gross unrecognized tax benefits and accrued interest and penalties of $89. If all of the Company’s unrecognized tax benefits were recognized, approximately $329 would impact the Company’s effective tax rate. 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. The Company will continue to recognize interest and penalties related to income tax matters in income tax expense and record the liability in the current or long-term income taxes payable, as appropriate.

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 the Company’s tax returns and propose adjustments to the Company’s tax filings. 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.

The IRS has finalized its audits with the Company for all years through fiscal year 1996. The IRS has issued its audit reports for fiscal years 1997 through 2004. The Company has reached agreement with the IRS on all significant issues for fiscal years 1997 through 2004, except for an issue related to the allocation of income between Medtronic, Inc., and its wholly owned subsidiary in Switzerland. The unresolved issues from the fiscal years 1997 through 2004 tax audits and tax positions taken by the IRS or foreign tax authorities, with respect to potential issues on future tax audits could have a material impact on our effective tax rate in future periods. The Company continues to believe that it has meritorious defenses for its tax filings and will vigorously defend them through litigation in the courts, if necessary. The Company believes it has appropriately provided for the liabilities resulting from the tax assessments by taxing authorities.

Note 12 — 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 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 ESPP.

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

	Three months ended				Nine months ended
(shares in millions)	January 25, 2008		January 26, 2007		January 25, 2008		January 26, 2007
Numerator:
Net earnings	$	77	$	710	$	1,418	$	1,990
Denominator:
Basic – weighted average shares outstanding		1,126.9		1,149.0		1,132.9		1,150.8
Effect of dilutive securities:
Employee stock options		7.3		12.7		10.4		9.7
Shares issuable upon conversion of Contingent Convertible Debentures		—		—		—		0.3
Other		0.8		2.0		2.0		2.0
Diluted – weighted average shares outstanding		1,135.0		1,163.7		1,145.3		1,162.8

Basic earnings per share	$	0.07	$	0.62	$	1.25	$	1.73
Diluted earnings per share	$	0.07	$	0.61	$	1.24	$	1.71

The calculation of weighted average diluted shares outstanding excludes options for approximately 43 million and 21 million common shares for the three and nine months ended January 25, 2008, and 15 million and 36 million common shares for the three and nine months ended January 26, 2007, as the exercise price of those options was greater than the average market price for the period, resulting in an anti-dilutive effect on diluted earnings per share. For the three and nine months ended January 25, 2008 and January 26, 2007, common share equivalents related to the Company's $4,400 of Senior Convertible Notes were anti-dilutive as the market price of the Company's stock was below the conversion price of the Senior Convertible Notes and, therefore, were excluded from the calculation of weighted average diluted shares.

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Note 13 — 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/(losses) on foreign exchange derivative contracts qualifying and designated as cash flow hedges, defined benefit pension and post-retirement plan adjustments, and unrealized gains/(losses) on available-for-sale marketable securities. Comprehensive income for the three months ended January 25, 2008 and January 26, 2007 was $88 and $694, respectively. Comprehensive income for the nine months ended January 25, 2008 and January 26, 2007 was $1,361 and $2,021, respectively.

Presented below is a summary of activity for each component of accumulated other comprehensive (loss)/income :

	Cumulative Translation Adjustment			Net Unrealized Gain/(Loss) on Foreign Exchange Derivatives			Defined Benefit Pension & Post- Retirement Plan Adjustments			Unrealized Gain/(Loss) on Investments			Accumulated Other Comprehensive (Loss)/Income
Balance April 27, 2007	$	195		$	(55	)	$	(209	)	$	6		$	(62	)
Period Change		14			(32	)		3			(11	)		(26	)
Balance July 27, 2007		209			(87	)		(206	)		(5	)		(88	)
Period Change		(7	)		(43	)		3			5			(42	)
Balance October 26, 2007		202			(130	)		(203	)		—			(130	)
Period Change		(17	)		30			3			(5	)		11
Balance January 25, 2008	$	185		$	(100	)	$	(200	)	$	(5	)	$	(119	)

Translation adjustments are not adjusted for income taxes as substantially all translation adjustments relate to our non-U.S. subsidiaries, which are considered permanent in nature. The tax expense/(benefit) on the unrealized gain/(loss) on foreign exchange derivatives for the three and nine months ended January 25, 2008 was $16 and $(26), respectively. The tax benefit on the unrealized loss on investments for the three and nine months ended January 25, 2008 was $2 and $5, respectively. The tax benefit on the defined benefit pension and post-retirement plan adjustments was not material for the three and nine months ended January 25, 2008.

Note 14 — Stock-Based Compensation

In fiscal year 2007, the Company adopted FASB SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123(R)) which replaced SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123) and superseded Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”. 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 were 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.

The following table presents the components and classification of stock-based compensation expense recognized for the three and nine months ended January 25, 2008 and January 26, 2007:

	Three months ended				Nine months ended
	January 25, 2008		January 26, 2007		January 25, 2008		January 26, 2007
Stock options	$	46	$	32	$	104	$	104
Restricted stock awards		22		10		47		24
Employee stock purchase plan		3		3		12		11
Total stock-based compensation expense	$	71	$	45	$	163	$	139

Cost of sales	$	8	$	5	$	19	$	15
Research and development expense		17		7		39		29
Selling, general and administrative expense		46		33		105		95
Total stock-based compensation expense	$	71	$	45	$	163	$	139

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In connection with the acquisition of Kyphon on November 2, 2007, the Company assumed Kyphon’s unvested stock-based awards. These awards are amortized over their remaining weighted average vesting period of 2.5 years. For both the three and nine months ended January 25, 2008, the Company recognized $13 of stock-based compensation expense associated with the assumed Kyphon awards. As of January 25, 2008, these stock-based awards have a remaining estimated fair value of approximately $70, which will be recognized as stock-based compensation expense by the Company over the remaining vesting period. See Note 3 for further discussion of the Kyphon acquisition.

Note 15 — Retirement Benefit Plans

The Company sponsors various retirement benefit plans, including defined benefit pension plans (pension benefits), defined contribution savings plans, post-retirement medical plans (post-retirement benefits), and termination indemnity plans, covering substantially all U.S. employees and many employees outside the U.S. The net periodic benefit cost of the pension and post-retirement medical plans include the following components for the three and nine months ended January 25, 2008 and January 26, 2007:

	U.S. Pension Benefits						Non-U.S. Pension Benefits						Post-Retirement Benefits
	Three months ended						Three months ended						Three months ended
	January 25, 2008			January 26, 2007			January 25, 2008			January 26, 2007			January 25, 2008			January 26, 2007
Service cost	$	18		$	16		$	8		$	7		$	4		$	3
Interest cost		13			11			4			3			3			3
Expected return on plan assets		(21	)		(18	)		(5	)		(3	)		(3	)		(2	)
Recognized actuarial loss		3			4			1			—			1			—
Net periodic benefit cost		13			13			8			7			5			4
Special termination benefits		—			—			—			—			—			—
Total Cost for Period	$	13		$	13		$	8		$	7		$	5		$	4

	U.S. Pension Benefits						Non-U.S. Pension Benefits						Post-Retirement Benefits
	Nine months ended						Nine months ended						Nine months ended
	January 25, 2008			January 26, 2007			January 25, 2008			January 26, 2007			January 25, 2008			January 26, 2007
Service cost	$	54		$	48		$	23		$	20		$	12		$	9
Interest cost		39			34			12			8			9			8
Expected return on plan assets		(63	)		(55	)		(14	)		(9	)		(9	)		(7	)
Recognized actuarial loss		9			10			2			2			2			2
Net periodic benefit cost		39			37			23			21			14			12
Special termination benefits		3			—			—			—			1			—
Total Cost for Period	$	42		$	37		$	23		$	21		$	15		$	12

As a result of the restructuring initiative that began in the fourth quarter of fiscal year 2007, the Company has recognized special termination benefits in the nine months ended January 25, 2008. The expense is related to employees who elected to accept early retirement packages provided under the restructuring initiatives in the first quarter of fiscal year 2008. The incremental expense from these special termination benefits is reflected in the table above.

Note 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, which, if granted, could require significant expenditures or result in lost revenues. In accordance with SFAS No. 5, “Accounting for Contingencies” (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, 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 on any one interim or annual period. With the exception of the Cordis, Marquis, and Kyphon matters discussed below, negative outcomes for the balance of the litigation matters are not considered probable or cannot be reasonably estimated.

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Litigation with Cordis Corporation

On October 6, 1997, Cordis, a subsidiary of J&J, filed suit in U.S. District Court for the District of Delaware against Arterial Vascular Engineering, Inc., which Medtronic acquired in January 1999 and which is now known as Medtronic Vascular, Inc. (Medtronic Vascular). The suit alleged that Medtronic Vascular’s modular stents infringe certain patents owned by Cordis. Boston Scientific Corporation is also a defendant in this suit. On December 22, 2000, a jury rendered a verdict that Medtronic Vascular’s previously marketed MicroStent and GFX stents infringed valid claims of two Cordis patents and awarded damages to Cordis totaling approximately $270. On March 28, 2002, the District Court entered an order in favor of Medtronic Vascular, deciding as a matter of law that Medtronic Vascular’s MicroStent and GFX stents did not infringe the patents. Cordis appealed, and on August 12, 2003, the U.S. Court of Appeals for the Federal Circuit reversed the District Court’s decision and remanded the case to the District Court for further proceedings. The District Court thereafter issued a new patent claim construction and a new trial was held in March 2005. On March 14, 2005, the jury found that the previously marketed MicroStent and GFX stent products infringed valid claims of Cordis’ patents. On March 27, 2006, the District Court denied post-trial motions filed by the parties, including Cordis’ motion to reinstate the previous damages award. On April 26, 2006, Medtronic filed its Notice of Appeal of the judgment of infringement. On February 23, 2007, the United States Patent and Trademark Office (USPTO) granted a request for reexamination of the claims of the patent at issue in the above proceedings. Until that reexamination is concluded, its impact remains unknown. On January 7, 2008, the U.S. Court of Appeals for the Federal Circuit upheld the District Court’s judgment of infringement. The District Court had deferred any hearing on damages issues until after the U.S. Court of Appeals for the Federal Circuit resolved the appeal on the finding of liability. A hearing date to address damages issues has not yet been set. The Company believes an unfavorable outcome in the matter is probable. In accordance with SFAS No. 5, Medtronic has recorded a $243 reserve in the third quarter of fiscal year 2008 for estimated damages in the matter. The range of potential loss related to this matter is subject to a high degree of estimation. The amount recorded represents an estimate of the low end of the range of probable outcomes related to this matter. The high end of the range is undeterminable, but the range of loss includes the previous jury award of approximately $270, which does not include post-judgment interest. When including post-judgment interest, the award would equal approximately $450 as of January 25, 2008.

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 the three U.S. Morris patents alleged to be owned by Wyeth and exclusively licensed to Cordis. The same three patents are the subject of a pending arbitration between Medtronic and J & J in which Medtronic asserts that it is licensed to the three patents under a 1997 Agreement with J & J and also that J & J has covenanted not to sue Medtronic on the three patents. An arbitration panel has been selected, but a hearing date has not been scheduled. Additionally, 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 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. Medtronic Vascular believes it has meritorious defenses to these allegations and intends to assert these defenses vigorously. The arbitrators have been selected, but a hearing date has not been set. 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.

Litigation with Abbott Cardiovascular Systems Inc.

On December 24, 1997, Abbott Cardiovascular Systems Inc. (ACS), a subsidiary of Abbott Laboratories, 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. Medtronic Vascular denies infringement. 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 had issued an order continuing a stay of any further proceedings on the questions of damages or willfulness.

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On March 30, 2007, the District Court denied the motions, and on April 24, 2007, the District Court decided that the patents were enforceable. 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 in May 2007. 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 Abbott/Medtronic agreement providing Medtronic with a license that Medtronic asserted precludes the ACS injunction motion. On February 12, 2008, the District Court conducted a hearing on the motion for permanent injunction on Medtronic’s bare metal stents. Once the District Court has ruled on the motion for injunction, Medtronic will appeal the May 2007 judgment. Issues of damages have been bifurcated from the liability phase of the proceedings. On May 18, 2007, the District Court again confirmed that it would not hold a trial on damage issues until the U.S. Court of Appeals for the Federal Circuit has reviewed the underlying liability issues concerning alleged infringement, invalidity and inequitable conduct.

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 Lau patents in its Endeavor stent. On February 26, 2008, an arbitrator concluded that the Company was not licensed to practice the Lau patents in its Endeavor stent. 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. Medtronic intends to oppose that motion. The District Court has not set a hearing date with respect to the motion to lift the stay.

In response to Medtronic’s Request for Reexamination for each of the four Lau patents, in December 2006, the 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. On February 11, 2008, the USPTO again determined that all claims of two of the Lau patents that Medtronic was found to have infringed were invalid with the exception of a single claim of one of those patents. 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.

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 and on February 9, 2005, the Court entered judgment against MSD, including prejudgment interest, in the aggregate amount of $24. In the third quarter of fiscal year 2005, the Company recorded an expense equal to the $24 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 May 30, 2007, the USPTO ordered reexamination of the patent. The District Court declined to stay the trial pending completion of the reexamination process. Until the reexamination is concluded, its potential impact on the remaining claims in the proceedings remains unknown. On September 27, 2007, a jury found that the Vertex and Vertex MAX screws infringe under the doctrine of equivalents and awarded $226 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. 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 recently-introduced VERTEX SELECT multi-axial screw is not affected by the injunction. Medtronic has filed a notice of appeal in the U.S. Court of Appeals for the Federal Circuit. The Company believes that an unfavorable outcome in this matter is not probable. Accordingly, the Company has not recorded any additional expense related to damages in this matter because any potential loss is not currently probable under SFAS No. 5.

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Litigation with Cross Medical Products, Inc.

On May 2, 2003, Cross Medical Products, Inc. (Cross) sued MSD in the U.S. District Court for the Central District of California. The suit alleges that MSD’s CD HORIZON, Vertex and Crosslink products infringe certain patents owned by Cross. MSD has countered that Cross’ cervical plate products infringe certain patents of MSD, and Cross has filed a reply alleging that certain MSD cervical plate products infringe certain patents of Cross. On May 19, 2004, the Court found that the MAS, Vertex, M8, M10, CD HORIZON SEXTANT and CD HORIZON LEGACY screw products infringe one Cross patent. A hearing on the validity of that patent was held on July 12, 2004, after which the District Court ruled that the patents were valid. Cross made a motion for permanent injunction on the multi-axial screw products, which the District Court granted on September 20, 2004, but stayed the effect of the injunction until January 3, 2005. MSD requested an expedited appeal of the ruling and the U.S. Court of Appeals for the Federal Circuit granted the request. On September 30, 2005, the Federal Circuit vacated the injunction, modified the trial court’s claim construction rulings, and remanded the matter for trial in the District Court. The Federal Circuit awarded costs to Medtronic on the appeal. In April 2005, the District Court ruled invalid certain claims in the patents Cross asserted against MSD’s Crosslink and cervical plate products. The Court also ruled that Cross’ cervical plate products infringe MSD’s valid patents and that MSD’s redesigned pedicle screw products infringe one claim of one of the patents owned by Cross. Cross thereafter moved for an injunction against the redesigned screw products, which the District Court granted on May 24, 2005. The District Court then stayed the effectiveness of the injunction until August 22, 2005. On July 27, 2005, the U.S. Court of Appeals for the Federal Circuit granted MSD’s motion to stay the District Court’s injunction pending a full hearing on the appeal. On March 20, 2007, the Federal Circuit ruled that MSD’s current multi-axial screw products do not infringe any claim of Cross’ patent and vacated the District Court’s injunction, which had already been stayed. On February 28, 2008, the U.S. District Court for the Central District of California found that the remaining patent claims asserted against MSD’s polyaxial screws are invalid. Remaining damages issues are scheduled for trial on April 29, 2008. 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. Separately, on February 1, 2006, MSD filed a lawsuit against Biomet Inc., the corporate parent of Cross (Biomet) and its subsidiary EBI Spine, L.P., for patent infringement. The suit, which involves seven Medtronic patents and seeks injunctive relief and monetary damages, was filed in the U.S. District Court for the District of New Jersey. Three of the patents were purchased by Medtronic from Michelson and involve single-lock anterior cervical plating systems used in cervical spinal fusions. Medtronic claims that a cervical plate marketed by Biomet under the trade name VueLock Anterior Cervical Plate System, and openly promoted as a plate that has a “Secure One Step Locking” mechanism feature, infringes these patents. The other patents involve instruments and surgical implantation methods commonly used in spinal surgeries to implant pedicle screws.

Other 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 have been filed against the Company in both federal and state courts, alleging a variety of claims, including individuals asserting claims of personal injury and third party payors (TPP) alleging entitlement to reimbursement. On December 21, 2007, Medtronic accepted a settlement agreement to resolve these matters. The cases in the settlement arise from the February 2005 field action and include both cases that have been filed and some cases that could properly have been filed. As a term of the settlement, each settling plaintiff must satisfy any insurance claims and subrogation interests of either Medicare or Medicaid from the proceeds of their individual settlement payments. No additional sums will be paid by Medtronic for third-party claims or attorney’s fees. Neither side has admitted any liability or the validity of any defenses in the litigation. This settlement can be terminated by either side if the MultiDistrict Litigation (MDL) proceedings are not terminated by the Judicial Panel on MultiDistrict Litigation (JPML). The trial court has entered an order for termination of the proceedings, which is awaiting action by the JPML. In the third quarter of fiscal year 2008, the Company recorded an expense of $123 relating to the settlement in accordance with SFAS No. 5 as the potential loss is both probable and reasonably estimable. The Company expects to pay the settlement in the fourth quarter of fiscal year 2008.

On October 24, 2005, Medtronic received a subpoena from the Office of the United States Attorney for the District of Massachusetts issued under the Health Insurance Portability & Accountability Act of 1996 requesting documents the Company may have, if any, relating to pacemakers and defibrillators and related components; monitoring equipment and services; a provision of benefits, if any, to persons in a position to recommend purchases of such devices; and the Company’s training and compliance materials relating to the fraud and abuse and federal Anti-Kickback statutes. The Company is cooperating fully with the investigation, and has begun to produce documents on a schedule requested by the United States Attorney.

During 2005, the Office of the United States Attorney for the District of New York received a complaint, which Medtronic has since learned is a qui tam complaint. The alleged impropriety involves Kyphon’s sales and marketing practices. On October 26, 2007, the Department of Justice and Kyphon entered into an oral agreement to settle the complaint for $75, without any admission of liability and subject to appropriate releases all to be contained in a settlement agreement.

The settlement requires entry into a mutually agreed upon corporate integrity agreement with the Office of Inspector General of the Department of Health and Human Services. The settlement agreement and corporate integrity agreement is in the process of being negotiated. As a result of the proposed settlement to pay $75, Kyphon recorded a liability in September 2007, which the Company assumed in the acquisition of Kyphon.

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On October 15, 2007, the Company voluntarily suspended worldwide distribution of its Sprint Fidelis family of defibrillation leads. This decision was based on a variety of factors that, when viewed together, indicated that suspending distribution was the appropriate action. At the time, Sprint Fidelis lead viability was trending lower than other Company defibrillation leads, but had not then become statistically significant. The leads are used to deliver therapy in patients with ICDs, but are generally not used in pacemaker patients. The United States Food and Drug Administration (FDA) subsequently classified the Company’s action as a Class I recall. Approximately 120 lawsuits regarding the Fidelis leads have been filed against the Company, including approximately 30 putative class action suits. In general, the suits allege claims of product liability, warranty, negligence, unjust enrichment, emotional distress and consumer protection violations. Eighteen of the lawsuits have been filed in state court, generally alleging similar causes of action. Plaintiffs’ counsel in several of the suits filed in federal court asked for consolidation and coordination of those suits under MDL rules. Medtronic did not oppose those requests. On February 21, the judicial panel for the MDL ordered the cases to be handled before the U.S. District Court for the District of Minnesota for pretrial MDL proceedings. 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.

On November 8, 2007, a class action complaint was filed against the Company and certain of its officers in the U.S. District Court for the District of Minnesota, alleging violations of Section 10b-5 of the Securities Exchange Act of 1934 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. In addition, parallel shareholder derivative actions alleging breach of fiduciary duty, waste of corporate assets and other claims arising out of the same subject matter have been filed in Minnesota state court and the U.S. District Court for the District of Minnesota. 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.

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 have 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. As of January 25, 2008, the amount of disputed royalties and interest related to CRT-D products is $73. 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 January 25, 2008, the current balance in the interest-bearing escrow account is $83. 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.

Note 17 — Segment and Geographic Information

Segment information:

During the first quarter of fiscal year 2008, the Company revised its operating segment reporting to combine its former Vascular and Cardiac Surgery businesses into the new CardioVascular business. Additionally, the Company created a new operating segment, Corporate Technologies and New Ventures, under which the Company intends to cultivate technologies that can be applied across business units. The Company has separated the Navigation business from the Spinal operating segment and will report its results as a part of this new operating segment since the Company expects to leverage this technology across multiple businesses. The Company now functions in eight operating segments, consisting of Cardiac Rhythm Disease Management (CRDM), Spinal, CardioVascular, Neuromodulation (formerly Neurological), Diabetes, Ear, Nose and Throat (ENT), Physio-Control, and Corporate Technologies and New Ventures. The information for the three and nine months ended January 26, 2007 has been reclassified to conform to the current presentation of eight operating segments.

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Management believes each of the Company’s operating segments have similar economic characteristics, technology, manufacturing processes, customers, distribution and marketing strategies, regulatory environments, and shared infrastructures. Net sales by operating segment were as follows:

	Three months ended				Nine months ended
	January 25, 2008		January 26, 2007		January 25, 2008		January 26, 2007
Cardiac Rhythm Disease Management	$	1,218	$	1,186	$	3,601	$	3,587
Spinal		808		598		2,112		1,774
CardioVascular		512		478		1,488		1,380
Neuromodulation		320		290		930		857
Diabetes		258		226		744		633
ENT		154		134		447		391
Physio-Control		94		105		228		317
Corporate Technologies and New Ventures		41		31		105		80
Total Net Sales	$	3,405	$	3,048	$	9,655	$	9,019

On December 4, 2006, the Company announced its intention to pursue a spin-off of Physio-Control into an independent, publicly traded company. Physio-Control is the Company’s wholly-owned subsidiary that offers external defibrillators, emergency response systems, data management solutions and support services used by hospitals and emergency response personnel. On January 15, 2007, the Company announced 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 and the FDA have continued their discussions regarding corrective actions for the Physio-Control quality systems. The degree to which shipments may be permitted or restricted as a result of this process will depend upon the extent and timing of any remaining corrective actions. Physio-Control is working diligently to make progress in improving its quality systems. Physio-Control has resumed limited shipments to critical need customers in the U.S. Following the resolution of these matters, the Company intends to continue to pursue the spin-off of Physio-Control. Physio-Control’s income/(loss) before interest and income taxes for the three and nine months ended January 25, 2008 was $2 and $(23), respectively. Physio-Control’s earnings before interest and income taxes for the three and nine months ended January 26, 2007 was $7 and $22, respectively.

Geographic information:

Net sales to external customers by geography are as follows:

	Three months ended				Nine months ended
	January 25, 2008		January 26, 2007		January 25, 2008		January 26, 2007
United States	$	2,098	$	1,957	$	6,005	$	5,873
Europe		838		693		2,294		1,993
Asia Pacific		346		301		1,025		868
Other Foreign		123		97		331		285
Total Net Sales	$	3,405	$	3,048	$	9,655	$	9,019

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

Understanding Our Financial Information

The following discussion and analysis provides information management believes to be relevant to understanding the financial condition and results of operations of Medtronic, Inc. For a full understanding of financial condition and results of operations, you should read this discussion along with Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended April 27, 2007. In addition, you should read this discussion along with our condensed consolidated financial statements and related Notes thereto as of January 25, 2008.

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Financial Trends

Throughout this financial information, you may 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 impairments), restructuring, certain litigation, and purchased in-process research and development (IPR&D) charges. These charges, or benefits, result from facts and circumstances that vary in frequency and/or impact to operations. While understanding these charges is important in 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 is necessary in order to estimate the likelihood that financial trends will continue.

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. During the first quarter of fiscal year 2008, we revised our operating segment reporting to combine our former Vascular and Cardiac Surgery businesses into the new CardioVascular business. Additionally, we created a new operating segment, Corporate Technologies and New Ventures, under which we intend to cultivate technologies that can be applied across business units. We have separated the Navigation business from Spinal and will report its results as a part of this new operating segment since we expect to leverage this technology across multiple businesses. We now function in eight operating segments, consisting of Cardiac Rhythm Disease Management (CRDM), Spinal, CardioVascular, Neuromodulation (formerly Neurological), Diabetes, Ear, Nose and Throat (ENT), Physio-Control, and Corporate Technologies and New Ventures. The applicable information for the three and nine months ended January 26, 2007 has been reclassified to conform to the current presentation of eight operating segments.

Through our eight operating segments, we develop, manufacture, and market our medical devices in more than 120 countries worldwide while expanding patient access to our products. 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.

On November 2, 2007, we consummated our $4.203 billion acquisition of Kyphon Inc. (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 into some of the fastest growing product segments of the spine market, enabling us to provide physicians with a broader range of therapies for use at all stages of the care continuum. For the three months ended January 25, 2008, Kyphon contributed $147 million of revenue to the Spinal business. See the “Acquisitions” section of this management’s discussion and analysis for further information.

Net earnings for the third quarter of fiscal year 2008 were $77 million, or $0.07 per diluted share, as compared to net earnings of $710 million, or $0.61 per diluted share for the same period in the prior fiscal year, each representing a decrease of 89 percent. Net earnings for the three months ended January 25, 2008 included after-tax special, certain litigation, and IPR & D charges that decreased net earnings by $636 million. There were no such items in the three months ended January 26, 2007. See further discussion of these charges in the “Special, Restructuring, Certain Litigation, and IPR & D Charges” section of this management’s discussion and analysis. The decrease in net earnings for the three months ended January 25, 2008 was driven primarily by the impact of these special, certain litigation, and IPR & D charges in the current quarter.

Net earnings for the nine months ended January 25, 2008 were $1.418 billion, or $1.24 per diluted share, as compared to net earnings of $1.990 billion, or $1.71 per diluted share for the same period last fiscal year, representing a decrease of 29 percent and 27 percent, respectively. Net earnings for the nine months ended January 25, 2008 included after-tax special, restructuring, certain litigation and IPR & D charges that decreased net earnings by $672 million. Net earnings for the nine months ended January 26, 2007 also included a certain litigation charge that decreased net earnings by $40 million. The decrease in net earnings for the nine months ended January 25, 2008 was driven by the charges recognized in the period and the impact of the second quarter of fiscal year 2008 suspension of worldwide distribution of the Fidelis lead. See further discussion of these charges in the “Special, Restructuring, Certain Litigation, and IPR & D Charges” and the Fidelis lead suspension in the “Other Matters” sections of this management’s discussion and analysis.

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The table below illustrates net sales by operating segment for the three and nine months ended January 25, 2008 and January 26, 2007 (dollars in millions):

	Three months ended						Nine months ended
	January 25, 2008		January 26, 2007		% Change		January 25, 2008		January 26, 2007		% Change
Cardiac Rhythm Disease Management	$	1,218	$	1,186	3	%	$	3,601	$	3,587	—	%
Spinal		808		598	35			2,112		1,774	19
CardioVascular		512		478	7			1,488		1,380	8
Neuromodulation		320		290	10			930		857	9
Diabetes		258		226	14			744		633	18
ENT		154		134	15			447		391	14
Physio-Control		94		105	(10	)		228		317	(28	)
Corporate Technologies and New Ventures		41		31	32			105		80	31
Total Net Sales	$	3,405	$	3,048	12	%	$	9,655	$	9,019	7	%

Net sales for the three and nine months ended January 25, 2008 were $3.405 billion and $9.655 billion, representing an increase of 12 percent and 7 percent, respectively, in comparison to the same periods in the prior fiscal year. Foreign currency translation had a favorable impact on net sales for the three and nine months ended January 25, 2008 of $117 million and $240 million, respectively, when compared to the same periods in the prior fiscal year. The increase in net sales for the three and nine months ended January 25, 2008 was primarily driven by our Spinal, CardioVascular, Neuromodulation, and Diabetes operating segments. For the three months ended January 25, 2008, the Spinal growth was primarily the result of net sales associated with the acquisition of Kyphon which closed in the first week of the third quarter of fiscal year 2008 and for the nine months ended January 25, 2008, the Spinal growth was primarily the result of the worldwide growth in Core Spinal and Biologics. The Diabetes business experienced strong net sales growth outside the U.S. for the three months ended January 25, 2008 and worldwide net sales growth for the nine months ended January 25, 2008 both led by strong sales of the Paradigm REAL-Time sensor-augmented pump system. CardioVascular experienced strong net sales growth outside the U.S. for the three and nine months ended January 25, 2008 led by sales of our Endeavor and Endeavor Resolute drug-eluting stents, while Neuromodulation experienced strong net sales growth in the U.S. for the three and nine months ended January 25, 2008 driven by sales of key products in Pain Stimulation. The growth in these businesses for the three and nine months ended January 25, 2008 was partially offset by declines in net sales in the U.S. for CRDM, CardioVascular and Physio-Control. CRDM growth in the U.S. is down principally because of the suspension of worldwide distribution of the Fidelis lead, while our continued voluntary suspension of U.S. sales of Physio-Control products is causing the decrease in sales in that business. See the discussion in the “Other Matters” section of this management’s discussion and analysis for further information on the suspension of worldwide distribution of the Fidelis lead and Physio-Control products. CardioVascular sales in the U.S. were down due to a voluntary field action on the AneuRx AAAdvantage Stent Graft System that required physician and patient notification. The primary exchange rate movements that impact our consolidated net sales growth are the U.S. dollar as compared to the Euro and 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 “Quantitative and Qualitative Disclosures About Market Risk” following this management’s discussion and analysis under “Item 3” as it relates to our hedging activities). For more detail regarding net sales, see our discussion of net sales by operating segment within this management’s discussion and analysis.

We remain committed to our mission of developing lifesaving and life enhancing therapies to alleviate pain, restore health and extend life. We continue to make substantial investments in the expansion of our existing product lines and for the identification of new innovative products. Research and development spending during the three and nine months ended January 25, 2008 was $329 million and $927 million, respectively, or 9.7 percent and 9.6 percent of net sales, respectively. Our research and development efforts are focused on maintaining or achieving leadership in each of the markets we serve by providing patients the most advanced and effective treatments possible. 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.

Other Matters

On October 15, 2007, we announced the voluntary suspension of worldwide distribution of Fidelis leads because of the potential for increased lead fractures. 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 implantable cardioverter defibrillators (ICDs) and cardiac resynchronization therapy – defibrillators (CRT-Ds). The decision to voluntarily suspend the worldwide distribution of the Fidelis lead was based on a variety of factors that, when viewed together, indicate a voluntary suspension was the appropriate action. Based on Medtronic’s extensive performance data, Fidelis lead viability was trending lower than Medtronic’s Sprint Quattro (Quattro) lead at 30 months after implant (97.7% Sprint Fidelis vs. 99.1% Sprint Quattro). This difference was not considered statistically significant; however, if the current lead fracture rates remain constant, it could become so over time. We believed that given this performance trend, this action was in the patients’ best interest.

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At the point we ceased selling Fidelis leads and asked customers to return their unused product, Fidelis leads represented approximately 75 percent of our high power lead manufacturing output with our Quattro leads representing the other 25 percent. We have successfully transitioned our manufacturing back to the production of Quattro leads and, as of January 25, 2008, have re-established sufficient internal inventory levels. Even though we re-established our internal inventory levels during the third quarter of fiscal year 2008, we believe we missed selling opportunities in both the second and third quarters of fiscal year 2008 due to the suspension of worldwide distribution of Fidelis leads, the lack of a single coil lead, and the lack of an approved lead in Japan. In January, we were able to begin selling our Quattro lead in Japan after receiving both regulatory and reimbursement approvals.

On December 4, 2006, we announced our intention to pursue a spin-off of Physio-Control into an independent, publicly traded company. Physio-Control is our wholly-owned subsidiary that offers external defibrillators, emergency response systems, data management solutions, and support services used by hospitals and emergency response personnel. On January 15, 2007, we announced our voluntary suspension of U.S. shipments of Physio-Control products manufactured at our facility in Redmond, Washington in order to address quality system issues. The Company and the United States Food and Drug Administration (FDA) have continued their discussions regarding corrective actions for the Physio-Control quality systems. The degree to which shipments may be permitted or restricted as a result of this process will depend upon the extent and timing of any remaining corrective actions. Physio-Control is working diligently to make progress in improving its quality systems. Physio-Control has resumed limited shipments to critical need customers in the U.S. Following the resolution of these matters, we intend to continue to pursue the spin-off of Physio-Control.

Critical Accounting Estimates

We have adopted various accounting policies to prepare the condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (U.S. GAAP). Our most significant accounting policies are disclosed in Note 1 to the consolidated financial statements included in our annual report on Form 10-K for the year ended April 27, 2007.

The preparation of the condensed consolidated financial statements, in conformity with U.S. GAAP, requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying Notes. Our estimates and assumptions, including those related to bad debts, inventories, intangible assets, property, plant and equipment, asset impairment, legal proceedings, IPR&D, warranty obligations, product liability, self-insurance, pension and post-retirement obligations, sales returns and discounts, stock-based compensation and income taxes are updated as appropriate, which in most cases is at least 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, the outcomes of which 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, which, if granted, 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,” 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, 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 notes accompanying our condensed consolidated financial statements. Our significant legal proceedings are discussed in Note 16 to the condensed consolidated financial statements and are incorporated by reference into Part II, Item 1 — Legal Proceedings. While it is not possible to predict the outcome for most of the matters discussed in Note 16 to the condensed consolidated financial statements, we believe it is possible that costs associated with them could have a material adverse impact on our consolidated earnings, financial position or cash flows on any one interim or annual period. With the exception of the Cordis, Marquis, and Kyphon matters, negative outcomes for the balance of the litigation matters discussed in Note 16 to the condensed consolidated financial statements are not considered probable or cannot be reasonably estimated.

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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. Significant judgment is required in determining our effective tax rate and evaluating our tax positions. 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. We adjust these reserves in light of changing facts and circumstances, such as the progress of a tax audit. The establishment and changes to tax reserves for uncertain tax positions are determined in accordance with the principles of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”. Our effective tax rate includes the impact of reserve provisions that we consider appropriate. This rate is then applied to our quarterly operating results. In the event there is a special, restructuring, certain litigation and/or IPR&D charge recognized in our operating results, the tax attributable to that item is separately calculated and recorded. Because the effective rate can be significantly impacted by 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 taxable income, excluding special, restructuring, certain litigation, and IPR & D charges. We believe that this resulting non-GAAP financial measure provides useful information to investors because it excludes the effect of certain discrete items so that investors can compare our recurring results over multiple periods.

Tax regulations require certain items 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 return. Some of these differences are permanent, such as expenses that are not deductible on our tax return, and some are timing differences, such as depreciation expense. Timing 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.

For the three months ended January 25, 2008, the Company’s overall tax rate includes the tax impact of special, certain litigation, and IPR&D charges which has resulted in an effective tax rate of 42.77 percent. For the nine months ended January 25, 2008 the Company’s overall tax rate includes the tax impact of special, restructuring, certain litigation, and IPR&D charges which has resulted in an effective tax rate of 24.61 percent. Excluding the impact of these items in the three and nine months ended January 25, 2008, our operational and tax strategies have resulted in a non-GAAP nominal tax rate of 19.84 and 22.12 percent, respectively, versus the U.S. Federal statutory rate of 35.0 percent. An increase in our nominal tax rate of 1 percent would result in an additional income tax provision for the three and nine months ended January 25, 2008 of approximately $9 million and $27 million, respectively. See discussion of the tax rate and the 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 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. 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 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 several estimates about fair value, most of which are based on projected future cash flows. Our estimates associated with the goodwill impairment tests are considered critical due to the amount of goodwill recorded on our condensed consolidated balance sheets and the judgment required in determining fair value amounts, including projected future cash flows. Goodwill was $7.528 billion and $4.327 billion as of January 25, 2008 and April 27, 2007, respectively.

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 January 25, 2008, 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 $2.259 billion and $1.433 billion as of January 25, 2008 and April 27, 2007, respectively.

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Stock-Based Compensation

We account for stock-based compensation in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123(R)). Under the fair value recognition provisions of SFAS No. 123(R), we measure stock-based compensation cost at the grant date based on the fair value of the award and recognize the compensation expense over the requisite service period, which is generally the vesting period. We elected the modified-prospective method of adopting SFAS No. 123(R), under which prior periods were not retroactively restated. Estimated 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 compensation cost estimated for the SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123), pro forma disclosures. Total stock-based compensation expense recognized during the three and nine months ended January 25, 2008 was $71 million and $163 million, respectively. See Note 14 to the condensed consolidated financial statements for further information regarding our stock-based compensation programs.

We use 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 rate, volatility of our stock price and expected dividends.

We analyze historical employee stock option exercise and termination data to estimate the expected life assumption. Beginning in the third quarter of fiscal year 2008, we began to calculate the expected life assumption using the midpoint scenario, which combines historical exercise data with hypothetical exercise data, as we believe 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, we calculated the expected life based solely on historical data. We also stratify our employee population based upon distinctive exercise behavior patterns. The risk-free interest rate we use is based on the yield, on the grant date, of a zero-coupon U.S. Treasury bond whose maturity period equals or approximates the option’s expected term. We calculate the expected volatility using a blended volatility, combining the historical volatility and implied volatility. The dividend yield rate used is calculated by dividing our annual dividend, based on the most recent quarterly dividend rate, by the closing stock price on the grant date. The amount of stock-based compensation expense we recognize during a period is based on the portion of the awards that are ultimately expected to vest. We estimate pre-vesting option forfeitures at the time of grant by analyzing historical data and revise those estimates in subsequent periods if actual forfeitures differ from those estimates.

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

There is a risk that our estimates of the fair values of our stock-based awards on the grant dates as determined using the Black-Scholes model may bear little resemblance to the actual values realized upon the exercise or forfeiture of those stock-based awards in the future. Some employee stock options may expire without value, or only realize minimal intrinsic value, as compared to the fair values originally estimated on the grant date and recognized in our financial statements. Alternatively, some employee stock options may realize significantly more value than the fair values originally estimated on the grant date and recognized in our financial statements.

New Accounting Pronouncements

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

Potential Changes in Accounting Pronouncements

In August 2007, the FASB proposed FASB Staff Position (FSP) APB 14-a, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”. The proposed FSP would require 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 would be amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. The proposed change in accounting treatment as originally issued would have been effective for fiscal years beginning after December 15, 2007, and applied retrospectively to prior periods. If adopted, this FSP would change the accounting treatment for our $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 $93 million remaining balance of our Contingent Convertible Debentures due 2021. The impact of this new accounting treatment could be significant to our results of operations and result in an increase to non-cash interest expense beginning in fiscal year 2009 for financial statements covering past and future periods. We cannot determine the exact impact of the change in accounting treatment or whether such accounting treatment will eventually be adopted by the FASB. As of the date of this filing, the FASB has not yet issued the final FSP.

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Acquisitions

Three and nine months ended January 25, 2008

On November 2, 2007, we consummated the acquisition of 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 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 into some of the fastest growing product segments of the spine market, 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 on July 27, 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 estimated 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 condensed 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 the three and nine months ended January 25, 2008. See Note 3 to the condensed consolidated financial statements for the unaudited pro forma results of operations for the three months ended January 26, 2007 and the nine months ended January 25, 2008 and January 26, 2007.

On November 1, 2007, we 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 us with exclusive rights to use and develop Setagon’s Controllable Elution Systems (CES) 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.

On June 25, 2007, we acquired substantially all of the O-arm Imaging System (O-arm) assets of Breakaway Imaging, LLC (Breakaway), a privately held company based in Littleton, Massachusetts. 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 within our Corporate Technologies and New Ventures business. 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 three and nine months ended January 25, 2008 or January 26, 2007.

Three and nine months ended January 26, 2007

On September 15, 2006, we 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, we 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.

On July 25, 2006, we acquired substantially all of the assets of Odin Medical Technologies, LTD (Odin), a privately held company. Prior to the acquisition, we 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 us. This acquisition was expected to help 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 during the second quarter of fiscal year 2007. The $8 million in net cash paid resulted from the $21 million in consideration less the value of our prior investment in Odin and Odin’s then existing cash balance. The results of operations related to Odin have been included in our condensed consolidated statements of earnings since the date of the acquisition. The pro forma impact of Odin was not significant to our results for the three and nine months ended January 26, 2007.

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

Net Sales

The table below illustrates net sales by operating segment for the three and nine months ended January 25, 2008 and January 26, 2007 (dollars in millions):

	Three months ended						Nine months ended
	January 25, 2008		January 26, 2007		% Change		January 25, 2008		January 26, 2007		% Change
Pacing Systems	$	478	$	458	4	%	$	1,468	$	1,391	6	%
Defibrillation Systems		726		711	2			2,091		2,147	(3	)
Other		14		17	(18	)		42		49	(14	)
CARDIAC RHYTHM DISEASE MANAGEMENT		1,218		1,186	3			3,601		3,587	—
Core Spinal		455		426	7			1,371		1,261	9
Spinal Biologics		206		172	20			594		513	16
Kyphon		147		—	N/A			147		—	N/A
SPINAL		808		598	35			2,112		1,774	19
Coronary Stents		157		148	6			459		399	15
Other Coronary/Peripheral		103		92	12			294		283	4
Endovascular		70		64	9			208		188	11
Revascularization and Surgical Therapies		109		105	4			316		303	4
Structural Heart Disease		73		69	6			211		207	2
CARDIOVASCULAR		512		478	7			1,488		1,380	8
Neuro Implantables		260		233	12			760		697	9
Gastroenterology & Urology		60		57	5			170		160	6
NEUROMODULATION		320		290	10			930		857	9
DIABETES		258		226	14			744		633	18
Core ENT		81		69	17			231		200	16
Neurologic Technologies		73		65	12			216		191	13
ENT		154		134	15			447		391	14
PHYSIO-CONTROL		94		105	(10	)		228		317	(28	)
CORPORATE TECHNOLOGIES & NEW VENTURES		41		31	32			105		80	31
TOTAL	$	3,405	$	3,048	12	%	$	9,655	$	9,019	7	%

Forward-looking statements are subject to risk factors (see “Cautionary Factors That May Affect Future Results” set forth in our Annual Report on Form 10-K for the year ended April 27, 2007 and “Part II, Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q).

Cardiac Rhythm Disease Management

CRDM products consist primarily of pacemakers, implantable defibrillators, leads, ablation products, electrophysiology catheters, and information systems for the management of patients with our devices. CRDM net sales for the three and nine months ended January 25, 2008 were $1.218 billion and $3.601 billion, an increase of 3 percent and 0 percent, respectively, when compared to the same periods of the prior fiscal year. Foreign currency translation had a favorable impact on net sales for the three and nine months ended January 25, 2008 of approximately $44 million and $94 million, respectively, when compared to the same periods of the prior fiscal year.

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Worldwide net sales of Defibrillation Systems, our largest product line, for the three and nine months ended January 25, 2008 were $726 million and $2.091 billion, an increase of 2 percent and a decrease of 3 percent, respectively, when compared to the same periods of the prior fiscal year. Net sales for the three months ended January 25, 2008 increased, as compared to the prior year period, as a result of foreign currency translation and the benefit of approximately $20 million in revenue from filling the second quarter backlog on Quattro leads and reversing a portion of the Fidelis returns reserve established in the second quarter of fiscal year 2008 associated with the suspension of worldwide distribution of the Fidelis lead. See the discussion in the “Other Matters” section of this management’s discussion and analysis for further information on the suspension of worldwide distribution of the Fidelis lead. Sales of leads and, in some cases, complete Defibrillation Systems were negatively impacted in the third quarter of fiscal year 2008 by the Fidelis lead suspension. In particular, we did not receive clearance to sell our Quattro lead in Japan until January 2008, we do not currently sell a single coil Quattro lead, which is a more preferred product in certain Western European markets, and our field organization focused efforts on serving Fidelis customers and patients. The net sales decrease for the nine months ended January 25, 2008 was primarily the result of the suspension of worldwide distribution of the Fidelis lead, partially offset by the benefit of foreign currency translation. Net sales from Defibrillation Systems in the U.S. for the three and nine months ended January 25, 2008 were $502 million and $1.440 billion, a decrease of 1 percent and 7 percent, respectively, when compared to the same periods of the prior fiscal year. Outside the U.S., net sales from Defibrillation Systems for the three and nine months ended January 25, 2008 were $224 million and $651 million, an increase of 10 percent each when compared to the same periods of the prior fiscal year. The decrease in net sales in the U.S. for the three and nine months ended January 25, 2008 was primarily the result of the suspension of worldwide distribution of the Fidelis lead. The increase in net sales outside the U.S. for the three and nine months ended January 25, 2008 was driven by continued acceptance of Virtuoso ICDs and Concerto CRT-Ds and the benefit of foreign currency translation. Both the Virtuoso ICDs and Concerto 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.

Pacing Systems net sales for the three and nine months ended January 25, 2008 were $478 million and $1.468 billion, an increase of 4 percent and 6 percent, respectively, when compared to the same periods of the prior fiscal year. Net sales for the three months ended January 25, 2008 were strong outside the U.S., benefiting from foreign currency translation; however, this was offset by U.S. net sales that were negatively impacted by the suspension of worldwide distribution of the Fidelis lead, as our field organization’s primary focus was on serving Fidelis customers and patients. Worldwide net sales for the nine months ended January 25, 2008 were driven by 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 and the benefit of foreign currency translation. 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. Net sales from Pacing Systems in the U.S. for the three and nine months ended January 25, 2008 were $218 million and $698 million, a decrease of 1 percent and an increase of 1 percent, respectively, when compared to the same periods of the prior fiscal year. Outside the U.S., net sales from Pacing Systems for the three and nine months ended January 25, 2008 were $260 million and $770 million, an increase of 9 percent and 10 percent, respectively, when compared to the same periods of the prior fiscal year. The revenue growth in the U.S. for the three and nine months ended January 25, 2008 was slowed by the suspension of worldwide distribution of the Fidelis lead, as our field organization focused their efforts on serving Fidelis customers and patients.

Looking ahead, we expect our CRDM operating segment should benefit from the following:

•

Future acceptance of our Quattro lead in Japan. We received regulatory and reimbursement approvals to begin selling our Quattro lead in Japan in January 2008. Prior to this approval, we did not have an approved lead in the Japanese market. Additionally, we expect future acceptance of our single coil Quattro lead, which we expect to launch in markets around the world in the first quarter of fiscal year 2009. Some physicians prefer a single coil lead, particularly physicians in certain Western European countries. We believe the future availability of this product will help us to further recover from the impact of the Fidelis lead action.

•

A worldwide Defibrillation System market that is still significantly under-penetrated. Our investments to expand the physician referral network, enhance clinical evidence, and develop technologies that promote the ease of use and care should drive increased usage of defibrillator therapies.

•

The future launch of our next generation products, including the Secura ICD and the Consulta CRT-D, along with the Maximo II line of ICDs and CRT-Ds. Secura and Consulta will be the first offerings in our Vision 3D family. Vision 3D is our first generation with a common platform across ICDs, CRT-Ds and Pacing Systems. Additionally these products extend our wireless technology to high power devices, provide enhanced follow-up and automaticity features and create meaningful manufacturing synergies. We are driven to meet the medical needs of our patients and continue to develop our industry leading product portfolio.

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•

Continued acceptance of the Adapta family of pacemakers, including the Adapta, Versa, and Sensia models.

•

Continued expansion of the Medtronic CareLink Service, available on both the Pacing and Defibrillator platforms in the U.S., Canada, and Western Europe, and beginning in the fourth quarter of fiscal year 2008, on a pilot basis in Japan. 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. The Medtronic CareLink Service continues to drive physician preference for our products. As of the end of the third quarter of fiscal year 2008, approximately 2,051 clinics were monitoring approximately 224,000 implant patients in the U.S. and we continue to expand this network.

Although we expect to benefit from having successfully restored a sufficient supply of Quattro leads, the January 2008 introduction of our Quattro lead in the Japanese market and the future launch of a single coil Quattro lead, there still remains uncertainty as to the future impact the Fidelis lead suspension may have on the overall Defibrillation System market or our results in this market.

Spinal

Spinal products include thoracolumbar, cervical and interbody spinal devices, and bone graft substitutes. Spinal net sales for the three and nine months ended January 25, 2008 were $808 million and $2.112 billion, an increase of 35 percent and 19 percent, respectively, over the same periods of the prior fiscal year. Foreign currency translation had a favorable impact on net sales for the three and nine months ended January 25, 2008 of approximately $15 million and $24 million, respectively, when compared to the same periods of the prior fiscal year. The growth in the third quarter of fiscal year 2008 was driven by the November 2, 2007 close of the acquisition of Kyphon, which generated revenue of $147 million in the period. The acquisition of Kyphon increased Spinal net sales by 24 percent and 8 percent for the three and nine months ended January 25, 2008, respectively. See below and Note 3 to the condensed consolidated financial statements for further discussion about the acquisition of Kyphon.

Core Spinal net sales for the three and nine months ended January 25, 2008 were $455 million and $1.371 billion, respectively, an increase of 7 percent and 9 percent, respectively, over the same periods of the prior fiscal year. Growth in the periods was primarily based on continued acceptance of our products for the thoracolumbar and cervical sections of the spine. Thoracolumbar net sales growth for the three and nine months ended January 25, 2008 was driven by net sales of the CD HORIZON LEGACY family of products (CD HORIZON) outside the U.S., worldwide net sales of the CAPSTONE and VERTE-STACK CRESCENT Vertebral Body Spacers (CAPSTONE and CRESCENT) for thoracolumbar stabilization, and worldwide net sales growth of the Lumbar Dynamic platform of products. CD HORIZON is the most comprehensive system on the market today, and is designed to provide procedural solutions for degenerative, deformity, or trauma applications using color coded implants and ergonomic instrumentation. The CAPSTONE and CRESCENT are minimal access devices and techniques designed to replace and restore vertebral height in the thoracolumbar spine. The growth of our Lumbar Dynamic platform of products, which allow some range in motion as compared to our fixed stabilization devices, was driven by demand for our PEEK Rod System in the U.S. and DIAM System outside the U.S. The growth in net sales of our cervical products for the three and nine months ended January 25, 2008 was led by continued acceptance of the VERTEX Max Reconstruction System for cervical stabilization outside the U.S.

Spinal Biologics net sales for the three and nine months ended January 25, 2008 were $206 million and $594 million, an increase of 20 percent and 16 percent, respectively, over the same periods of the prior fiscal year. These increases were primarily driven by continued strong acceptance of INFUSE Bone Graft in the U.S. 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. Additionally, although on smaller bases, we have continued to experience strong growth in the sales of InductOs Bone Graft, the outside the U.S. equivalent of INFUSE Bone Graft, for both the three and nine months ended January 25, 2008.

Kyphon net sales of $147 million for the three and nine months ended January 25, 2008 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. 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 or benign lesions, or trauma through minimally invasive spine surgeries. Kyphon’s interspinous products for treating lumbar spinal stenosis include the commercially available X-STOP IPD technology and Aperius PercLID.

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Looking ahead, we expect our Spinal operating segment should benefit from the following:

	•	Continued acceptance of our products for stabilization of the thoracolumbar and cervical sections of the spine, including the CD HORIZON LEGACY 5.5 and the VERTEX Max Reconstruction System.

	•	Continued acceptance of the INFUSE Bone Graft for spinal fusion and certain types of acute, open tibia fractures.
	•	Future launch of the extra small and double extra small Infuse kits for use in Spinal and oral maxillofacial procedures. These smaller kits should help to continue the strong growth that we have experienced to date, as these smaller size offerings will expand the potential user population.

	•	Continued growth in the acceptance of our PRESTIGE Cervical Disc System, for dynamic stabilization, which received FDA approval on July 16, 2007 and was launched in the U.S. at the end of the first quarter of fiscal year 2008. The PRESTIGE Cervical Disc System is the first in a portfolio of artificial discs designed to serve patients suffering from severe degenerative disc disease, while maintaining motion in a patient’s cervical spine. We continue to train additional surgeons and are encouraged by the steady progress we are making with reimbursement agencies for coverage. Additionally, on July 17, 2007 the BRYAN Cervical Disc System received a recommendation for approval from an FDA advisory panel. We anticipate launching the BRYAN Cervical Disc System in the first half of calendar year 2008.

	•	Continued acceptance of our Lumbar dynamic platform of products including the PEEK Rod System in the U.S. and the DIAM System outside the U.S. combined with continued acceptance of Kyphon’s X-Stop IPD system and the Aperius PercLID, for the treatment of mild to moderate lumbar spinal stenosis.

	•	Continued acceptance of the Kyphon instruments for use in balloon kyphoplasty. The acquisition of Kyphon will add to the growth of our existing Spinal business by extending our product offerings into some of the fastest growing product segments of the spine market, enabling us to provide physicians with a broader range of therapies for use at all stages of the care continuum.

CardioVascular

CardioVascular products consist of coronary and peripheral stents and related delivery systems, endovascular stent grafts, products for the treatment of heart valve disease and tissue ablation, and open heart and coronary bypass grafting surgical products. CardioVascular net sales for the three and nine months ended January 25, 2008 were $512 million and $1.488 billion, an increase of 7 percent and 8 percent, respectively, over the same periods of the prior fiscal year. Foreign currency translation had a favorable impact on net sales for the three and nine months ended January 25, 2008 of approximately $29 million and $63 million, respectively, when compared to the same periods of the prior fiscal year.

Coronary Stent and Other Coronary/Peripheral net sales for the three and nine months ended January 25, 2008 were $260 million and $753 million, an increase of 8 percent and 10 percent, respectively, as compared to the same periods in the prior fiscal year. The increase in net sales for the three months ended January 25, 2008 was led by sales of our Endeavor and Endeavor Resolute drug-eluting stents outside the U.S., and sales of the Driver family of bare metal stents in the U.S. Our drug-eluting stents, which generated revenue of $84 million and $245 million in the three and nine months ended January 25, 2008, respectively, were commercially released in all global markets during the quarter except Canada, Japan, and the U.S. Although the market for stents and drug-eluting stents has been under pressure, sales of our Endeavor DES continue to benefit from favorable long-term clinical data, along with its ease of delivery. In addition, we recognized revenue of $73 million and $214 million in the three and nine months ended January 25, 2008, respectively, from the Driver family of bare metal stents, which experienced strong growth in the U.S. as a result of the aforementioned reduction in the use of drug-eluting stents. The Driver bare metal stent is a cobalt-chromium coronary stent which has thinner struts and provides greater maneuverability in placing the stent.

Endovascular net sales for the three and nine months ended January 25, 2008 were $70 million and $208 million, an increase of 9 percent and 11 percent, respectively, in comparison to the same periods in the prior fiscal year. For the three and nine months ended January 25, 2008 growth in the Endovascular business was driven 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. for the three and nine months ended January 25, 2008, decreased and were flat, respectively, in comparison to the same period in the prior year as a result of a voluntary field action on the AneuRx AAAdvantage Stent Graft System that required physician and patient notification.

Revascularization and Surgical Therapies net sales for the three and nine months ended January 25, 2008 were $109 million and $316 million, both an increase of 4 percent in comparison to the same periods in the prior fiscal year, led by net sales of our cannulae and beating heart products outside the U.S.

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Structural Heart Disease net sales for the three and nine months ended January 25, 2008 were $73 million and $211 million, an increase of 6 percent and 2 percent, respectively, in comparison to the same periods in the prior fiscal year. The increases in net sales for the three and nine months ended January 25, 2008 were led 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 valves, tempered by the impacts of the suspension of sales for the Advantage mechanical heart valve for a portion of the three and nine months ended January 25, 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 hemodynamics.

Looking ahead, we expect our CardioVascular operating segment should benefit from the following:

•

Future acceptance of the Endeavor DES in the U.S. market. On February 1, 2008 we announced FDA approval and the initiation of our U.S. launch of the Endeavor DES. The Endeavor DES is the first new drug-eluting stent approved for use in the U.S. market in over four years and provides a beneficial safety and efficacy profile for treating patients with coronary artery disease.

•

Continued acceptance of Endeavor Resolute in markets outside the U.S. Endeavor Resolute combines the proven drug and stent components of the Endeavor DES with Biolinx, a proprietary biocompatible polymer. Biolinx facilitates the elongation of Zotarolimus elution to correspond with the extended healing characteristics associated with complex lesions and patients with complex medical conditions, such as diabetes. In October 2007, we received CE Mark approval and launched Endeavor Resolute in select countries. Endeavor Resolute is currently available in 50 countries and we expect to launch it in an additional five countries outside the U.S. by the end of fiscal year 2008.

•

Continued acceptance of our Sprinter Legend Semicompliant Rapid Exchange Balloon Dilation Catheter for use in coronary angioplasty procedures. We received CE Mark approval and initiated a November 2007 launch in markets outside the U.S. The Sprinter Legend Balloon incorporates revolutionary Zerofold technology which enables an exceptionally low profile with no wrapped material and no balloon shoulders. This design assists our customers in addressing their most difficult clinical challenges.

•

Future acceptance of the Talent AAA Stent Graft System in the U.S. market and our anticipated entry into the U.S. and Japanese thoracic stent graft markets. The Talent AAA Stent Graft System PMA was filed with the FDA in October 2007 and we anticipate FDA approval and U.S. launch in the first half of calendar year 2008. The Talent Thoracic PMA was filed with the FDA in July 2007 and we anticipate FDA approval and launch of our Talent Thoracic device in the second half of calendar year 2008. In addition, we anticipate continued sales growth outside the U.S. with future acceptance of our next generation Endurant AAA stent graft and continued acceptance of the Valiant Thoracic Stent Graft System. We anticipate completion of our first-in-human trial for the new Endurant AAA stent graft in Western Europe in the first half of calendar year 2008. We anticipate CE mark approval of Endurant in the second half of calendar year 2008.

Neuromodulation

Neuromodulation products consist of therapeutic and diagnostic devices, including implantable neurostimulation systems, implantable drug administration devices, and urology and gastroenterology products. Neuromodulation net sales for the three and nine months ended January 25, 2008 were $320 million and $930 million, an increase of 10 percent and 9 percent, respectively, when compared to the same periods of the prior fiscal year. Foreign currency translation had a favorable impact on net sales for the three and nine months ended January 25, 2008 of approximately $9 million and $19 million, respectively, when compared to the same periods of 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 6 percent and 4 percent for the three and nine months ended January 25, 2008, respectively.

Net sales from Neuromodulation Implantables for treating pain and movement disorders for the three and nine months ended January 25, 2008 were $260 million and $760 million, an increase of 12 percent and 9 percent, respectively, over the same periods in the prior fiscal year. The growth was driven by sales in the U.S. of key products in Pain Stimulation including the RestoreADVANCED and PrimeADVANCED neurostimulation systems for pain management, our Synchromed II drug delivery pump and our new surgical lead for spinal cord stimulation, the Specify 5-6-5. Additionally, worldwide sales of Activa therapy for deep brain stimulation for the treatment of movement disorders associated with advanced Parkinson’s disease and essential tremor contributed to our growth for the three and nine months ended January 25, 2008.

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Net sales of Gastroenterology and Urology products for the three and nine months ended January 25, 2008 were $60 million and $170 million, an increase of 5 percent and 6 percent, respectively, over the same periods in the prior fiscal year. The growth in Gastroenterology and Urology was led by U.S. sales of our InterStim product line for the treatment of overactive bladder and urinary retention. The InterStim II was launched in the second quarter of fiscal year 2007, and its smaller design continues to be widely accepted. For the three and nine months ended January 25, 2008 net sales in the U.S. for the InterStim product line increased 22 percent and 26 percent, respectively, in comparison to the same periods of the prior year.

Looking ahead, we expect our Neuromodulation operating segment should benefit from the following:

•

Future acceptance of the RestoreULTRA, our next generation rechargeable neurostimulator with advanced programming capabilities and thinner device size. U.S. approval of our RestoreULTRA was announced in the fourth quarter of fiscal year 2008 and is expected to be fully launched by March 2008. RestoreULTRA will be the smallest and thinnest 16 electrode rechargeable neurostimulator on the market and will offer patients the ability to customize their pain control.

•

Continued acceptance of our new surgical lead, the Specify 5-6-5 with Durable Electrode Technology, which was launched in the first quarter of fiscal year 2008. The Specify 5-6-5 surgical lead offers exclusive advantages and electrode programming patterns when used with our neurostimulators. Additionally, we anticipate the launch of the Specify 2x8 surgical lead in the first half of fiscal year 2009.

•

Continued acceptance of our Activa Therapy for the treatment of Parkinson’s disease and essential tremor. We continue to educate neurologists and the patient population of the benefits that our Activa Therapy offers them. Additionally, we look forward to the anticipated launch of the Activa Rechargeable Stimulator, our next generation stimulator, which will be the therapy’s first rechargeable device.

•

Continued acceptance of InterStim II for the treatment of overactive bladder and urinary incontinence.

Diabetes

Diabetes products consist of external insulin pumps and related consumables, continuous glucose monitoring systems, and subcutaneous glucose sensors. Diabetes net sales for the three and nine months ended January 25, 2008 were $258 million and $744 million, an increase of 14 percent and 18 percent, respectively, when compared to the same periods of the prior fiscal year. Foreign currency translation had a favorable impact on net sales for the three and nine months ended January 25, 2008 of approximately $9 million and $19 million, respectively, when compared to the same periods of the prior fiscal year.

External pump sales for the three and nine months ended January 25, 2008 were $112 million and $334 million, representing growth of 8 percent and 17 percent, respectively, over the same periods in the prior fiscal year. The increase in net sales for the three months ended January 25, 2008 was led by strong outside the U.S. net sales of the Paradigm REAL-Time sensor-augmented pump system that integrates continuous glucose monitoring and insulin pump functionality, while net sales in the U.S. were affected by accelerated upgrades of our installed base to the Paradigm Real-Time system that occurred in fiscal year 2007 upon its initial launch. The increase in net sales for the nine months ended January 25, 2008 was lead by strong worldwide market acceptance of the Paradigm REAL-Time sensor-augmented pump system. Sales of consumables for the three and nine months ended January 25, 2008 were $124 million and $351 million, an increase of 13 percent and 11 percent, respectively, over the same periods in the prior fiscal year.

Looking ahead, we expect our Diabetes operating segment should benefit from the following:

•

Continued acceptance from both physicians and patients of the Paradigm REAL-Time sensor-augmented pump system, which integrates continuous glucose monitoring and insulin pump functionality.

	•	Continued acceptance of the Guardian REAL-Time Continuous Glucose Monitoring System (CGMS) for diabetes management. The Guardian REAL-Time System is a stand alone glucose monitoring system that provides patients with real-time glucose trend graphs and predictive alarms informing them when their glucose levels become too high or too low, enabling better management of diabetes.

	•	Future acceptance of the CGMS iPro recorder, which received U.S. FDA approval in January 2008 and will be launched in the U.S. in February 2008. The CGMS iPro is a new physician-use CGMS recorder that is smaller, lighter in weight and less time consuming to use than previous CGMS recorders. It is designed to help uncover patterns and potential problems that often go undetected with standard glucose measurements.

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•

Future acceptance and customer preference for Medtronic products due to the alliances with LifeScan, Inc. (Lifescan), a Johnson & Johnson 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. In February 2008 we launched our co-developed blood glucose meter with Bayer, starting with initial shipments in the German market, and we are on track for launching the Lifescan meter in the U.S. market later this spring.

•

Expansion of the number of physician education programs that are designed to teach physicians about pump therapy and continuous glucose monitoring.

ENT

The ENT operating segment consists of ear, nose, and throat related products (Core ENT) and neurologic technology-related products (Neurologic Technologies) including powered tissue-removal systems and other microendoscopy instruments, implantable devices, nerve monitoring systems, disposable fluid-control products, image-guided surgery systems, a Ménière’s disease therapy device, hydrocephalus shunt devices, external drainage systems, cranial fixation devices, neuroendoscopes, and dura repair products. ENT net sales for the three and nine months ended January 25, 2008 were $154 million and $447 million, an increase of 15 percent and 14 percent, respectively, when compared to the same periods of the prior fiscal year. Foreign currency translation had a favorable impact on net sales for the three and nine months ended January 25, 2008 of approximately $4 million and $9 million, respectively, when compared to the same periods of the prior fiscal year.

Core ENT net sales for the three and nine months ended January 25, 2008 were $81 million and $231 million, increases of 17 percent and 16 percent, respectively, in comparison to the same periods in the prior fiscal year. The increases for the three and nine months ended January 25, 2008 were driven by strong growth in net sales outside the U.S. of the Straightshot M4 Microdebrider and endoscopy sales. Additionally, during the three months ended January 25, 2008 net sales in the U.S. started to benefit from the successful launch of the Fusion EM IGS System, our new Image Guidance Surgery System for use in sinus surgical procedures. Fusion EM IGS is an electromagnetic-based image-guided surgery product that will avoid “line of sight constraints” of optical systems.

Neurologic Technologies net sales for the three and nine months ended January 25, 2008 were $73 million and $216 million, increases of 12 percent and 13 percent, respectively, in comparison to the same periods in the prior fiscal year. The primary driver of growth for the three and nine months ended January 25, 2008 in Neurologic Technologies was the continued worldwide acceptance of high-speed powered surgical drill systems, including the EHS Stylus system and the Strata valves.

Looking ahead, we expect our ENT operating segment should benefit from the following:

•

Continued acceptance of our new FUSION EM IGS System that was launched in the U.S. in the third quarter of fiscal year 2008.

•

Continued adoption of power systems outside the U.S. for sinus procedures, including the Straightshot M4 Microdebrider, as well as continued global adoption of nerve monitoring for ENT and thyroid procedures.

•

Continued development of the normal pressure hydrocephalus market, resulting in increased sales of our shunt products, including the Strata valve, and continued acceptance of our Legend high-speed drill systems, electric bone mill, and Durepair dura substitute.

Costs and Expenses

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

	Three months ended				Nine months ended
	January 25, 2008		January 26, 2007		January 25, 2008		January 26, 2007
Cost of products sold	25.6	%	25.4	%	25.9	%	25.5	%
Research & development	9.7		9.6		9.6		10.1
Selling, general & administrative	35.4		34.1		35.3		33.9
Special charges	2.3		—		0.8		—
Restructuring	—		—		0.1		—
Certain litigation	10.7		—		3.8		0.4
IPR & D	9.1		—		3.6		—
Other expense, net	3.5		1.4		2.6		1.8
Interest income, net	(0.3	)	(1.2	)	(1.2	)	(1.3	)

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Cost of Products Sold

Cost of products sold for the three and nine months ended January 25, 2008, as a percentage of net sales, increased 0.2 of a percentage point and 0.4 of a percentage point to 25.6 percent and 25.9 percent, respectively, when compared to the same periods in the prior fiscal year. Cost of products sold as a percentage of net sales in the three months ended January 25, 2008 was negatively impacted by 1.0 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 for manufacturing variances in the period. These increases in cost of products sold were offset by 1.0 percentage point of favorable foreign currency adjustments and 0.2 of a percentage point of favorable product mix. Cost of products sold as a percentage of net sales in the nine months ended January 25, 2008 was negatively impacted by 0.4 of a percentage point associated with the impact of the $34 million fair value adjustment for the inventory acquired in the Kyphon acquisition and 0.6 of a percentage point of unfavorability for scrap and other product costs associated with the suspension of worldwide distribution of the Fidelis lead and scrap costs at our Physio-Control business segment. These increases in cost were offset by favorable adjustments of 0.6 of a percentage point for foreign currency adjustments.

The $34 million fair value adjustment for the inventory acquired in the Kyphon acquisition was related to the step-up to fair value. This was recognized in the third quarter of fiscal year 2008, corresponding to the time over which the inventory was sold to customers. See the “Acquisitions” section of this management’s discussion and analysis for further information.

Research and Development

Consistent with prior periods, we have continued to invest in the future by spending aggressively on research and development efforts. For the three and nine months ended January 25, 2008, research and development spending was $329 million and $927 million, or 9.7 percent and 9.6 percent of net sales, respectively. Research and development spending for the three and nine months ended January 26, 2007 was $293 million and $912 million, or 9.6 percent and 10.1 percent of net sales, respectively. Research and development spending for the three months ended January 25, 2008 is relatively consistent with the prior year. The decrease in research and development as a percentage of net sales for the nine months ended January 25, 2008 is the result of our restructuring initiatives that began in the fourth quarter of fiscal year 2007. We remain committed to developing technological enhancements and new indications for existing products, and less invasive and new technologies to address unmet medical needs.

Selling, General and Administrative

Selling, general and administrative expense for the three and nine months ended January 25, 2008, as a percentage of net sales, increased by 1.3 percentage points and 1.4 percentage points to 35.4 percent and 35.3 percent, respectively, as compared to the same periods of the prior fiscal year. For the three months ended January 25, 2008, 0.9 of a percentage point of the increase was driven by the acquisition of Kyphon. The remainder of the increase is the result of our investment in selling and marketing activities for the Endeavor DES launch, which did not occur in the third quarter of fiscal year 2008, thus providing no revenue. For the nine months ended January 25, 2008, 0.3 of a percentage point of the increase was driven by the acquisition of Kyphon. 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. launch of the Prestige Cervical Disc System, the anticipated U.S. launch of the Endeavor DES, 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.

Special, Restructuring, Certain Litigation and IPR&D Charges

Special, restructuring, certain litigation, and IPR&D charges for the three and nine months ended January 25, 2008 and January 26, 2007 were as follows:

	Three months ended					Nine months ended
(dollars in millions)	January 25, 2008			January 26, 2007		January 25, 2008			January 26, 2007
Special charges	$	78		$	—	$	78		$	—
Restructuring charges		—			—		14			—
Certain litigation charges		366			—		366			40
IPR & D charges		310			—		343			—
Total special, restructuring, certain litigation, and IPR & D charges		754			—		801			40
Net tax impact of special, restructuring, certain litigation, and IPR & D charges		(118	)		—		(129	)		—
Total special, restructuring, certain litigation, and IPR & D charges, net of tax	$	636		$	—	$	672		$	40

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Special

During the three and nine months ended January 25, 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. See Note 4 to the condensed consolidated financial statements for further discussion of this special charge.

During the three and nine months ended January 26, 2007, there were no special charges.

Restructuring

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. As previously announced, 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. The employee termination costs related to 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 restructuring initiatives, which are scheduled to be substantially complete by the end of fiscal year 2008, are expected to produce annualized operating savings of approximately $125 million. These savings will arise mostly from reduced compensation expense.

As a continuation of our fiscal year 2007 initiatives, 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, see Note 15 to the condensed consolidated financial statements.

When the restructuring initiative began in fiscal year 2007, we identified approximately 900 positions for elimination which will be achieved through early retirement packages offered to employees, voluntary separation, and involuntary separation. As previously announced, all potentially impacted employees have been notified. Of the positions identified, 759 have been eliminated as of January 25, 2008. See additional details of the restructuring activity in Note 5 to the condensed consolidated financial statements.

There were no restructuring charges for the three and nine months ended January 26, 2007.

Certain Litigation

We classify settlements or judgments from material litigation as certain litigation charges. During the three and nine months ended January 25, 2008, we incurred certain litigation charges of $366 million. Of the amount recorded, $123 million, relates 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. The remainder of the charge, $243 million, relates to an estimated reserve established for litigation with Cordis Corporation, a subsidiary of Johnson & Johnson. The Cordis litigation originated in October 1997 and pertains to a patent infringement claim on a previous generation of bare mental stents that are no longer on the market. We believe an unfavorable outcome in the matter is probable. In accordance with SFAS No. 5, “Accounting for Contingencies”, Medtronic has recorded a $243 million reserve in the third quarter of fiscal year 2008 for estimated damages in the matter. As of January 25, 2008, these amounts have not yet been paid. See Note 16 to the condensed consolidated financial statements for further discussion of these certain litigation charges.

During the three months ended January 26, 2007, there were no certain litigation charges.

During the first quarter of fiscal year 2007 we recorded a certain litigation charge of $40 million related to a settlement agreement with the United States Department of Justice which requires the government to obtain dismissal of two qui tam civil suits pending against us, and is conditional upon such dismissal being obtained. The two suits were based upon allegations about certain sales and marketing practices in the Spinal business. To resolve the matter, we have entered into a five-year corporate integrity agreement effective which will become effective when any appeals regarding those dismissals to the U.S. Court of Appeals for the Sixth Circuit become final. The corporate integrity agreement further strengthens our employee training and compliance systems surrounding sales and marketing practices. The settlement agreement reflects our assertion that the Company and its current employees have not engaged in any wrongdoing or illegal activity. Both qui tam suits have now been dismissed, and one of them is on appeal to the U.S. Court of Appeals for the Sixth Circuit, but no date has been set for a hearing. The other dismissal will not be appealed. As of January 25, 2008, this amount has not yet been paid.

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IPR&D Charges

During the three months ended January 25, 2008, we recorded $310 million of IPR&D charges of which $290 million related to technology acquired through the purchase of Kyphon that had not yet reached technological feasibility and had no future alternative use and $20 million related to the purchase of intellectual property from Setagon, Inc. that had not yet reached technological feasibility and had no future alternative use. See Note 2 to the condensed consolidated financial statements for further discussion of these IPR&D charges.

During the nine months ended January 25, 2008, we recorded $343 million of IPR&D charges of which $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 $8 million from 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. See Note 2 to the condensed consolidated financial statements for further discussion of these IPR&D charges.

There were no IPR&D charges for the three and nine months ended January 26, 2007.

Other Expense, Net

Other expense, net includes intellectual property amortization expense, royalty income and expense, realized minority investment gains/(losses), realized foreign currency transaction and derivative gains/(losses) and certain impairment charges. Other expense, net for the three and nine months ended January 25, 2008 increased $75 million and $88 million, to $119 million and $248 million, respectively, compared to the same periods in the prior fiscal year. The change for the three months ended January 25, 2008 is primarily due to losses of $41 million versus gains in the third quarter of the prior year of $3 million on our hedging programs, amortization on intangibles acquired as part of the Kyphon acquisition, which negatively impacted the third quarter of fiscal year 2008 by $22 million, and the comparative impact of the third quarter of the prior year which included $26 million of accelerated amortization of deferred income in connection with a product supply agreement in the CardioVascular business. The increase of $88 million for the nine months ended January 25, 2008 is primarily due to foreign exchange losses versus gains in the same period in the prior fiscal year from our hedging programs.

Interest Income, Net

For the three and nine months ended January 25, 2008, we generated interest income, net of $9 million and $114 million, respectively, as compared to interest income, net of $36 million and $113 million, respectively, for the same periods of the prior fiscal year. The decrease in the three months ended January 25, 2008 is the result of the financing of the Kyphon acquisition. The acquisition was financed through a combination of approximately $3.303 billion cash on hand causing a decrease in interest income, the issuance of $600 million short-term commercial paper and borrowing $300 million through a new long-term unsecured revolving credit facility both causing increases to interest expense.

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Income Taxes

	Three months ended						Nine months ended
	January 25, 2008			January 26, 2007			January 25, 2008			January 26, 2007
	(dollars in millions)
Provision for income taxes	$	58		$	224		$	463		$	670
Effective tax rate		42.77	%		23.98	%		24.61	%		25.19	%
Impact of special, restructuring, certain litigation, and IPR & D charges		(22.93	)		—			(2.49	)		—
Non-GAAP nominal tax rate ⁽¹⁾		19.84	%		23.98	%		22.12	%		25.19	%

_________

⁽¹⁾

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

Our effective tax rate for the three and nine months ended January 25, 2008 was 42.77 percent and 24.61 percent compared to 23.98 percent and 25.19 percent, respectively, from the same periods of the prior fiscal year. The change in our effective tax rate is primarily due to the impact of special, restructuring, certain litigation, and IPR & D charges, tax benefits derived from our international operations, and operational tax benefits discussed below. Excluding the impact of special, restructuring, certain litigation, and IPR & D charges, our non-GAAP nominal tax rate for the three and nine months ended January 25, 2008 was 19.84 and 22.12 percent, compared to 23.98 and 25.19 percent, from the same periods of the prior fiscal year.

During the three and nine months ended January 25, 2008, the Company recorded $30 million in operational tax benefits for the finalization of certain tax returns, and changes to uncertain tax position reserves for the settlement of certain tax audits. During the same periods in the prior fiscal year, the Company recorded a $12 million operational tax benefit for the retroactive renewal and extension of the research and development credit enacted by the Tax Relief and Health Act of 2006. These tax adjustments are operational in nature and recorded as part of our provision for income taxes. Excluding the impact of the operational tax adjustments, the Company’s non-GAAP nominal tax rate would have been 23.25% for the three and nine months ended January 25, 2008, compared to 25.25% for the same periods for the prior fiscal year. The decrease is primarily due to the income tax benefits derived from our international operations. See Note 11 to the condensed consolidated financial statements for further information.

Liquidity and Capital Resources

	January 25, 2008			April 27, 2007
	(dollars in millions)
Working capital	$	3,145		$	5,355
Current ratio*		1.9:1.0			3.1:1.0
Cash, cash equivalents, and short-term investments	$	1,307		$	3,078
Long-term investments in public and private debt securities**		2,018			3,004
Cash, cash equivalents, short-term investments, and long-term debt securities	$	3,325		$	6,082
Short-term borrowings and long-term debt	$	6,974		$	6,087
Net cash position***	$	(3,649	)	$	(5	)

_________________

*		Current ratio is the ratio of current assets to current liabilities.
**		Long-term investments include public and private 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 public and private debt securities less short-term borrowings and long-term debt.

We believe our liquidity remains strong as of January 25, 2008 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 $1.937 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 January 25, 2008, our Standard and Poor’s Ratings Group and Moody’s Investors Service ratings remain unchanged as compared to the fiscal year ending April 27, 2007 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 the third quarter of fiscal year 2008 as compared to the fiscal year ending April 27, 2007, is primarily due to the acquisition of Kyphon which was consummated on November 2, 2007. The transaction was financed through a combination of $3.303 billion of 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. For further information regarding the acquisition of Kyphon, see Note 3 to the condensed consolidated financial statements.

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At January 25, 2008 and April 27, 2007, approximately $3.058 billion and $5.428 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 be subject to U.S. tax.

We have investments in marketable debt securities which are classified and accounted for as available-for-sale. Our debt securities include government securities, commercial paper, corporate bonds, bank certificates of deposit, and mortgage backed and other asset backed securities including auction rate securities. Market conditions during the third quarter of fiscal year 2008 and subsequent to our quarter-end continue to indicate significant uncertainty on the part of investors on the economic outlook for the U.S. and for financial institutions that have potential exposure to the sub-prime housing market. This uncertainty has created reduced liquidity across the fixed income investment market, including the securities that the Company is invested in. As a result, some of our investments have experienced reduced liquidity including unsuccessful monthly auctions for our auction rate security holdings. During the third quarter of fiscal year 2008, we reclassified approximately $184 million in auction rate fixed income securities from short-term investments to long-term investments on our condensed consolidated balance sheet due to the fact that they are currently not trading, and current conditions in the general debt markets have reduced the likelihood that the securities will successfully auction within the next 12 months. Auction rate securities that did not successfully auction reset to the maximum rate as prescribed in the underlying indenture and all of the Company’s holdings continue to be current with their interest payments. Based on the Company’s assessment of the credit quality of the underlying collateral and credit support available to each of the securities in which we are invested, we believe no permanent impairment has occurred as the Company has the ability and the intent to hold these investments long enough to avoid realizing any significant loss. Additionally, if we required capital we believe we could liquidate the majority of our portfolio and incur no impairment loss and we have capacity under our commercial paper program and lines of credit that we could access. As of January 25, 2008, we do not believe that we have material risk in our current portfolio of investments that would impact our financial condition or liquidity. For further information about the risks associated with our investments see “Part 1, Item 3. Quantitative and Qualitative Disclosures About Market Risk”.

Summary of Cash Flows

	For the nine months ended
	January 25, 2008			January 26, 2007
Cash provided by (used in):
Operating activities	$	2,900		$	2,054
Investing activities		(2,686	)		(629	)
Financing activities		(696	)		(2,354	)
Effect of exchange rate changes on cash and cash equivalents		(45	)		22
Net change in cash and cash equivalents	$	(527	)	$	(907	)

Operating Activities

Cash provided by operating activities during the nine months ended January 25, 2008 increased $846 million over the same period of the prior year due to timing of receipts and payments for disbursements in the ordinary course of business.

Investing Activities

The $2.057 billion increase, over the same period of the prior year, in net cash used in investing activities was primarily attributable to the close of the Kyphon acquisition, which took place early in the third quarter of fiscal year 2008. In addition to the Kyphon acquisition, cash was used for additions to property, plant, and equipment and other investing activities.

Financing Activities

The $1.658 billion decrease, from the same period of the prior year, 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 $621 million from short-term borrowings and $300 million from the issuance of long-term debt. These cash inflows were offset by a $1.026 billion increase in cash used for stock 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.

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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 January 25, 2008. See Note 6 to the condensed consolidated financial statements for additional information regarding long-term debt. See Note 11 to the condensed consolidated financial statements for additional information regarding accrued income tax obligations, which are not reflected in the table below.

	Maturity by Fiscal Year
	Total		Remaining 2008		2009		2010		2011		2012		Thereafter
(dollars in millions)
Contractual obligations related to off-balance sheet arrangements:
Foreign currency contracts ⁽¹⁾	$	6,741	$	2,323	$	2,482	$	1,737	$	199	$	-	$	-
Operating leases ⁽²⁾		221		25		75		48		24		11		38
Inventory purchases ⁽³⁾		585		77		278		109		75		14		32
Commitments to fund minority investments/contingent acquisition consideration ⁽⁴⁾		239		13		38		33		40		29		86
Interest payments ⁽⁵⁾		594		58		115		115		106		64		136
Other ⁽⁶⁾		265		90		39		34		25		19		58
Total	$	8,645	$	2,586	$	3,027	$	2,076	$	469	$	137	$	350

Contractual obligations reflected in the balance sheet:
Long-term debt, excluding capital leases ⁽⁷⁾	$	5,544	$	-	$	94	$	-	$	2,612	$	-	$	2,838
Capital leases ⁽⁸⁾		77		-		11		13		16		17		20
Other ⁽⁹⁾		23		13		10		-		-		-		-
Total	$	5,644	$	13	$	115	$	13	$	2,628	$	17	$	2,858

⁽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 $4.400 billion of Senior Convertible Notes, $1.000 billion of Senior Notes and $94 million of Contingent Convertible Debentures. The interest rate on each outstanding obligation varies and interest is payable semi-annually. The interest rate is 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 commitments to replace our existing legacy enterprise resource systems, construction of our new CRDM campus, and certain research and development arrangements.

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⁽⁷⁾	Long-term debt in the table above includes $4.400 billion Senior Convertible Notes issued in April 2006, and $1.000 billion Senior Notes issued in September 2005 and $94 million related to our Contingent Convertible Debentures. The Contingent Convertible Debentures were classified in short-term borrowings in the condensed consolidated balance sheet as of January 25, 2008 as the holders have the option to require us to repurchase the outstanding securities (referred to as a put option) in September 2008. The table above also includes the impact of the five year interest rate swap entered into in November 2005 and the eight year interest rate swap agreement entered into in June 2007.
⁽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.
⁽⁹⁾	These obligations include royalty payments and a financing arrangement associated with our fiscal year 2002 acquisition of Kobayashi Pharmaceutical Co.’s interest in a joint venture it had formed with us in 1996 to distribute spinal products in Japan. This also includes our final deferred payment to Gary Michelson, M.D. and Karlin Technology, Inc.

Debt and Capital

Our capital structure consists of equity and interest-bearing debt. Interest-bearing debt as a percentage of total interest-bearing debt and equity was 39 percent at January 25, 2008 in comparison to 36 percent at April 27, 2007.

Share Repurchase Program

In October 2005, our Board of Directors authorized the repurchase of up to 40 million shares of our common stock and in April 2006, the Board of Directors made a special authorization for us to repurchase up to 50 million shares in connection with the $4.400 billion Senior Convertible Note offering (see Note 6 to the condensed consolidated financial statements for further discussion). In June 2007, our Board of Directors authorized the repurchase of an additional 50 million shares of our common stock.

Shares are repurchased from time to time to support our stock-based compensation programs and to take advantage of favorable market conditions. During the three and nine months ended January 25, 2008, we repurchased approximately 11.5 million shares and 29.0 million shares at an average price per share of $49.06 and $50.50, respectively. As of January 25, 2008, we have approximately 36.1 million shares remaining under current buyback authorizations approved by the Board of Directors.

Financing Arrangements

We have issued a combination of contingent convertible debentures, bank borrowings, and commercial paper to fund our short term needs. Short-term debt, including the current portion of our capital lease obligations, at January 25, 2008 was $1.318 billion compared to $509 million at April 27, 2007. We utilize a combination of contingent convertible debentures, senior convertible notes, and senior notes to meet our long-term financing needs. Long-term debt at January 25, 2008 was $5.656 billion compared to $5.578 billion at April 27, 2007. For more information on our financing arrangements, see Note 6 to the condensed consolidated financial statements.

Credit Arrangements and Debt Ratings

We have existing lines of credit of approximately $2.778 billion with various banks at January 25, 2008. The existing lines of credit include a five-year $1.750 billion syndicated credit facility dated December 20, 2006 (Credit Facility), which provides backup funding for our $2.250 billion 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. The Company can also request the extension of the Credit Facility maturity date for one additional year on December 20, 2008, the second anniversary of the date of this facility.

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. 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. The New Credit Agreement contains customary representations and warranties of the Company as well as affirmative covenants regarding the Company. Upon the occurrence of an event of default as defined under the New Credit Agreement, the New Lender could elect to declare all amounts outstanding under the New Facility to be immediately due and payable.

As of January 25, 2008 and April 27, 2007, $140 million and $0, respectively, were outstanding on all available lines of credit.

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We maintain a commercial paper program that allows us to have a maximum of $2.250 billion in commercial paper outstanding, with maturities up to 364 days from the date of issuance. As of January 25, 2008 and April 27, 2007, outstanding commercial paper totaled $1.019 billion and $249 million, respectively. During the three and nine months ended January 25, 2008, the weighted average original maturity of the commercial paper outstanding was approximately 49 and 33 days, respectively, and the weighted average interest rate was 4.54 and 5.00 percent, respectively. The issuance of commercial paper reduces the amount of credit available under our existing lines of credit.

In connection with the issuance of the contingent convertible debentures, 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 as compared to the fiscal year ending April 27, 2007. For more information on credit arrangements, see Note 6 to the condensed consolidated financial statements.

Operations Outside of the United States

The table below illustrates U.S. net sales versus net sales outside the U.S. for the three and nine months ended January 25, 2008 and January 26, 2007 (in millions):

	Three months ended				Nine months ended
	January 25, 2008		January 26, 2007		January 25, 2008		January 26, 2007
U.S. Net Sales	$	2,098	$	1,957	$	6,005	$	5,873
Non U.S. Net Sales		1,307		1,091		3,650		3,146
Total net sales	$	3,405	$	3,048	$	9,655	$	9,019

For the three and nine months ended January 25, 2008, consolidated net sales outside the U.S. grew 20 percent and 16 percent, respectively, over the same periods of the prior year. For the three and nine months ended January 25, 2008, growth outside the U.S. was 13 percent and 14 percent, respectively, higher than net sales growth in the U.S. primarily as a result of the CRDM, CardioVascular, Diabetes, and Spinal businesses. Overall, for the three and nine months ended January 25, 2008, outside of the U.S. sales continue to be led by acceptance of CardioVascular’s Endeavor DES and CRDM’s Pacing Systems. The acquisition of Kyphon increased the sales for the Spinal business outside of the U.S. as well.

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 $1.586 billion at January 25, 2008, or 51 percent, of total outstanding accounts receivable, and $1.456 billion at April 27, 2007, or 50 percent, of total outstanding accounts receivable.

Cautionary Factors That May Affect Future Results

Certain statements contained in this Quarterly Report on Form 10-Q and other written and oral statements made from time to time by us do not relate strictly to historical or current facts. As such, they are considered “forward-looking statements” which provide current expectations or forecasts of future events. Our forward-looking statements generally relate to our growth strategies, financial results, product development, regulatory approvals, competitive strengths, the scope of our intellectual property rights, litigation, mergers and acquisitions, integration of our acquisitions, including Kyphon, divestitures, market acceptance or continued 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,” “potential,” “project,” “should,” “will” and similar words or expressions. One must carefully consider forward-looking statements that may be affected by inaccurate assumptions, and understand that such statements involve a variety of risks and uncertainties, known and unknown, including, among others, risks related to competition in the medical device industry, reduction or interruption in our supply, quality problems and price decrease for our products and services, and international operations, as well as those discussed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended April 27, 2007. 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 forward-looking statement, 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 (if any), in which we may discuss in more detail various important factors that could cause actual results to differ from expected or historical results. 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.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Due to the global nature of our operations, we are subject to the exposures that arise from foreign exchange rate fluctuations. We manage these exposures using operational and economic hedges as well as derivative financial instruments. The primary currencies hedged are the Euro and the Japanese Yen.

Our objective in managing exposure to foreign currency fluctuations is to minimize 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 $6.741 billion and $5.372 billion at January 25, 2008 and April 27, 2007, respectively. The fair value of these contracts at January 25, 2008 was $197 million less than the original contract value. A sensitivity analysis of changes in the fair value of all foreign exchange derivative contracts at January 25, 2008 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 $664 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 January 25, 2008 indicates that the fair value of these instruments would change by $17 million.

We have investments in marketable debt securities which are classified and accounted for as available-for-sale. Our debt securities include government securities, commercial paper, corporate bonds, bank certificates of deposit, and mortgage backed and other asset backed securities including auction rate securities. Market conditions during the third quarter of fiscal year 2008 and subsequent to our quarter-end continue to indicate significant uncertainty on the part of investors on the economic outlook for the U.S. and for financial institutions that have potential exposure to the sub-prime housing market. This uncertainty has created reduced liquidity across the fixed income investment market, including the securities that the Company is invested in. As a result, some of our investments have experienced reduced liquidity including unsuccessful monthly auctions for our auction rate security holdings. During the third quarter of fiscal year 2008, we reclassified approximately $184 million in auction rate fixed income securities from short-term investments to long-term investments on our condensed consolidated balance sheet due to the fact that they are currently not trading, and current conditions in the general debt markets have reduced the likelihood that the securities will successfully auction within the next 12 months. Auction rate securities that did not successfully auction reset to the maximum rate as prescribed in the underlying indenture and all of the Company’s holdings continue to be current with their interest payments. Based on the Company’s assessment of the credit quality of the underlying collateral and credit support available to each of the securities in which we are invested, we believe no permanent impairment has occurred as the Company has the ability and the intent to hold these investments long enough to avoid realizing any significant loss. Additionally, if we required capital, we believe we could liquidate the majority of our portfolio and incur no impairment loss and we have capacity under our commercial paper program and lines of credit that we could access. As of January 25, 2008, we do not believe that we have material risk in our current portfolio of investments that would impact our financial condition or liquidity. As of January 25, 2008, we have $5 million of net unrealized losses on our aggregate investments of $3.325 billion; however, if market conditions continue to deteriorate further some of these holdings may experience permanent impairment in the future. For further information about the liquidity risks associated with our investments see “Liquidity and Capital Resources” within “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In the third quarter of fiscal year 2004, we began lending certain fixed income securities to enhance our investment income. These lending activities are collateralized at an average rate of 103 percent, with the collateral determined based on the underlying securities and creditworthiness of the borrowers. The value of the securities on loan at January 25, 2008 and April 27, 2007 was $276 million and $1.318 billion, respectively.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

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

Changes in internal control

We continue to implement a new enterprise resource planning (ERP) system using a multi-phased approach which has resulted in certain changes in internal controls. During the second quarter of fiscal year 2008, portions of our Cardiac Rhythm Disease Management, CardioVascular, and Neuromodulation operating segments implemented the new ERP system which resulted in some changes in internal controls. As a result, management could not test or rely on some of the internal controls for the three months ended January 25, 2008 due to the changes made in the second quarter. However, management performed other procedures and analysis to ensure the financial statements were materially correct for the three and nine months ended January 25, 2008. There have been no other changes in the Company’s internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

A discussion of the Company’s policies with respect to legal proceedings is discussed in the management’s discussion and analysis and our legal proceedings and other loss contingencies are described in Note 16 of the condensed consolidated financial statements. The description of our legal proceedings in Note 16 of the condensed consolidated financial statements to this filing is incorporated herein by reference.

The Company has received two letter requests from the chair of the U.S. Senate Committee on Finance. On September 20, 2007, the chair sent a letter requesting information about financial ties between the medical device industry and practicing physicians. On October 16, 2007, the chair sent a letter requesting information about the Company’s decision to suspend distribution of its Sprint Fidelis family of defibrillation leads. The Company is cooperating with the information requests.

On September 25, 2007, the Company received a letter from the SEC requesting information relating to any potential violations of the U.S. Foreign Corrupt Practices Act in connection with the sale of medical devices in an unspecified number of foreign countries, including Greece, Poland and Germany. The letter notes that the Company is a significant participant in the medical device industry, and seeks any information concerning certain types of payments made directly or indirectly to government-employed doctors. A number of competitors have publicly disclosed receiving similar letters. On November 16, 2007, the Company received a letter from the Department of Justice requesting any information provided to the SEC. The Company is cooperating with both requests.

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

Item 1A. Risk Factors

In addition to the risk factor set forth below and the other information set forth in this report, you should carefully consider the factors discussed in “Part I, Item 1A. Risk Factors” in our 2007 Annual Report filed on Form 10-K, which could materially affect our business, financial condition, or future results.

We may be unable to successfully integrate Kyphon’s operations or realize the anticipated benefits of the merger.

We entered into a merger agreement with Kyphon because we believe that the merger will be beneficial to us and our shareholders. Achieving the anticipated benefits of the merger depends in part on whether we can successfully integrate Kyphon’s business with our existing business. We may not be successful in integrating Kyphon’s business as efficiently and effectively as we anticipate. The integration of certain operations following the merger will require significant management resources which may distract attention from our day-to-day business. Any inability of management to successfully integrate Kyphon’s business could have a material adverse effect on our business and result of operations. We may not achieve anticipated cost synergies or long-term strategic benefits of the merger. An inability to realize the full extent of, or any of, the anticipated benefits of the merger, as well as any delays encountered in the integration process, could have an adverse effect on our business and results of operations, which may affect the value of our common stock after completion of the merger. Risks we may encounter in connection with the integration of Kyphon’s business also include:

•

difficulty incorporating acquired technologies or products with our existing product lines and maintaining uniform standards, controls, procedures and policies;

•

higher than anticipated costs in continuing support and development of acquired products;

•

legal or tax exposures as a result of unanticipated difficulties encountered during the integration process; and

•

inability to achieve the anticipated synergies such as increased sales and achieving cost savings.

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

Issuer Purchases of Equity Securities

The following table provides information about the shares repurchased by Medtronic during the third quarter of fiscal year 2008:

Fiscal Period	Total Number of Shares Purchased (1)		Average Price Paid per Share	Total Number of Shares Purchased as a Part of Publicly Announced Program	Maximum Number of Shares that May Yet Be Purchased Under the Program
10/27/07-11/23/07	1,649,900	$	48.49	1,649,900	45,904,461
11/24/07-12/28/07	6,677,100		49.97	6,677,100	39,227,361
12/29/07-1/25/08	3,159,900		47.44	3,159,900	36,067,461
Total	11,486,900	$	49.06	11,486,900	36,067,461

_________________

⁽¹⁾	In October 2005 and June 2007, our Board of Directors authorized the repurchase of up to 40 million and 50 million shares of our common stock, respectively. As authorized by the Board of Directors, each program expires when its total number of authorized shares has been repurchased.

Item 6. Exhibits

(a)

Exhibits

10.1

1994 Stock Award Plan (Amended and Restated as of January 1, 2008).

10.2

Medtronic Incentive Plan (As amended and restated effective as of January 1, 2008).

10.3

Medtronic, Inc. 1998 Outside Director Stock Compensation Plan (as amended and restated effective January 1, 2008).

10.4

Medtronic, Inc. 2003 Long-Term Incentive Plan (As amended and restated effective January 1, 2008).

10.5

Medtronic, Inc. Israeli Amendment to the 2003 Long-Term Incentive Plan.

10.6

Medtronic, Inc. – Kyphon Inc. 2002 Stock Plan (Amended and Restated July 26, 2007, as further amended on October 18, 2007).

10.7

Addendum: Medtronic, Inc. – Kyphon Inc. 2002 Stock Plan (Dated December 13, 2007).

12.1

Medtronic, Inc. Computation of Ratio of Earnings to Fixed Charges.

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

_________________

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SIGNATURES

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

	Medtronic, Inc. (Registrant)

Date: March 4, 2008	/s/ William A. Hawkins
	William A. Hawkins President and Chief Executive Officer

Date: March 4, 2008	/s/ Gary L. Ellis
	Gary L. Ellis Senior Vice President and Chief Financial Officer

1994 STOCK AWARD PLAN

(Amended and Restated as of January 1, 2008)

1. Purpose. The purpose of this 1994 Stock Award Plan (the “Plan’) is to motivate key personnel to produce a superior return to the shareholders of Medtronic, Inc. (the “Company”) and its Affiliates by offering such individuals an opportunity to realize Stock appreciation, by facilitating Stock ownership, and by rewarding them for achieving a high level of corporate performance. This Plan is also intended to facilitate recruiting and retaining key personnel of outstanding ability. The Plan is amended and restated January 1, 2008 to comply with Section 409A of the Internal Revenue Code.

2. Definitions. The capitalized terms used in this Plan have the meanings set forth below.


	(a) “Affiliate” means any corporation that is a “parent corporation” or “subsidiary corporation” of the Company, as those terms are defined in Sections 424(e) and (t) of the Code, or any successor provision, and, for purposes other than the grant of Incentive Stock Options, any joint venture in which the Company or any such “parent corporation” or “subsidiary corporation” owns an equity interest.

	(b) “Agreement” means the agreement, whether in written or electronic form, between the Company or an Affiliate and a Participant containing the terms and conditions of an Award (not inconsistent with this Plan), together with all amendments to such agreement, which amendments may be unilaterally made by the Company unless such amendments are deemed by the Committee to be materially adverse to the Participant or are not required as a matter of law. The Agreement and any amendments thereto shall be deemed accepted and agreed upon by the Participant upon receipt, without the necessity of obtaining the Participant’s signature.

	(c) “Award” means a grant made under this Plan in the form of Options, Stock Appreciation Rights, Restricted Stock, Performance Shares or any Other Stock-Based Award.

	(d) “Board” means the Board of Directors of the Company.

	(e) “Change in Control” means:


		(i) Any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Act or any successor thereto (a “Person”) becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Act) of 30% or more of either (A) the then -outstanding Shares (the “Outstanding Company Common Stock”) or (B) the combined voting power of the then - outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided , however , that, for purposes of this clause (c)(i), the following acquisitions shall not constitute a Change in Control: (1) any acquisition directly from the Company, (2) any acquisition by the Company or any of its subsidiaries, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its subsidiaries, (4) any acquisition by an underwriter temporarily holding securities pursuant to an offering of such securities or (5) any acquisition pursuant to a transaction that complies with clauses (iii) (A), (B) and (C) below; or

		(ii) Individuals who, as of the date hereof, constitute the Board (the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board; provided , however , that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the Incumbent Directors then on the Board shall be considered as though such individual was an Incumbent Director, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or


		(iii) Consummation of a reorganization, merger, statutory share exchange or consolidation (or similar corporate transaction) involving the Company or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of assets or stock of another entity by the Company or any of its subsidiaries (each, a “Business Combination”), in each case, unless, immediately following such Business Combination, (A) substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50 % of, respectively, the then - outstanding shares of common stock (or, for a non-corporate entity, equivalent securities) and the then-outstanding voting securities entitled to vote generally in the election of directors (or, for a non-corporate entity, equivalent governing body), as the case may be, of (1) the entity resulting from such Business Combination (the “Surviving Corporation”) or (2) if applicable, the ultimate parent entity that directly or indirectly has beneficial ownership of 80% or more of the voting securities eligible to elect directors of the Surviving Corporation (the “Parent Corporation”), in substantially the same proportion as their ownership, immediately prior to the Business Combination, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 30% or more of the outstanding shares of common stock and the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Business Combination; or

		(iv) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

Notwithstanding the foregoing provisions of this definition, a Change in Control shall not be deemed to occur with respect to a Participant if the acquisition of the 30% or greater interest referred to in clause (i) is by a group, acting in concert, that includes the Participant or if at least 40% of the then outstanding common stock or combined voting power of the then outstanding voting securities (or voting equity interests) of the Surviving Corporation or, if applicable, the Parent Corporation shall be beneficially owned, directly or indirectly, immediately after a Business Combination by a group, acting in concert, that includes that Participant.


	(f) “Code” means the Internal Revenue Code of 1986, as amended and in effect from time to time, or any successor statute.

	(g) “Committee” means the persons designated by the Board to administer this Plan under Section 3 hereof. The Committee shall consist of not less than three members of the Board and, except as otherwise determined by the Board, such persons shall be “non-employee directors” under Exchange Act Rule 16b-3 and “outside directors” under Section 162(m) of the Code.

	(h) “Company” means Medtronic, Inc., a Minnesota corporation, or any successor to all or substantially all of its businesses by merger, consolidation, purchase of assets or otherwise.

	(i) “Disability” means the disability of a Participant such that the Participant is considered disabled under any retirement plan of the Company which is qualified under Section 401 of the Code, or, in the case of a Participant employed by a non-U.S. Affiliate or in a non-U.S. location, under any retirement plan or long-term disability plan of the Company or such Affiliate applicable to such Participant, or as otherwise determined by the Committee.


	(j) “Employee” means any full-time or part-time regular employee (including officers) of the Company or an Affiliate. For purposes of this Plan, a regular employee is an employee who is on the regular payroll of the Company or an Affiliate and who is identified in the personnel records of the Company or an Affiliate as being an employee. Except with respect to grants of Incentive Stock Options, “Employee” shall also include other individuals who are not regular employees of the Company or an Affiliate but who provide services to the Company or an Affiliate in the capacity of an independent contractor and to whom the Company specifically chooses to grant an Award and therefore treat as a Participant. References in this Plan to “employment” and related terms shall include the providing of services in any such capacity.

	(k) “Exchange Act” means the Securities Exchange Act of 1934, as amended; “Exchange Act Rule 16b-3” means Rule l6b-3 promulgated by the Securities and Exchange Commission under the Exchange Act as in effect with respect to the Company or any successor regulation.

	(l) “Fair Market Value” as of any date means, unless otherwise expressly provided in this Plan:


		(i) the closing sale price of a Share (A) on the composite tape for New York Stock Exchange (“NYSE”) listed shares, or (B) if the Shares are not quoted on the NYSE composite tape, on the principal United States securities exchange registered under the Exchange Act on which the Shares are listed, or (C) if the Shares are not listed on any such exchange, on the National Association of Securities Dealers, Inc. Automated Quotation System National Market System, on that date, or, if no sale of Shares shall have occurred on that date, on the next preceding day on which a sale of Shares occurred, or

		(ii) if clause (i) is not applicable, what the Committee determines in good faith to be 100% of the fair market value of a Share on that date. In the case of an Incentive Stock Option, if such determination of Fair Market Value is not consistent with the then current regulations of the Secretary of the Treasury, Fair Market Value shall be determined in accordance with said regulations. The determination of Fair Market Value shall be subject to adjustment as provided in Section 14(f) hereof.


	(m) “Fundamental Change” means a dissolution or liquidation of the Company, a sale of substantially all of the assets of the Company, a merger or consolidation of the Company with or into any other corporation, regardless of whether the Company is the surviving corporation, or a statutory share exchange involving capital stock of the Company.

	(n) “Incentive Stock Option” means any Option designated as such and granted in accordance with the requirements of Section 422 of the Code or any successor to such section.

	(o) “Non-Employee Director” means a member of the Board who is not an employee of the Company or any Affiliate.

	(p) “Non-Qualified Stock Option” means an Option other than an Incentive Stock Option.

	(q) “Other Stock-Based Award” means an Award of Stock or an Award based on Stock other than Options, Stock Appreciation Rights, Restricted Stock or Performance Shares.

	(r) “Option” means a right to purchase Stock, including both Non-Qualified Stock Options and Incentive Stock Options.

	(s) “Participant” means an Employee to whom an Award is made.

	(t) “Performance Period” means the period of time as specified in an Agreement over which Performance Shares are to be earned.


	(u) “Performance Shares” means a contingent award of a specified number of Performance Shares, with each Performance Share equivalent to one Share, a variable percentage of which may vest depending upon the extent of achievement of specified performance objectives during the applicable Performance Period.

	(v) “Plan” means this 1994 Stock Award Plan, as amended and in effect from time to time.

	(w) “Restricted Stock” means Stock granted under Section 10 hereof so long as such Stock remains subject to one or more restrictions.

	(x) “Retirement” means retirement of an Employee as defined under any retirement plan of the Company which is qualified under Section 401 of the Code (which currently provides for retirement on or after age 55, provided the Employee has been employed by the Company and/or one or more Affiliates for at least ten years, or retirement on or after age 62), or under any retirement plan of the Company or any Affiliate applicable to the Employee due to employment by a non-U.S. Affiliate or employment in a non-U.S. location, or as otherwise determined by the Committee.

	(y) “Share” means a share of Stock.

	(z) “Stock” means the common stock, $. 10 par value per share (as such par value may be adjusted from time to time), of the Company.

	(aa) “Stock Appreciation Right” means a right, the value of which is determined relative to appreciation in value of Shares pursuant to an Award granted under Section 8 hereof.

	(bb) “Subsidiary” means a “subsidiary corporation,” as that term is defined in Section 424(f) of the Code, or any successor provision.

	(cc) “Successor” with respect to a Participant means the legal representative of an incompetent Participant or, if the Participant is deceased, the legal representative of the estate of the Participant or the person or persons who may, by bequest or inheritance, or valid beneficiary designation under Section 14(i) hereof, acquire the right to exercise an Option or Stock Appreciation Right or receive cash and/or Shares issuable in satisfaction of an Award in the event of a Participant’s death.

	(dd) “Term” means the period during which an Option or Stock Appreciation Right is outstanding or the period during which the restrictions placed on Restricted Stock or any other Award are in effect.

Except when otherwise indicated by the context, reference to the masculine gender shall include, when used, the feminine gender and any term used in the singular shall also include the plural.

	3. Administration.

	(a) Authority of Committee. The Committee shall administer this Plan. The Committee shall have exclusive power to make Awards and to determine when and to whom Awards will be granted, and the form, amount and other terms and conditions of each Award, subject to the provisions of this Plan. The Committee may determine whether, to what extent and under what circumstances Awards may be settled, paid or exercised in cash, Shares or other Awards or other property, or cancelled, forfeited or suspended. The Committee shall have the authority to interpret this Plan and any Award or Agreement made under this Plan, to establish, amend, waive and rescind any rules and regulations relating to the administration of this Plan, to determine the terms and provisions of any Agreements entered into hereunder (not inconsistent with this Plan), and to make all other determinations necessary or advisable for the administration of this Plan. The Committee may correct any defect, supply any omission or reconcile any inconsistency in this Plan or in any Award in the manner and to the extent it shall deem desirable. The determinations of the Committee in the administration of this Plan, as described herein, shall be final, binding and conclusive.


	(b) Delegation of Authority. The Committee may delegate all or any part of its authority under this Plan to (i) one or more subcommittees which may consist solely of “non-employee directors” under Exchange Act Rule 16b-3 and “outside directors” under Section 162(m) of the Code and (ii) persons who are not non-employee directors for purposes of determining and administering Awards solely to Employees who are not then subject to the reporting requirements of Section 16 of the Exchange Act.

	(c) Rule 16b-3. It is the intent that this Plan and all Awards granted pursuant to it shall be administered by the Committee (or a subcommittee thereof) so as to permit this Plan and Awards to comply with Exchange Act Rule I 6b-3. If any provision of this Plan or of any Award would otherwise frustrate or conflict with the intent expressed in this Section 3(c), that provision to the extent possible shall be interpreted and deemed amended in the manner determined by the Committee so as to avoid such conflict.

	(d) Indemnification. To the full extent permitted by law, each member and former member of the Committee and each person to whom the Committee delegates or has delegated authority under this Plan shall be entitled to indemnification by the Company against and from any loss, liability, judgment, damages, cost and reasonable expense incurred by such member, former member or other person by reason of any action taken, failure to act or determination made in good faith under or with respect to this Plan.

	(e) Code Section 409A. Any Award agreement that is subject to Code Section 409A and provides for payment upon termination of employment or separation from service shall not be payable to a Participant that is a “specified employee” until six months following the date of such Participant’s “separation from service.” A “specified employee” and a “separation from service” shall be determined by the Company in accordance with the Company’s Capital Accumulation Plan and similar Code Section 409A arrangements.


	4. Shares Available; Maximum Payouts.

	(a) Shares Available. The number of additional Shares available for distribution under this Plan as of April 30, 2000 is 58,000,000 (which brings the total number of shares authorized for distribution under this Plan since inception to 102,800,000, as adjusted to date pursuant to Section 14(f)). All shares are subject to adjustment under Section 14(f) hereof.

	(b) Shares Again Available. Any Shares subject to the terms and conditions of an Award under this Plan which are not used because the terms and conditions of the Award are not met may again be used for an Award under this Plan.

	(c) Unexercised Awards. Any unexercised or undistributed portion of any terminated, expired, exchanged, or forfeited Award or any Award settled in cash in lieu of Shares shall be available for further Awards.

	(d) No Fractional Shares. No fractional Shares may be issued under this Plan. Fractional Shares will be rounded to the nearest whole Share.

	(e) Maximum Payouts. No more than 35% of all Shares subject to this Plan may be granted in the aggregate pursuant to Restricted Stock, Performance Share and Other Stock-Based Awards. No Participant may be granted Options, Stock Appreciation Rights, Performance Shares or any combination thereof relating to more than 2,000,000 Shares over a one-year period under this Plan.

	5. Eligibility. Awards may be granted under this Plan to any Employee at the discretion of the Committee.

	6. General Terms of Awards.

	(a) Awards. Awards under this Plan may consist of Options (either Incentive Stock Options or Non-Qualified Stock Options), Stock Appreciation Rights, Performance Shares, Restricted Stock and


	Other Stock-Based Awards. Awards of Restricted Stock may, in the discretion of the Committee, provide the Participant with dividends or dividend equivalents and voting rights prior to vesting (whether vesting is based on a period of time during which employment must continue or on attainment of specified performance conditions).

	(b) Amount of Awards. Each Agreement shall set forth the number of Shares of Restricted Stock, Stock or Performance Shares subject to such Agreement, or the number of Shares to which the Option applies or with respect to which payment upon the exercise of the Stock Appreciation Right is to be determined, as the case may be, as determined by the Committee in its sole discretion.

	(c) Term. Each Agreement, other than those relating solely to Awards of Stock without restrictions, shall set forth the Term of the Award and any applicable Performance Period for Performance Shares, as the case may be, but in no event shall the Term of an Award (other than Awards granted in lieu of cash compensation) or the Performance Period be longer than ten years after the date of grant. In addition to the accelerated vesting provided pursuant to Sections 7(c), 8(b), 9(b), 10(b) and 11(b) hereof in the event of a Change in Control, an Agreement with a Participant may permit acceleration of vesting and of the expiration of the applicable Term upon such terms and conditions as shall be set forth in the Agreement, which may, but need not, include, without limitation, acceleration resulting from the occurrence of a Fundamental Change, or the Participant’s death, Disability or Retirement. Acceleration of the Performance Period of Performance Shares shall be subject to Sections 9(b) and 9(c) hereof.

	(d) Agreements. Each Award under this Plan shall be evidenced by an Agreement setting forth the terms and conditions, as determined by the Committee, which shall apply to such Award in addition to the terms and conditions specified in this Plan. All provisions of the Plan, which by their terms apply to an Award, shall apply regardless of whether such terms are expressly set forth in the Award Agreement, except to the extent that the Agreement for that Award expressly provides otherwise.

	(e) Transferability. During the lifetime of a Participant to whom an Award is granted, only such Participant (or such Participants legal representative or, if so provided in the applicable Agreement in the case of a Non-Qualified Stock Option, a permitted transferee as hereafter described) may exercise an Option or Stock Appreciation Right or receive payment with respect to Performance Shares or any other Award. No Award of Restricted Stock (prior to the expiration of the restrictions), Options, Stock Appreciation Rights, Performance Shares or other Award (other than an award of Stock without restrictions) may be sold, assigned, transferred, exchanged, or otherwise encumbered, and any attempt to do so shall be of no effect. Notwithstanding the immediately preceding sentence, (i) an Award shall be transferable to a Successor in the event of a Participant’s legal incompetency or death and (ii) an Agreement may provide that a Non-Qualified Stock Option shall be transferable to any member of a Participant’s ‘immediate family” (as such term is defined in Rule 16a-1(e) promulgated under the Exchange Act, or any successor rule or regulation) or to one or more trusts whose beneficiaries are members of such Participant’s “immediate family” or partnerships in which such family members are the only partners; provided, however, that (1) the Participant receives no consideration for the transfer and (2) such transferred Non-Qualified Stock Option shall continue to be subject to the same terms and conditions as were applicable to such Non-Qualified Stock Option immediately prior to its transfer.

	(f) Termination of Employment. Except as otherwise determined by the Committee or provided by the Committee in an applicable Agreement, in case of termination of employment, the following provisions shall apply:

	(1) Options and Stock Appreciation Rights.


		(i) Death. If a Participant who has been granted an Option or Stock Appreciation Rights shall die before such Option or Stock Appreciation Rights have expired, the Option or Stock Appreciation Rights shall become exercisable in full, and may be exercised by the Participant’s Successor at any time, or from time to lime, within three years after the date of the Participant’s death, in the case of an Option or Stock


		Appreciation Right granted before April 30, 2000 and within five years after the date of the Participant’s death in the case of an Option or Stock Appreciation Right granted on or after April 30, 2000.

		(ii) Disability or Retirement. If a Participant’s employment terminates because of Disability or Retirement, the Option or Stock Appreciation Rights shall become exercisable in full, and the Participant may exercise his or her Options or Stock Appreciation Rights at any time, or from time to time, within three years after the date of such termination, in the case of an Option or Stock Appreciation Right granted before April 30, 2000, and within five years after the date of such termination in the case of an Option or Stock Appreciation Right granted on or after April 30, 2000.

		(iii) Reasons other than Death, Disability or Retirement. If a Participant’s employment terminates for any reason other than death, Disability or Retirement, the unvested or unexercised portion of any Award held by such Participant shall terminate (a) on the date of termination of employment for Awards granted before April 30, 2000, and (b) at the close of business on the date 30 days after the date of termination of employment for Awards granted on or after April 30, 2000, provided, however, that no further vesting shall occur after the date of termination of employment.

		(iv) Expiration of Term . Notwithstanding the foregoing paragraphs (i)-(iii), in no event shall an Option or a Stock Appreciation Right be exercisable after expiration of the Term of such Award.

	(2) Performance Shares. If a Participant’s employment with the Company or any of its Affiliates terminates during a Performance Period because of death, Disability or Retirement, or under other circumstances provided by the Committee in its discretion in the applicable Agreement, the Participant shall be entitled to a payment of Performance Shares at the end of the Performance Period based upon the extent to which achievement of performance targets was satisfied at the end of such period (as determined at the end of the Performance Period) and prorated for the portion of the Performance Period during which the Participant was employed by the Company or any Affiliate. Except as provided in this Section 6(f)(2), in the applicable Agreement, or in Section 9(b) or 9(c) hereof, if a Participant’s employment terminates with the Company or any of its Affiliates during a Performance Period, then such Participant shall not be entitled to any payment with respect to that Performance Period.

	(3) Restricted Stock. In case of a Participant’s death, Disability or Retirement, the Participant shall be entitled to receive that number of shares of Restricted Stock under outstanding Awards that has been pro rated for the portion of the Term of the Awards during which the Participant was employed by the Company or any Affiliate, and with respect to such Shares all restrictions shall lapse. Upon termination of employment for any reason other than death, Disability or Retirement, any shares of Restricted Stock whose restrictions have not lapsed (including pursuant to Section 10(b) hereof) will automatically be forfeited in full and cancelled by the Company upon such termination of employment.

	(g) Rights as Shareholder. A Participant shall have no rights as a shareholder with respect to any securities covered by an Award until the date the Participant becomes the holder of record.

	7. Stock Options.

	(a) Terms and Exercisability of All Options. Each Option shall be granted pursuant to an Agreement as either an Incentive Stock Option or a Non-Qualified Stock Option. Only Non-Qualified Stock Options may be granted to Employees who are not regular employees of the Company or an Affiliate. The purchase price of each Share subject to an Option shall be determined by the Committee and set forth in the Agreement, but shall not be less than 100% of the Fair Market Value of a Share on the date the Option is granted. The Agreement shall specify a vesting schedule under which the Option becomes


	available to exercise, subject to any acceleration that may be provided in the Agreement or in this Plan. Only the vested portion of an Option may be exercised. When exercising an Option, the purchase price of the Shares shall be paid in full at the time of exercise, provided that, to the extent permitted by law, Participants may simultaneously exercise Options and sell the Shares thereby acquired pursuant to a brokerage or similar relationship and use the proceeds from such sale to pay the purchase price of such Shares. The purchase price may be paid in cash, or by delivery of cash proceeds of such a simultaneous exercise and sale or by delivery to the Company, physically or by attestation, of Shares already owned by such Participant, provided that any such Shares not acquired on the open market shall have been owned for at least 6 months (with such Shares having a total fair market value as of the date the Option is exercised equal to the total exercise cost of the Shares being purchased pursuant to the Option), or a combination thereof unless otherwise provided in the Agreement. Each Option shall be exercisable in whole or in part on the terms provided in the Agreement. In no event shall any Option be exercisable at any time after its Term. When an Option is no longer exercisable, it shall be deemed to have lapsed or terminated.

		(b) Incentive Stock Options. In addition to the other terms and conditions applicable to all Options:


		(i) the aggregate Fair Market Value (determined as of the date the Option is granted) of the Shares with respect to which Incentive Stock Options held by an individual first become exercisable in any calendar year (under this Plan and all other incentive stock option plans of the Company and its Affiliates) shall not exceed $100,000 (or such other limit as may be required by the Code), if such limitation is necessary to qualify the Option as an Incentive Stock Option, and to the extent an Option or Options granted to a Participant exceed such limit, such Option or Options shall be treated as a Non-Qualified Stock Option;

		(ii) an Incentive Stock Option shall not be exercisable and the Term of the Award shall not be more than ten years after the date of grant (or such other limit as may be required by the Code) if such limitation is necessary to qualify the Option as an Incentive Stock Option;

		(iii) the Agreement covering an Incentive Stock Option shall contain such other terms and provisions which the Committee determines necessary to qualify such Option as an Incentive Stock Option; and

		(iv) notwithstanding any other provision of this Plan to the contrary, no Participant may receive an Incentive Stock Option under this Plan if, at the time the Award is granted, the Participant owns (after application of the rules contained in Section 424(d) of the Code, or its successor provision) Shares possessing more than ten percent of the total combined voting power of all classes of stock of the Company or its subsidiaries, unless (A) the option price for such Incentive Stock Option is at least 110% of the Fair Market Value of the Shares subject to such Incentive Stock Option on the date of grant and (B) such Option is not exercisable after the date five years from the date such Incentive Stock Option is granted.


	(c) Change in Control. For all Options granted prior to October 25, 2001, and for all Options granted after such date except in the latter case where otherwise expressly provided in the Agreement relating to an Option, upon the occurrence of a Change in Control, each then-outstanding Option, whether or not previously exercisable, shall vest and be exercisable in full.

	8. Stock Appreciation Rights.

	(a) In General. An Award of a Stock Appreciation Right shall entitle the Participant, subject to terms and conditions determined by the Committee, to receive upon exercise of the Stock Appreciation Right all or a portion of the excess of (i) the Fair Market Value of a specified number of Shares on the date of exercise of the Stock Appreciation Right over (ii) a specified price which shall not be less than 100% of the Fair Market Value of such Shares on the date of grant of the Stock Appreciation Right. A Stock Appreciation Right may be granted in connection with a previously or contemporaneously granted Option, or independent of any Option. If issued in connection with an Option, the Committee may impose a condition that exercise of a Stock Appreciation Right cancels the Option with which it is connected and


	exercise of the connected Option cancels the Stock Appreciation Right. Each Stock Appreciation Right may be exercisable in whole or in part on the terms provided in the Agreement. No Stock Appreciation Right shall be exercisable at any time after its Term. When a Stock Appreciation Right is no longer exercisable, it shall be deemed to have lapsed or terminated. Except as otherwise provided in the applicable Agreement, upon exercise of a Stock Appreciation Right, payment to the Participant (or to his or her Successor) shall be made in the form of cash, Stock or a combination of cash and Stock as promptly as practicable after such exercise. The Agreement may provide for a limitation upon the amount or percentage of the total appreciation on which payment (whether in cash and/or Stock) may be made in the event of the exercise of a Stock Appreciation Right.

	(b) Change in Control. For all Stock Appreciation Rights granted prior to October 25, 2001, and for all Stock Appreciation Rights granted after such date except in the latter case where otherwise expressly provided in the Agreement relating to a Stock Appreciation Right, upon the occurrence of a Change in Control, each then-outstanding Stock Appreciation Right, whether or not previously exercisable, shall vest and be exercisable in full.

	9. Performance Shares.

	(a) Initial Award. An Award of Performance Shares shall entitle a Participant (or a Successor) to future payments based upon the achievement of performance targets established in writing by the Committee. Payment shall be made in Stock, or a combination of cash and Stock, as determined by the Committee, provided that at least 25% of the value of the vested Performance Shares shall be distributed in the form of Stock. With respect to those Participants who are “covered employees” within the meaning of Section 162(m) of the Code and the regulations thereunder, such performance targets shall consist of one or any combination of two or more of revenue, revenue per employee, earnings before income tax (profit before taxes), earnings before interest and income tax, net earnings (profits after tax), earnings per employee, tangible, controllable or total asset turnover, earnings per share, operating income, total shareholder return, market share, return on equity, before- or after-tax return on net assets, distribution expense, inventory turnover, or economic value added (economic profit), and any such targets may relate to one or any combination of two or more of corporate, group, unit, division, Affiliate or individual performance. The Agreement may establish that a portion of the maximum amount of a Participants Award will be paid for performance, which exceeds the minimum target but falls below the maximum target applicable to such Award. The Agreement shall also provide for the timing of such payment. The Committee shall determine the extent to which (i) performance targets have been attained, (ii) any other terms and conditions with respect to an Award relating to such Performance Period have been satisfied, and (iii) payment is due with respect to a Performance Share Award.

	(b) Change in Control. For all Performance Share Awards granted prior to October 25, 2001, and for all Performance Share Awards granted after such date except in the latter ease where otherwise expressly provided in the Agreement relating to a Performance Share Award, upon the occurrence of a Change in Control, a Participant who has been awarded Performance Shares (but has not yet received payment of such shares) shall be entitled to a pro rata payment of such Performance Shares. The pro rata payment shall be made to the Participant as of the date of the Change in Control, in shares or cash (at the election of the Company) equal to the number of Shares covered by the Performance Shares multiplied by the performance-based accrual percentage pertaining to such Performance Shares as of the Change in Control, multiplied by a fraction the numerator of which is the number of months elapsed from the date the Performance Shares were granted through the date of the Change in Control and the denominator of which is the number of months from the date the Performance Shares were granted through the Performance Shares’ scheduled maturity date.

	(c) Acceleration and Adjustment for Other Reasons. In addition to the acceleration upon a Change in Control provided pursuant to Section 9(b) hereof and subject to the requirements of Section 409A of the Code, the Agreement may permit an acceleration of the Performance Period and an adjustment of performance targets and payments with respect to some or all of the Performance Shares awarded to a Participant, upon such terms and conditions as shall be set forth in the Agreement, upon the occurrence of certain events, which may, but need not, include without limitation a Fundamental Change, the


	Participant’s death, Disability or Retirement, a change in accounting practices of the Company or its Affiliates, or, with respect to payments in Stock for Performance Share Awards, a reclassification, stock dividend, stock split or stock combination as provided in Section 14(t) hereof.

	(d) Valuation. Each Performance Share earned after conclusion of a Performance Period shall have a value equal to the average of the Fair Market Values of a Share for the 20 consecutive business days ending on and including the last day of such Performance Period.

10. Restricted Stock.



	(a) In General. Restricted Stock may be granted in the form of Shares registered in the name of the Participant but held by the Company until the end of the Term of the Award. Any employment conditions, performance conditions and the Term of the Award shall be established by the Committee in its discretion and included in the applicable Agreement. The Committee may provide in the applicable Agreement for the lapse or waiver of any such restriction or condition based on such factors or criteria as the Committee, in its sole discretion, may determine. No Award of Restricted Stock may vest earlier than one year from the date of grant, except as provided in the applicable Agreement or in Section 10(b) hereof.

	(b) Change in Control. For all Restricted Stock Awards granted prior to October 25, 2001, and for all Restricted Stock Awards granted after such date except in the latter case where otherwise expressly provided in the Agreement relating to a Restricted Stock Award, upon the occurrence of a Change in Control, all restrictions with respect to shares of Restricted Stock shall lapse.

11. Other Stock-Based Awards.



	(a) In General. The Committee may from time to time grant Awards of Stock, and other Awards under this Plan (collectively herein defined as “Other Stock-Based Awards”), including, without limitation, those Awards pursuant to which Shares may be acquired in the future, such as Awards denominated in Stock units, securities convertible into Stock and phantom securities. The Committee, in its sole discretion, shall determine the terms and conditions of such Awards provided that such Awards shall not be inconsistent with the terms and purposes of this Plan. The Committee may, in its sole discretion, direct the Company to issue Shares subject to restrictive legends and/or stop transfer instructions which are consistent with the terms and conditions of the Award to which such Shares relate.

	(b) Change in Control. Unless otherwise specifically provided in the Agreement related to the grant of an Other Stock-Based Award, upon a Change in Control any such Award shall vest and/or pay out in full, as applicable, as if the Award had continued to maturity with all applicable conditions and targets satisfied.

	(c) 409A Limitation. Notwithstanding anything in Section 11(b) to the contrary, if an amount becomes payable with respect to an Award upon a Change in Control pursuant to Section 11(b), the amount is subject to Section 409A of the Code, and the Change in Control does not constitute a “change in the ownership or effective control” or a “change in the ownership of a substantial portion of the assets” of the Company within the meaning of Section 409A(a)(2)(A)(v) of the Code, then the amount shall not be paid upon the Change in Control, but shall instead be paid at the earliest to occur of: (i) the Participant’s “separation from service” with the Company (determined in accordance with Section 409A of the Code), provided, that if the Participant is a “specified employee” (within the meaning of Section 409A of the Code), the payment date shall be the date that is six months after the date of the Participant’s separation from service with the Company; (ii) the date payment otherwise would have been made in the absence of any provisions in this Plan to the contrary (provided such date is permissible under Section 409A of the Code); or (iii) the Participant’s death.

12. Prior Automatic Grants to Non-Employee Directors. The provisions of Section 12 of the Plan as in effect prior to April 30, 2000 shall be applicable to automatic grants of Non-Qualified Stock Options (and related Limited Rights) made prior to March 5, 1998 to Non-Employee Directors.


13. Prior Elective Grants to Non-Employee Directors. The provisions of Section 13 of the Plan as in effect prior to April 30, 2000 shall be applicable to grants of Restricted Stock made prior to March 5, 1998 to Non-Employee Directors pursuant to their elections to receive such grants in lieu of all or a portion of their annual fees for their services as Non-Employee Directors.

	14. General Provisions.

	(a) Effective Date of this Plan. This Plan shall become effective as of April 29, 1994, provided that this Plan is approved and ratified by the affirmative vote of the holders of a majority of the outstanding Shares of Stock present or represented and entitled to vote in person or by proxy at a meeting of the shareholders of the Company no later than August 31, 1994. This Plan, as amended and restated, is effective as of April 30, 2000.

	(b) Duration of this Plan. This Plan shall remain in effect until all Stock subject to it shall be distributed or all Awards have expired or lapsed, whichever is latest to occur, or this Plan is terminated pursuant to Section 14(e) hereof. No Award of an Incentive Stock Option shall be made more than ten years after the effective date provided in the second sentence of Section 14(a) hereof (or such other limit as may be required by the Code) if such limitation is necessary to qualify the Option as an Incentive Stock Option. The date and time of approval by the Committee of the granting of an Award shall be considered the date and time at which such Award is made or granted, notwithstanding the date of any Agreement with respect to such Award; provided, however , that the Committee may grant Awards other than Incentive Stock Options to be effective and deemed to be granted on the occurrence of certain specified contingencies.

	(c) Right to Terminate Employment. Nothing in this Plan or in any Agreement shall confer upon any Participant who is an Employee the right to continue in the employment of the Company or any Affiliate or affect any right which the Company or any Affiliate may have to terminate or modify the employment of the Participant with or without cause.

	(d) Tax Withholding. The Company shall withhold from any payment of cash or Stock to a Participant or other person under this Plan an amount sufficient to cover any required withholding taxes, including the Participants social security and Medicare taxes (FICA) and federal, state and local income tax with respect to income arising from payment of the Award. The Company shall have the right to require the payment of any such taxes before issuing any Stock pursuant to the Award.

	(e) Amendment, Modification and Termination of this Plan. Except as provided in this Section 14(e), the Board may at any time amend, modify, terminate or suspend this Plan. Except as provided in this Section 14(e), the Committee may at any time alter or amend any or all Agreements under this Plan to the extent permitted by law. Plan amendments are subject to approval of the shareholders of the Company only if such approval is necessary to maintain this Plan in compliance with the requirements of Exchange Act Rule 16b-3, Section 422 of the Code, their successor provisions, or any other applicable law or regulation. No termination, suspension or modification of this Plan may materially and adversely affect any right acquired by any Participant (or a Participant’s legal representative) or any Successor under an Award granted before the date of termination, suspension or modification, unless otherwise agreed by the Participant in the Agreement or otherwise or required as a matter of law. It is conclusively presumed that any adjustment for changes in capitalization provided for in Section 9(c) or 14(f) hereof does not adversely affect any right of a Participant under an Award.

	(f) Adjustment for Changes in Capitalization. In the event of any change in corporate capitalization (including, but not limited to, a change in the number of Shares outstanding), arising from a stock split, Fundamental Change, Change in Control, or other corporate transaction, including, without limitation, any merger, consolidation, separation, spin-off, distribution of stock or property of the Company, share exchange, reorganization (whether or not such reorganization comes within the definition of such term in Section 368 of the Code) or any partial or complete liquidation of the Company, the Committee or Board may make such substitution or adjustments in the aggregate number and type of Shares reserved for issuance under the Plan, and the maximum limitation upon Awards to be granted to any


	Participant, in the number, type and option price of shares subject to outstanding Stock Options and Stock Appreciation Rights, in outstanding Performance Shares and payments with respect to outstanding Performance Shares in the number and type of Shares subject to other outstanding Awards granted under the Plan and/or such other equitable substitution or adjustments as it may determine to be appropriate in its sole discretion; provided however, that the number of Shares subject to any Award shall always be a whole number. Such adjusted option price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right connected with any Stock Option.

	(g) Fundamental Change. In the event of a proposed Fundamental Change: (a) involving a merger, consolidation or statutory share exchange, unless appropriate provision shall be made (which the Committee may, but shall not be obligated to, make) for the protection of the outstanding Options and Stock Appreciation Rights by the substitution of options, stock appreciation rights and appropriate voting common stock of the corporation surviving any such merger or consolidation or, if appropriate, the parent corporation of the Company or such surviving corporation, to be issuable upon the exercise of options or used to calculate payments upon the exercise of stock appreciation rights in lieu of Options, Stock Appreciation Rights and capital stock of the Company, or (b) involving the dissolution or liquidation of the Company, the Committee may, but shall not be obligated to, declare, at least twenty days prior to the occurrence of the Fundamental Change, and provide written notice to each holder of an Option or Stock Appreciation Right of the declaration, that each outstanding Option and Stock Appreciation Right, whether or not then exercisable, shall be cancelled at the time of, or immediately prior to the occurrence of, the Fundamental Change in exchange for payment to each holder of an Option or Stock Appreciation Right, within 20 days after the Fundamental Change, of cash equal to (i) for each Share covered by the cancelled Option, the amount, if any, by which the Fair Market Value (as defined in this Section 14(g)) per Share exceeds the exercise price per Share covered by such Option or (ii) for each Stock Appreciation Right, the price determined pursuant to Section 8 hereof, except that Fair Market Value of the Shares as of the date of exercise of the Stock Appreciation Right, as used in clause (i) of Section 8, shall be deemed to mean Fair Market Value for each Share with respect to which the Stock Appreciation Right is calculated determined in the manner hereinafter referred to in this Section 14(g). At the time of the declaration provided for in the immediately preceding sentence, each Stock Appreciation Right and each Option shall immediately become exercisable in full and each person holding an Option or a Stock Appreciation Right shall have the right, during the period preceding the time of cancellation of the Option or Stock Appreciation Right, to exercise the Option as to all or any part of the Shares covered thereby or the Stock Appreciation Right in whole or in part, as the case may be. In the event of a declaration pursuant to this Section 14(g), each outstanding Option and Stock Appreciation Right that shall not have been exercised prior to the Fundamental Change shall be cancelled at the time of, or immediately prior to, the Fundamental Change, as provided in the declaration. Notwithstanding the foregoing, no person holding an Option or Stock Appreciation Right shall be entitled to the payment provided for in this Section 14(g) if such Option or Stock Appreciation Right shall have expired or terminated. For purposes of this Section 14(g) only, ‘Fair Market Value’ per Share means the cash plus the fair market value, as determined in good faith by the Committee, of the non-cash consideration to be received per Share by the shareholders of the Company upon the occurrence of the Fundamental Change, notwithstanding anything to the contrary provided in this Plan. .

	(h) Other Benefit and Compensation Programs. Payments and other benefits received by a Participant under an Award shall not be deemed a part of a Participants regular, recurring compensation for purposes of any termination, indemnity or severance pay laws and shall not be included in, nor have any effect on, the determination of benefits under any other employee benefit plan, contract or similar arrangement provided by the Company or an Affiliate, unless expressly so provided by such other plan, contract or arrangement or the Committee determines that an Award or portion of an Award should be included to reflect competitive compensation practices or to recognize that an Award has been made in lieu of a portion of competitive cash compensation.

	(i) Beneficiary Upon Participant’s Death. A Participant may designate a beneficiary to succeed to the Participant’s Awards under the Plan in the event of the Participant’s death by filing a beneficiary form with the Company and, upon the death of the Participant, such beneficiary shall succeed to the rights of the Participant to the extent permitted by law and the terms of this Plan and the applicable Agreement. In the


	absence of a validly designated beneficiary who is living at the time of the Participant’s death, the Participant’s executor or administrator of the Participant’s estate shall succeed to the Awards, which shall be transferable by will or pursuant to laws of descent and distribution.

	(j) Forfeitures. In the event an Employee has received or been entitled to payment of cash, delivery of Stock or a combination thereof pursuant to an Award within the period beginning six months prior to the Employee’s termination of employment with the Company and its Affiliates and ending when the Award terminates or is cancelled, the Company, in its sole discretion, may require the Employee to return or forfeit the cash and/or Stock received with respect to the Award (or its economic value as of (i) the date of the exercise of Options or Stock Appreciation Rights, (ii) the date of, and immediately following, the lapse of restrictions on Restricted Stock or the receipt of Stock without restrictions, or (iii) the date on which the right of the Employee to payment with respect to Performance Shares vests, as the case may be) in the event of any of the following occurrences: performing services for or on behalf of a competitor of, or otherwise competing with, the Company or any Affiliate, unauthorized disclosure of material proprietary information of the Company or any Affiliate, a violation of applicable business ethics policies or business policies of the Company or any Affiliate, or any other occurrence specified in the related Agreement. The Company’s right to require forfeiture must be exercised not later than 90 days after discovery of such an occurrence but in no event later than 15 months after the Employee’s termination of employment with the Company and its Affiliates. Such right shall be deemed to be exercised upon the Company’s mailing written notice to the Employee of such exercise, at the Employee’s most recent home address as shown on the personnel records of the Company. In addition to requiring forfeiture as described herein, the Company may exercise its rights under this Section 14(j) by preventing or terminating the exercise of any Awards or the acquisition of Shares or cash thereunder. In the event an Employee fails or refuses to forfeit the cash and/or Shares demanded by the Company (adjusted for any intervening stock splits), the Employee shall be liable to the Company for damages equal to the number of Shares demanded times the highest closing price per share of the Stock during the period between the applicable date specified in (i) through (iii) above and the date of any judgment or award to the Company, together with all costs and attorneys’ fees incurred by the Company to enforce this provision.

	(k) Unfunded Plan. This Plan shall be unfunded and the Company shall not be required to segregate any assets that may at any time be represented by Awards under this Plan. Neither the Company, its Affiliates, the Committee, nor the Board shall be deemed to be a trustee of any amounts to be paid under this Plan nor shall anything contained in this Plan or any action taken pursuant to its provisions create or be construed to create a fiduciary relationship between the Company and/or its Affiliates, and a Participant or Successor. To the extent any person acquires a right to receive an Award under this Plan, such right shall be no greater than the right of an unsecured general creditor of the Company.


	(l) Limits of Liability.

		(i) Any liability of the Company to any Participant with respect to an Award shall be based solely upon contractual obligations created by this Plan and the Agreement.

		(ii) Except as may be required by law, neither the Company nor any member or former member of the Board or of the Committee, nor any other person participating (including participation pursuant to a delegation of authority under Section 3(b) hereof) in any determination of any question under this Plan, or in the interpretation, administration or application of this Plan, shall have any liability to any party for any action taken, or not taken, in good faith under this Plan.


	(m) Compliance with Applicable Legal Requirements. No certificate for Shares distributable pursuant to this Plan shall be issued and delivered unless the issuance of such certificate complies with all applicable legal requirements including, without limitation, compliance with the provisions of applicable state securities laws, the Securities Act of 1933, as amended and in effect from time to time, or any successor statute, the Exchange Act and the requirements of the exchanges on which the Company’s Shares may, at the time, be listed.


	15. Governing Law. To the extent that federal laws do not otherwise control, this Plan and all determinations made and actions taken pursuant to this Plan shall be governed by the laws of Minnesota, without giving effect to conflicts of law provisions, and construed accordingly.

	16. Severability. In the event any provision of this Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of this Plan, and this Plan shall be construed and enforced as if the illegal or invalid provision had not been included.

	17. Termination of Prior Plans. Effective upon the approval of this Plan by the Company’s shareholders as provided by Section 14(a) hereof, no further grants of options, performance shares or restricted stock or any other awards shall be made under the Company’s 1979 Restricted Stock and Performance Share Award Plan, 1979 Nonqualified Stock Option Plan, 1989 Phantom Stock Award Plan or 1991 Restricted Stock Plan for Non-Employee Directors (the “Prior Plans”). Thereafter, all grants and awards made under the Prior Plans prior to such approval by the shareholders shall continue in accordance with the terms of the Prior Plans.

MEDTRONIC, INC.

MEDTRONIC INCENTIVE PLAN
(As amended and restated effective January 1, 2008)

SECTION 1.

BACKGROUND, PURPOSE AND DURATION

1.1. Effective Date. The Company previously established the Medtronic Incentive Plan effective as of April 26, 2003 (the “Effective Date”). The Company hereby restates the Plan in its entirety, effective January 1, 2008 to comply with the provisions of Section 409A of the Internal Revenue Code.

1.2. Purpose of the Plan. The Plan is designed to motivate employees to achieve the Company’s primary annual objectives as reflected in the Company’s annual operating plan by providing the opportunity for incentive compensation in addition to annual salaries.

The Plan is intended to amend, incorporate and restate prior incentive compensation plans established by the Company, including the Management Incentive Plan and the Employee Incentive Plan. The terms of the Plan, as set forth herein, shall apply to awards granted under the Plan on and after the Effective Date. Awards granted under the Company’s incentive compensation plans in effect prior to the Effective Date shall be governed by the terms of such plans.

SECTION 2.

DEFINITIONS

The following words and phrases shall have the following meanings unless a different meaning is plainly required by the context:

2.1. “ Actual Award ” means as to any Performance Period, the actual award of incentive compensation (if any) payable to a Participant for the Performance Period. Each Actual Award is determined by the Payout Formula for the Performance Period, subject to the Committee’s authority under Section 4.6 to increase, reduce or eliminate the award determined by the Payout Formula.

2.2. “ Affiliate ” means any corporation that is a “parent corporation” or “subsidiary corporation” of the Company, as those terms are defined in Sections 424(e) and (f) of the Code, or any successor provision, and any joint venture in which the Company or any such “parent corporation” or “subsidiary corporation” owns a controlling equity interest.

2.3. “ Board ” means the Board of Directors of the Company.

2.4. “ Code ” means the Internal Revenue Code of 1986, as amended.

2.5. “ Committee ” means the Compensation Committee of the Board or its delegate as set forth in Section 3.4 hereof.

2.6. “ Company ” means Medtronic, Inc., a Minnesota corporation.

2.7. “ Disability ” means the disability of a Participant such that the Participant is considered disabled under any retirement plan of the Company which is qualified under Section 401 of the Code, or, in the case of a Participant employed by a non-U.S. Affiliate or in a non-U.S. location, under any retirement plan or long-term disability plan of the Company or such Affiliate applicable to such Participant, or as otherwise determined by the Committee.

2.8. “ Employee ” means any employee of the Company or of an Affiliate, whether such employee is so employed at the time the Plan is adopted or becomes so employed subsequent to the adoption of the Plan.

2.9. “ Fiscal Year ” means the fiscal year of the Company.

2.10. “ Participant ” means as to any Performance Period, an Employee who has been selected by the Committee for participation in the Plan for that Performance Period.

2.11. “ Payout Formula ” means as to any Performance Period, the formula or payout matrix established by the Committee pursuant to Section 4.4 in order to determine the Actual Awards (if any) to be paid to Participants. The formula or matrix may differ from Participant to Participant.

2.12. “ Performance Period ” means generally, the Fiscal Year. However, the Committee may, at its discretion, designate a shorter period.

2.13. “ Plan ” means the Medtronic, Inc. Medtronic Incentive Plan, as set forth herein and as hereafter amended from time to time.

2.14. “ Retirement ” means retirement of an Employee as defined under any retirement plan of the Company which is qualified under Section 401 of the Code (which currently provides for retirement on or after age 55, provided the Employee has been employed by the Company and/or one or more Affiliates for at least ten years, or retirement on or after age 62), or under any retirement plan of the Company or any Affiliate applicable to the Employee due to employment by a non-U.S. Affiliate or employment in a non-U.S. location, or as otherwise determined by the Committee.

2.15. “ Salary ” of a Participant for a Performance Period, means the Participant’s eligible earnings during such period, determined in accordance with the Company’s normal payroll practices:


	a. including:

	i. base salary;

	ii. any other individual performance-based forms of compensation such as lump sum merit, development or promotional payments;

	iii. the amount of any reduction in Salary to which a Participant has agreed as part of any plan of the Company to use the amount of such reduction to purchase benefits under a cafeteria plan under Code Section 125, a transportation fringe benefit plan under Code Section 132(f), or in connection with any qualified cash or deferred arrangement under Code Section 401(k);

	iv. any Participant payments by salary reduction or its equivalent to a Company-sponsored nonqualified deferred compensation plan; and

	v. if applicable, overtime, sick pay, and shift differentials; but

b. excluding: (i) any discretionary bonuses (such as hiring bonuses); (ii) workers compensation payments; (iii) short-term disability benefit payments from a third party; (iv) long-term disability benefit payments; (v) other payments made by a third party; (vi) service awards; (vii) tuition reimbursements; (viii) relocation allowances; (ix) severance payments; (x) any one-time payment, or other payment not directly related to base salary (such as referral bonuses, incentive payments for a current Performance Period or prior Performance Period and other similar payments); (xi) payments of deferred compensation, whether qualified or nonqualified; (xii) payments made to the Participant under the Company’s salary continuance plan for absence due to illness, injury, or approved medical leave of absence; and (xiii) expatriate allowances.

2.16. “ Target Award ” means the target award payable under the Plan to a Participant for the Performance Period, expressed as a percentage of his or her Salary or a specific dollar amount, as determined by the Committee in accordance with Section 4.2 hereof.

2.17. “ Termination of Employment ” means a cessation of the employee-employer relationship between an Employee and the Company or an Affiliate for any reason, including, but not limited to, a termination by resignation, discharge, death, Disability, Retirement, or the cessation of Affiliate status, whether through sale, decrease in equity ownership or otherwise, but excluding any such termination where there is a simultaneous reemployment by the Company or an Affiliate.

SECTION 3.

ADMINISTRATION

3.1. Committee is the Administrator. The Plan shall be administered by the Compensation Committee of the Board (the “Committee”). The Committee shall consist of not less than two (2) members of the Board. The members of the Committee shall be appointed from time to time by the Board.

3.2. Committee Authority. It shall be the duty of the Committee to administer the Plan in accordance with the Plan’s provisions. The Committee shall have all powers and discretion necessary or appropriate to administer the Plan and to control its operation, including, but not limited to, the power to (a) determine which Employees shall be Participants, (b) prescribe the terms and conditions of awards, (c) interpret the Plan and the awards, (d) adopt such procedures and subplans as are necessary or appropriate to permit participation in the Plan by Employees who are foreign nationals or employed outside of the United States, (e) adopt rules for the administration, interpretation and application of the Plan as are consistent therewith, and (f) interpret, amend or revoke any such rules.

3.3. Decisions Binding. All determinations and decisions made by the Committee, the Board, and any delegate of the Committee pursuant to the provisions of the Plan shall be final, conclusive, and binding on all persons, and shall be given the maximum deference permitted by law.

3.4. Chief Executive Officer Oversight and Delegation. The Committee may delegate all or any part of its authority to other Board members or Medtronic employees. Unless the Committee determines otherwise, the Committee shall be treated as having delegated its authority to the Company’s Chief Executive Officer (“CEO”) to the fullest extent permitted hereunder. The CEO may make such determinations and take such actions within the scope of such delegation as the CEO deems necessary. In his or her sole discretion, the CEO may delegate all or part of the CEO’s authority and powers under the Plan to one or more directors, officers, or other employees of the Company on such terms and conditions as he or she may provide.

3.5 Indemnification. To the full extent permitted by law, each member and former member of the Committee and each person to whom the Committee or the CEO delegates or has delegated authority under this Plan shall be entitled to indemnification by the Company against and from any loss, liability, judgment, damages, cost and reasonable expense incurred by such member, former member or other person by reason of any action taken, failure to act or determination made in good faith under or with respect to this Plan.

SECTION 4.

SELECTION OF PARTICIPANTS AND DETERMINATION OF AWARDS

4.1. Selection of Participants. The Committee, in its sole discretion, shall select the Employees who shall be Participants for any Performance Period based upon the recommendation of appropriate management. In addition, the Committee, in its sole discretion, shall determine whether Employees who are hired after the commencement of a Performance Period shall participate in the Plan for that Performance Period. Participation in the Plan is in the sole discretion of the Committee, and on a Performance Period by

Performance Period basis. Accordingly, an Employee who is a Participant for a given Performance Period in no way is guaranteed or assured of being selected for participation in any subsequent Performance Period.

4.2. Determination of Target Awards. The Committee, in its sole discretion, shall establish a Target Award for each Participant, which shall be set forth in writing. The amount of each Participant’s Target Award shall be determined by the Committee in its sole discretion, based upon the Participant’s level of responsibility within the Company or such other objective criteria as the Committee may determine is appropriate.

4.3. Determination of Performance Objectives. The Committee, in its sole discretion, shall establish the Performance Objectives for the Performance Period. Such Performance Objectives shall be set forth in writing. “Performance Objectives” means the Corporate Financial Performance, Sector Financial Performance, and/or Unit/Individual Performance Category goal(s) (or combined goal(s)) determined by the Committee (in its sole discretion) to be applicable to the Participants for a Target Award for a Performance Period. As determined by the Committee, the Performance Objectives for any Target Award applicable to the Participants may provide for a targeted level or levels of achievement in the Performance Categories using one or more financial or other measures. The Performance Objectives may differ from award to award.

Minimum threshold(s) may be set by the Committee for any or all of the Performance Categories (as defined in Section 4.4) for a Participant, below which no Actual Awards may be payable to the Participant for that Category.

A Participant may be assigned multiple Performance Objectives in the same Performance Category. In such cases the Performance Objectives shall be given a percentage weight that is dependent on the assessment of the importance of the Performance Objective and the sum of the percentage weights in a Performance Category shall equal 100%.

4.4. Determination of Payout Formula or Formulas. The Committee, in its sole discretion, shall establish a Payout Formula or Formulas for purposes of determining the Actual Award (if any) payable to each Participant. Each Payout Formula shall (a) be in writing, (b) be based on a combination of Performance Categories (as defined below) designated for the Participant, (c) be based on a comparison of actual performance to the Performance Objectives, (d) provide for the payment of a Participant’s Target Award if the Performance Objectives for the Performance Period are achieved, and (e) provide for an Actual Award greater than or less than the Participant’s Target Award, depending upon the extent to which actual performance exceeds or falls below the Performance Objectives.

Each Participant’s entitlement to an Actual Award will be based on one or more of the percentage-weighted combination(s) of the performance of the Company as a whole (“Corporate Financial Performance”), the Participant’s sector (“Sector Financial Performance”), and/or the Participant’s Unit (e.g., business unit, division, work group, department, country, geography, etc.) and/or individual performance (“Unit/Individual Performance”) (each defined as a “Performance Category”). The Committee shall designate for each Participant in the Plan a combination of Performance Categories based upon the level of impact and responsibility the Participant’s job has on corporate, sector and/or business unit specific financial results and/or individual performance. The Participant’s Payout Formula shall include one or a combination of the foregoing Performance Categories. For instance, the Payout Formula for Participant A may contain only the Corporate Financial Performance Category, in which case the Participant’s Payout Formula would be based solely on attainment of Performance Objectives in the Corporate Financial Performance Category. Likewise, the Payout Formula for Participant B may contain both the Corporate Financial Performance Category and Sector Financial Performance Category, and the Participant’s Payout Formula would be based on attainment of Performance Objectives in both the Corporate Financial Performance Category and the Sector Financial Performance Category.

4.5. Date for Determinations. The Committee shall make all determinations under Section 4.1 through 4.4 on or before the 90th day of each Performance Period, but in no event after 25% of the applicable Performance Period has elapsed.

4.6. Determination of Actual Awards. After the end of each Performance Period, the Committee shall certify in writing the extent to which the Performance Objectives applicable to each Participant for the Performance Period were achieved or exceeded. The Actual Award for each Participant shall be determined by applying the Payout Formula to the level of actual performance that has been certified by the Committee. Notwithstanding any contrary provision of the Plan, the Committee, in its sole discretion, may (a) eliminate or reduce the Actual Award payable to any Participant below that which otherwise would be payable under the Payout Formula, (b) increase the Actual Award payable to any Participant above that which otherwise would be payable under the Payout Formula, and (c) as further set forth in Section 5.4 below, determine whether or not a Participant will receive an Actual Award in the event the Participant incurs a Termination of Employment prior to the date the Actual Award is to be paid pursuant to Section 5.2 below.

SECTION 5.

PAYMENT OF AWARDS

5.1. Right to Receive Payment. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of any amounts under the Plan, and rights to the payment hereunder shall be no greater than the rights of the Company’s unsecured creditors. All expenses involved in administering the Plan shall be borne by the Company.

5.2. Timing of Payment. A Participant’s Actual Award for a Performance Period shall be paid to him or her within two and one-half months following the close of the Fiscal Year. A Participant may, however, elect to defer or exchange some or all of his or her Actual Award under other Company plans in effect at that time.

5.3. Form of Payment. Except as set forth in Section 5.2, payment of an Actual Award shall be in cash in the form of a lump sum.


	5.4. *Termination of Employment During Performance Period.*

	a. If the Participant’s employment is terminated during a Performance Period due to the Participant’s death, Disability, or Retirement, the Participant (or the Participant’s beneficiary in the case of the Participant’s death) will be entitled to receive a pro rata portion of the Actual Award for which the Participant otherwise would have been eligible, determined at the end of the applicable Performance Period based upon the portion of the Performance Period the Participant was employed by the Company or Affiliate.

	b. Following a Termination of Employment during a Performance Period, or after completion of a Performance Period but prior to the time an Actual Award is paid, for any reason other than death, Disability or Retirement, a Participant’s eligibility to receive an Actual Award for such Performance Period shall be determined solely at the discretion of the Committee. No such Actual Award may exceed a pro rata portion of the Actual Award for which the Participant otherwise would have been eligible, determined at the end of the applicable Performance Period based upon the portion of the Performance Period the Participant was employed by the Company or Affiliate.

	c. Notwithstanding anything in this Section 5.4 to the contrary, a Participant shall not be entitled to any Actual Award for a Performance Period if the Participant’s employment is terminated by the Company or Affiliate during the Performance Period or during the period between the end of the Performance Period and the date on which the Actual Award is otherwise payable to the Participant for the following reasons: (a) failure to comply with any material policies and procedures of the Company or Affiliate; (b) conduct reflecting dishonesty or disloyalty to the Company or

Affiliate, or which may have a negative impact on the reputation of the Company or Affiliate; (c) allegation of commission of a felony, theft or fraud, or violations of law involving moral turpitude; or (d) failure to perform the material duties of his or her employment. If a Participant’s employment is terminated for any of the foregoing reasons, the time at which the Participant ceases to be an employee for purposes of this Section 5.4 shall mean the time at which such Participant is instructed or notified to cease performing his or her job responsibilities for the Company or any Affiliate, whether or not for other reasons, such as payroll, benefits or compliance with legal procedures or requirements, he or she may still have other attributes of an employee.

5.5. Beneficiary. The Committee or its delegate shall create a procedure whereby a Participant may file, on a form to be provided by the Company, a written election designating one or more beneficiaries with respect to the amount, if any, payable in the event of the Participant’s death. The Participant may amend such beneficiary designation in writing at any time prior to the Participant’s death without the consent of any previously designated beneficiary. Such designation or amended designation, as the case may be, shall not be effective unless and until received by the authorized representatives of the Company prior to the Participant’s death. In the absence of any such designation, the amount payable, if any, shall be delivered to the legal representative of such Participant’s estate.

SECTION 6.

CHANGE IN CONTROL

6.1. Calculation of Awards. Notwithstanding any other provisions of the Plan (including, without limitation, minimum thresholds provided under Section 4.3 and the provisions of Section 5.4, none of which shall apply), if a Change in Control (as defined below) occurs during a Performance Period, each Participant shall be entitled to an Actual Award under the Plan for the full Performance Period (typically 12 months), calculated in accordance with Section 4.6, but with payment accelerated to the time of the Change in Control. A Participant’s Actual Award for such Performance Period shall be the greater of (a) the Target Award for which the Participant would have been eligible had the Participant’s Salary, determined as of the day immediately prior to the Change in Control, remained the same throughout the Performance Period; or (b) if the Change in Control occurs after the first quarter of a Fiscal Year, the Actual Award that the Participant would have received if (i) no Change in Control had occurred during such Fiscal Year, (ii) the Participant’s Salary, determined as of the day immediately prior to the Change in Control, remained the same throughout the Performance Period, and (iii) the achievement of the Participant’s Performance Objectives for the Performance Period had equaled the performance most recently projected by the Company for such Performance Period prior to the Change in Control, adjusted to exclude: (A) all non-recurring or special charges incurred by the Company during the Performance Period; (B) all legal, accounting, investment banking and other costs and expenses incurred or projected by the Company in connection with, or in opposition to, the events resulting in the Change in Control; and (C) the projected effect of the Change in Control upon the achievement of Participant’s Performance Objectives.

6.2. Definition. For purposes of this Section 6, a “Change in Control” means:



	a. Any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either (i) the then-outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (ii) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided , however , that, for purposes of this clause (a), the following acquisitions shall not constitute a Change in Control: (1) any acquisition directly from the Company, (2) any acquisition by the Company or any of its subsidiaries, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its subsidiaries, (4) any acquisition by an underwriter temporarily holding securities pursuant to an offering of such securities or (5) any acquisition pursuant to a transaction that complies with clauses (i), (ii) and (iii) of clause (c) below; or


	b. Individuals who, as of the date hereof, constitute the Board (the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board; provided , however , that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the Incumbent Directors then on the Board shall be considered as though such individual was an Incumbent Director, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

	c. Consummation of a reorganization, merger, statutory share exchange or consolidation (or similar corporate transaction) involving the Company or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of assets or stock of another entity by the Company or any of its subsidiaries (each, a “Business Combination”), in each case, unless, immediately following such Business Combination, (i) substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then-outstanding shares of common stock (or, for a non-corporate entity, equivalent securities) and the then-outstanding voting securities entitled to vote generally in the election of directors (or, for a non-corporate entity, equivalent governing body), as the case may be, of (A) the entity resulting from such Business Combination (the “Surviving Corporation”) or (B) if applicable, the ultimate parent entity that directly or indirectly has beneficial ownership of 80% or more of the voting securities eligible to elect directors of the Surviving Corporation (the “Parent Corporation”), in substantially the same proportion as their ownership, immediately prior to the Business Combination, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (ii) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 30% or more of the outstanding shares of common stock and the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (iii) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Business Combination; or

	d. Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

6.3. Payment of Awards. Actual Awards shall be paid under this Section 6 within two and one-half months following the date of the first Change in Control to occur during the Performance Period. Notwithstanding the preceding sentence, a Participant may, however, elect to defer or exchange some or all of his or her Actual Awards under other Company plans in effect at that time.

SECTION 7.

GENERAL PROVISIONS

7.1. Tax Withholding. The Company or an Affiliate shall have the right to deduct from any payment made under the Plan any federal, state, local or non-U.S. income, payroll or other taxes required by law to be withheld with respect to such payment.

7.2. No Effect on Employment. Neither the Plan nor any action taken hereunder shall be construed as giving any employee or other person any right to continue to be employed by or perform services for the Company or any Affiliate of the Company, and the right to terminate the employment of or performance of services by any Participant at any time and for any reason is specifically reserved to the Company and its Affiliates.

7.3. Participation. No Employee shall have the right to be selected to receive an award under this Plan, or, having been so selected, to be selected to receive a future award.

7.4. Release. Any payment of an Actual Award to or for the benefit of a Participant or beneficiary that is made in good faith by the Company in accordance with the Company’s interpretation of its obligations hereunder, shall be in full satisfaction of all claims against the Company for payments under the Plan.

7.5. Notices. Any notice provided by the Company under the Plan may be posted to a Company-designated website.

7.6. Benefits Not Transferable. Except as may be approved by the Committee, a Participant’s rights and interest under the Plan may not be assigned or transferred, hypothecated or encumbered, in whole or in part, either directly or by operation of law or otherwise (except in the event of a Participant’s death) including, but not by way of limitation, execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner; provided, however, that, subject to applicable law, any amounts payable to any Participant hereunder are subject to reduction to satisfy any liabilities owed to the Company or any of its Affiliates by the Participant.

7.7. Successors. All obligations of the Company and any Affiliate under the Plan, with respect to awards granted hereunder, shall be binding on any successor to the Company and/or such Affiliate, whether the existence of such successor is the result of a direct or indirect purchase, merger or consolidation of all or substantially all of the business or assets of the Company or such Affiliate, or otherwise.

7.8. Actions and Decision Regarding the Business or Operations of the Company. Notwithstanding anything in the Plan to the contrary, none of the Company, its officers, directors, employees or agents shall have any liability to any Participant (or his or her beneficiaries or heirs) under the Plan or otherwise on account of any action taken, or not taken, in good faith by any of the foregoing persons with respect to the business or operations of the Company or any Affiliates.

SECTION 8.

AMENDMENT, TERMINATION AND DURATION

8.1. Plan Amendment or Suspension. The Plan may be amended or suspended in whole or in part at any time and from time to time by the Committee.

8.2. Plan Termination. This Plan shall terminate upon the adoption of a resolution of the Committee terminating the Plan.

8.3. Duration of the Plan. The Plan shall commence on the date specified herein, and subject to Sections 8.1 and 8.2 (regarding the Board’s right to amend or terminate the Plan, respectively), shall remain in effect thereafter.

SECTION 9.

LEGAL CONSTRUCTION

9.1. Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural.

9.2. Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.

9.3. Requirements of Law. The granting and payment of awards under the Plan shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.

9.4. Governing Law. The validity, construction, interpretation, administration and effect of the Plan, and rights relating to the Plan and to awards granted under the Plan, shall be governed by the substantive laws, but not the choice of law rules, of the State of Minnesota.

MEDTRONIC, INC.
1998 OUTSIDE DIRECTOR STOCK COMPENSATION PLAN
(as amended and restated effective January 1, 2008)


1.	Purpose. The purpose of this Plan is to facilitate recruiting and retaining non-employee directors of outstanding ability. The Plan has been amended and restated effective January 1, 2008 to comply with the requirements of Section 409A of the Internal Revenue Code.

2.	Definitions. The capitalized terms used in this Plan have the meanings set forth below.


	(a)	“Account” means a bookkeeping account maintained for a Participant to which Deferred Stock Units are credited pursuant to Section 8 of this Plan.

	(b)	“Affiliate” means any corporation that is a “parent corporation” or “subsidiary corporation” of the Company, as those terms are defined in Sections 424(e) and (f) of the Code, or any successor provision, and any joint venture in which the Company or any such “parent corporation” or “subsidiary corporation” owns an equity interest.

	(c)	“Agreement” means a written contract entered into between the Company or an Affiliate and a Participant containing the terms and conditions of an Award granted hereunder (not inconsistent with this Plan).

	(d)	“Annual Award” means an Option or Stock Appreciation Right granted pursuant to Section 7(c) of this Plan.

	(e)	“Annual Retainer” of a Participant means the fixed annual fee for such Participant in effect on the first day of the Plan Year for which such Annual Retainer is payable for services to be rendered as a Non-Employee Director of the Company. For purposes of determining Awards, other than an Initial Award, for the short Plan Year beginning September 1, 2007 and ending on April 25, 2008, the Annual Retainer in effect on September 1, 2007 shall be 8/12 of the annual fee in effect as of September 1, 2007.

	(f)	“Award” means an Option granted pursuant to Section 5 of this Plan, a Stock Appreciation Right granted pursuant to Section 6 of this Plan, an Annual or Initial Award granted pursuant to Section 7 of this Plan or a credit of Deferred Stock Units pursuant to Section 8 of this Plan.

	(g)	“Board” means the Board of Directors of the Company.

	(h)	“Change in Control” shall mean:


	(i)	Any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either (i) the then-outstanding Shares (the “Outstanding Company Common Stock”) or (ii)


		the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided , however , that, for purposes of this clause (h)(i), the following acquisitions shall not constitute a Change in Control: (1) any acquisition directly from the Company, (2) any acquisition by the Company or any of its subsidiaries, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its subsidiaries, (4) any acquisition by an underwriter temporarily holding securities pursuant to an offering of such securities or (5) any acquisition pursuant to a transaction that complies with clauses (A), (B) and (C) of clause (iii) below; or

	(ii)	Individuals who, as of the date hereof, constitute the Board (the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board; provided , however , that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the Incumbent Directors then on the Board shall be considered as though such individual was an Incumbent Director, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

	(iii)	Consummation of a reorganization, merger, statutory share exchange or consolidation (or similar corporate transaction) involving the Company or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of assets or stock of another entity by the Company or any of its Subsidiaries (each, a “Business Combination”), in each case, unless, immediately following such Business Combination, (A) substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then-outstanding Shares (or, for a non-corporate entity, equivalent securities) and the then-outstanding voting securities entitled to vote generally in the election of directors (or, for a non-corporate entity, equivalent governing body), as the case may be, of (1) the entity resulting from such Business Combination (the “Surviving Corporation”) or (2) if applicable, the ultimate parent entity that directly or indirectly has beneficial ownership of 80% or more of the voting securities eligible to elect directors of the Surviving Corporation (the “Parent Corporation”), in substantially the same proportion as their ownership, immediately prior to the Business Combination, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 30% or more of the


		outstanding Shares and the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Business Combination; or

	(iv)	Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.


	(i)	“Code” shall mean the Internal Revenue Code of 1986, as amended and in effect from time to time, or any successor statute.

	(j)	“Committee” means any committee of the Board designated by the Board to administer this Plan under Section 3 hereof which shall be composed of not less than two members, each of whom shall be a “non-employee director” as defined in Exchange Act Rule 16b-3.

	(k)	“Company” means Medtronic, Inc., a Minnesota corporation, or any successor to all or substantially all of its businesses by merger, consolidation, purchase of assets or otherwise.

	(l)	“Deferred Stock Unit” means the right to receive one Share pursuant to Section 8 of this Plan.

	(m)	“Disability” means the disability of a Participant such that the Participant is unable due to a physical or mental illness or condition that is expected to be of duration of twelve (12) months or more to perform the essential duties of a member of the Board.

	(n)	“Exchange Act” means the Securities Exchange Act of 1934, as amended; “Exchange Act Rule 16b-3” means Rule 16b-3 promulgated by the Securities and Exchange Commission under the Exchange Act as in effect with respect to the Company or any successor regulation.

	(o)	“Fair Market Value” means, on a given date, (i) if there should be a public market for the Shares on such date, the closing sale price of the Shares on The New York Stock Exchange, or, if the Shares are not listed or admitted on any national securities exchange, the arithmetic mean of the per Share closing bid price and per Share closing asked price on such date as quoted on the National Association of Securities Dealers Automated Quotation System (or such market in which such prices are regularly quoted) (the “NASDAQ”), or, if no sale of Shares shall have been reported on The New York Stock Exchange or quoted on the NASDAQ on such date, then the immediately preceding date on which sales of the Shares have been so reported or quoted shall be used, and (ii) if there should not be a public market for the Shares on


		such date, the Fair Market Value shall be the value established by the Committee in good faith.


	(p)	“Fundamental Change” means a dissolution or liquidation of the Company, a sale of substantially all of the assets of the Company, a merger or consolidation of the Company with or into any other corporation, regardless of whether the Company is the surviving corporation, or a statutory share exchange involving capital stock of the Company.

	(q)	“Initial Award” means an Option or Stock Appreciation Right granted pursuant to Section 7(b) of this Plan.

	(r)	“Meeting” means a regular or special meeting of the Board or of a committee of the Board on which a particular Participant serves.

	(s)	“Non-Employee Director” means a member of the Board who is not an employee of the Company or any Affiliate.

	(t)	“Option” means a right to purchase Stock granted pursuant to Sections 5 and 7 of this Plan.

	(u)	“Participant” means any Non-employee Director to whom an Award is made.

	(v)	“Plan” means this 1998 Outside Director Stock Compensation Plan, as amended and in effect from time to time.

	(w)	“Plan Year” means the period from September 1 of any year through the following August 31. Effective September 1, 2007 the Plan Year shall be a short year ending on April 25, 2008 and thereafter the Plan Year shall correspond to the Company’s fiscal year.

	(x)	“Pro-Ration Factor” means: (A) in the case of a Participant who is a Non-Employee Director for the entire Plan Year in question and attends at least 75 percent of the Meetings that occur during such Plan Year (such Meetings, the “Plan Year Meetings”), 100 percent; (B) in the case of a Participant who is a Non-Employee Director for only a portion of a Plan Year and attends at least 75 percent of the Meetings that occur during that portion of a Plan Year (such meetings, the “Applicable Meetings”), a percentage determined by dividing the number of Applicable Meetings by the total number of Plan Year Meetings for that Plan Year; and (C) in the case of a Non- Employee Director who fails to satisfy the Meeting attendance requirement of clause (A) or (B), as applicable, 75 percent of the percentage specified in clause (A) or (B), as applicable.

	(y)	“Share” means a share of common stock of the Company, $.10 par value per share.


	(z)	“Stock Appreciation Right” means a stock appreciation right granted pursuant to Sections 6 and 7 of this Plan.

	(aa)	“Subsidiary” means a “subsidiary corporation,” as that term is defined in Section 424(f) of the Code, or any successor provision.

	(bb)	“Successor” with respect to a Participant means a court appointed conservator or guardian of a Participant; if the Participant is deceased, the legal representative of the estate of the Participant; or the person or persons who may, by bequest or inheritance, or pursuant to a transfer permitted under Section 9(d) of this Plan, acquire the right to exercise an Option or Stock Appreciation Right or receive Shares issuable in satisfaction of Deferred Stock Units in the event of the Participant’s death.

	(cc)	“Term” means the period during which an Award may be exercised.Except when otherwise indicated by the context, reference to the masculine gender shall include, when used, the feminine gender and any term used in the singular shall also include the plural.


3.	Administration.


	(a)	Authority of Committee. The Committee or its delagee shall administer this Plan. The Committee shall have the authority to interpret this Plan and any Award or Agreement made under this Plan, to establish, amend, waive and rescind any rules and regulations relating to the administration of this Plan (including without limitation the manner in which Participants shall make elections provided for herein), to determine the terms and provisions of any Agreements entered into hereunder (not inconsistent with this Plan), and to make all other determinations necessary or advisable for the administration of this Plan. The Committee may correct any defect, supply any omission or reconcile any inconsistency in this Plan or in any Award in the manner and to the extent it shall deem desirable. The determinations of the Committee in the administration of this Plan, as described herein, shall be final, binding and conclusive.

	(b)	Indemnification. To the full extent permitted by law, each member and former member of the Committee and each person to whom the Committee delegates or has delegated authority under this Plan shall be entitled to indemnification by the Company against and from any loss, liability, judgment, damage, cost and reasonable expense incurred by such member, former member or other person by reason of any action taken, failure to act or determination made in good faith under or with respect to this Plan.


4.	In General.


	(a)	Shares Available. The number of Shares available for distribution under this Plan is 3,000,000 (subject to adjustment under Section 9(f) hereof). Any Shares subject to the terms and conditions of an Award under this Plan which are not used because the


		terms and conditions of the Award are not met may again be used for an Award under this Plan. Any undistributed portion of any terminated, expired, exchanged, exercised or forfeited Award or any portion of an Award settled in cash in lieu of Shares shall be available for further Awards.

	(b)	No Fractional Shares. No fractional Shares may be issued under this Plan; fractional Shares will be rounded to the nearest whole Share.

	(c)	Rights as Shareholder. A participant shall have no rights as a shareholder with respect to any securities covered by an Award until the date the Participant becomes the holder of record.


5.	Options.

	(a)	Agreements. Each Option granted under this Plan shall be evidenced by an Option Agreement setting forth the terms and conditions thereof.

	(b)	Discretionary Options. The Board or the Committee may, in its discretion, at any time or from time to time grant to any Non-Employee Director an Option to purchase such number of Shares, on such terms and conditions, as it shall determine.

	(c)	Purchase Price; Term and Exercisability of Options. The purchase price of each share subject to an Option shall be the Fair Market Value of a Share as of the date the Option is granted. Options granted to a Non-Employee Director under this Section 5 shall vest and be exercisable in full on the date of grant, except to the extent the Board or Committee provides otherwise in the Option Agreement; provided , however, that in no event shall a Non-Employee Director initially appointed by the Board be entitled to exercise an Option unless, and until such time as, such director shall have been elected to the Board by the shareholders of the Company. Notwithstanding the foregoing, except as otherwise provided in the Option Agreement, vesting of an Option granted to a Non-Employee Director who shall have been elected by the shareholders of the Company shall accelerate and shall become immediately exercisable in full upon the occurrence of a Change in Control or in the event that the Non-Employee Director ceases to serve as a director of the Company due to death, Disability, resignation or retirement under the policies of the Company then in effect. Options shall expire no later than the ten-year anniversary date of the Option’s grant; provided , that an Option granted to a Non-Employee Director initially appointed by the Board shall expire on the date such director ceases to be a director of the Company unless such director shall have been elected by the shareholders subsequent to the grant of the Initial Award to such director.

	(d)	Payment of Option Price. The purchase price of the Shares with respect to which an Option is exercised shall be payable in full at the time of exercise; provided , that to the extent permitted by law, Participants may simultaneously exercise Options and sell the Shares thereby acquired pursuant to a brokerage or similar relationship and use the proceeds from such sale to pay the purchase price of such Shares. The


		purchase price may also be paid in cash, or by delivery to the Company of Shares held by such Participant for at least six months before such exercise (in each case, such Shares having a Fair Market Value as of the date the Option is exercised equal to the purchase price of the Shares being purchased pursuant to the Option), or a combination thereof, in the discretion of the Participant. In no event shall any Option be exercisable at any time after its Term. When an Option is no longer exercisable, it shall be deemed to have lapsed or terminated.

6.	Stock Appreciation Rights.

	(a)	Agreements. Each Stock Appreciation Right granted under this Plan shall be evidenced by an Agreement setting forth the terms and conditions thereof.

	(b)	Discretionary Grant of Stock Appreciation Right. The Board or the Committee may, in its discretion, at any time or from time to time grant to any Non-Employee Director a Stock Appreciation Right (“Stock Appreciation Right”), on such terms and conditions, as it shall determine.

	(c)	Term and Exercisability of Stock Appreciation Rights. Stock Appreciation Rights granted to a Non-Employee Director under this Section 6 shall vest and be exercisable in full on the date of grant, except to the extent the Board or Committee provides otherwise in the Stock Appreciation Right agreement; provided , however, that in no event shall a Non-Employee Director initially appointed by the Board be entitled to exercise a Stock Appreciation Right unless, and until such time as, such director shall have been elected to the Board by the shareholders of the Company. Notwithstanding the foregoing, except as otherwise provided in the Stock Appreciation Right agreement, vesting of a Stock Appreciation Right granted to a Non-Employee Director who shall have been elected by the shareholders of the Company shall accelerate and shall become immediately exercisable in full upon the occurrence of a Change in Control or in the event that the Non-Employee Director ceases to serve as a director of the Company due to death, Disability, resignation or retirement under the policies of the Company then in effect. Stock Appreciation Rights shall expire no later than the ten-year anniversary date of the Stock Appreciation Rights’ grant; provided , that a Stock Appreciation Right granted to a Non-Employee Director initially appointed by the Board shall expire on the date such director ceases to be a director of the Company unless such director shall have been elected by the shareholders subsequent to the grant of the Initial Award to such director.

	(d)	Settlement of Appreciation Right. Upon exercise of an Appreciation Right, the Participant shall receive Shares with an aggregate value determined by multiplying the number of Appreciation Rights units being exercised, by the excess of (i) the Fair Market Value of a Share as of the date of exercise over (ii) the Fair Market Value of a Share as of the date of the Award.


7.	Initial and Annual Awards.

	(a)	General. Each Non-Employee Director shall automatically be granted an Initial Award and Annual Award. Such Awards may take the form of an Option or Stock Appreciation Right as determined by the Committee from time to time. The provisions of Section 5 or 6 respectively shall govern the Option or Stock Appreciation Rights Agreement except as otherwise provided in this Section 7.

	(b)	Initial Award. Each Non-Employee Director shall automatically be granted on the date such director first becomes a director an “Initial Award” for a number of units determined by dividing (i) two times the amount of the Annual Retainer as in effect immediately following such election or appointment by (ii) the Fair Market Value of a Share on the date of grant. No increase in the Annual Retainer of the Non-Employee Directors after a person becomes a Non-Employee Director shall increase the number of units subject to the Initial Award granted to such Non-Employee Director. An employee of the Company or an Affiliate who terminates such employment and thereafter becomes a Non-Employee Director is not entitled to receive an Initial Award but will be entitled to receive Annual Awards. A Non-Employee Director is not entitled to receive more than one Initial Award during his or her lifetime. For purposes of Section 7(b) and 7(c) a unit shall represent an Option or Stock Appreciation Right with respect to one share of Stock.

	(c)	Annual Awards. On the first day of each Plan Year, each Non-Employee Director shall automatically be granted an Annual Award for a number of units equal to (i) the amount of the Annual Retainer in effect as of such day, divided by (ii) the Fair Market Value of a Share on the first day of the Plan Year. If there is an increase in the Annual Retainer after the Annual Award is granted in a given year, each Non-Employee Director shall automatically be granted, as of the date such increase is approved, a supplemental Annual Award for the number of units equal to (i) the amount of the increase in such Annual Retainer divided by (ii) the Fair Market Value of a Share on the date of the grant. In the event that a Non-Employee Director joins the Board in the middle of the Plan Year, then such Non-Employee Director shall automatically be granted an Annual Award for a number of units equal to (i) the product obtained by multiplying the amount of the Annual Retainer in effect as of such day by a fraction the numerator of which is the number of days remaining in the Plan Year as of the day such Non-Employee Director commenced her or his term as a Non-Employee Director and the denominator of which is 365, divided by (ii) the Fair Market Value of a Share on the day that such Non-Employee Director commenced her or his term as a Non-Employee Director.

	(d)	Term and Exercisability of Awards. Initial Awards and Annual Awards shall expire on the fifth anniversary of the date the Non-Employee Director ceases to be a director of the Company for any reason, if earlier than the tenth anniversary of the date of the grant of the Award; and provided , further, that the Initial Award granted to a Non-Employee Director initially appointed by the Board shall expire on the date such director ceases to be a director of the Company unless such director shall have


		been elected by the shareholders subsequent to the grant of the Initial Award to such director.

8.	Deferred Stock Units.

	(a)	Annual Credit. As of the last day of each Plan Year, there shall be credited to the Account of each Participant who is a Non-Employee Director on such day a number of Deferred Stock Units equal to (i) the Annual Retainer in effect as of such day, times the Pro-Ration Factor, divided by (ii) the average of the Fair Market Value of a Share on each of the last 20 trading days during such Plan Year determined in accordance with clause (i) of Section 2(o) or, if clause (i) of Section 2(o) is inapplicable, the Fair Market Value of a Share as of the last day of such Plan Year determined in accordance with clause (ii) of Section 2(o). There shall be credited to the Account of any Non-Employee Director who retires from the Board prior to the last day of the Plan Year, as of the retirement date, a number of Deferred Stock Units equal to (i) the Annual Retainer in effect as of such date, times the Pro-Ration Factor, divided by (ii) the average of the Fair Market Value of a Share on each of the last 20 trading days prior to such date as determined in accordance with Section 2(o).

	(b)	Discretionary Credits. The Board or the Committee may, in its discretion, at any time and from time to time, cause additional Deferred Stock Units to be credited to the account of any Non-Employee Director.

	(c)	Credits of Dividend Equivalents; Maintenance of Accounts. The Company shall maintain an Account for each Participant to which the credits provided for in Sections 8(a) and (b) above shall be made. Each Participant’s Account shall be credited from time to time with additional Deferred Stock Units to reflect deemed reinvestment of any amounts that would have been paid as cash dividends with respect to the Deferred Stock Units held in such Account if they were Shares. Subject to the provisions of Section 8(d) regarding delivery of Shares, Accounts may be credited with fractional Deferred Stock Units pursuant to this Section 8(c) and Sections 8(a) and (b).

	(d)	Delivery of Shares from Accounts.

		(i)	Each Participant shall be provided the opportunity to elect, in accordance with procedures established by the Committee in compliance with the requirements of Section 409A of the Code, whether to receive the amounts credited to the Participant’s Account in a single lump sum or in five annual installments. Such election shall be made no later than the December 31 prior to the Plan Year in which the Deferred Stock Units are earned (or such later date permitted under Section 409A of the Code); provided, however, that in the case of a newly appointed director such election may be made within 30 days of the date of such appointment. Any such election made by a newly appointed director shall apply only to that portion of the Deferred Stock Units that are earned after the election is made. Alternatively, an individual may


			make an election immediately before being appointed to the Board that is conditioned on the individual’s actual appointment. Once made, an election may be changed on or before December 31 of any year, but such changed election shall take effect only with respect to Awards for the Plan Year beginning after such change. If no election is made for a Plan Year, the amounts credited to a Participant’s account with respects to Awards for such year shall be delivered in a lump sum.

		(ii)	If a Participant has elected a lump sum delivery, or if a Participant dies while a member of the Board, the Participant or the Participant’s Successor, as applicable, shall receive a number of Shares equal to the total number of Deferred Stock Units in the Participant’s Account as of the date on which the Participant ceases for any reason to be a member of the Board (the “Termination Date”) in full satisfaction of all of the Participant’s interest in the Account; provided , that any fractional Deferred Stock Units shall be rounded to the nearest higher whole number of Shares. Payment shall be delivered to the Participant or the Participant’s Successor in the form of Shares as soon as practicable, but not later than 90 days, after the Participant’s Termination Date. If a Participant has elected installment delivery and ceases to be a member of the Board for any reason other than the death of the Participant, then the Participant shall receive the balance in such Participant’s Account in the form of five annual deliveries of Shares (and if a Participant dies after ceasing to be a Board member, any remaining annual deliveries shall be made to the Participant’s Successor). The first installment shall be made as soon as practicable, but not later than 90 days after the Participant’s Termination Date. The remaining four installments shall be made on the subsequent anniversary dates of the initial installment payment. The precise number of shares delivered in each installment shall be determined in such a manner as to cause each such delivery to represent approximately one-fifth of the Deferred Stock Units held in such Account as of the Termination Date together with any dividend equivalents credited thereon. Notwithstanding the foregoing, no such installment shall be delivered unless and until the Board or the Committee shall have approved the delivery (unless such approval is not necessary under Exchange Act Rule 16b-3).

		(iii)	Notwithstanding anything in Section 8(d)(iii) to the contrary, if a Change in Control constituting a “change in control” within the meaning of Section 409A of the Code occurs, the balance in each Participant’s Account shall be delivered to the Participant in a single lump sum delivery of Shares no later than 90 days following the Change in Control.


9.	General Provisions.

	(a)	Effective Date of this Plan. This Plan originally became effective as of March 5, 1998.

	(b)	Duration of this Plan. This Plan shall remain in effect until it is terminated pursuant to Section 9(e) hereof.

	(c)	No Right to Board Membership. Nothing in this Plan or in any Agreement shall confer upon any Participant the right to continue as a member of the Board.

	(d)	Transferability. A non-Employee Director may transfer an Award granted pursuant to Section 5, 6, or 7 to any member of such Non-Employee Director’s “immediate family” (as such term is defined in Rule 16a-1(e) promulgated under the Exchange Act, or any successor rule or regulation) or to one or more trusts whose beneficiaries are members of such Non-Employee Director’s “immediate family” or partnerships in which such family members are the only partners; provided , that (i) the transferor receives no consideration for the transfer and (ii) such transferred Award shall continue to be subject to the same terms and conditions as were applicable to such Award immediately prior to its transfer. Unless an Award granted pursuant to Section 5, 6, or 7 shall have expired, in the event of a Non-Employee Director’s death, an Award granted to such Non-Employee Director pursuant to Section 5, 6, or 7 shall be transferable to the beneficiary, if any, designated by the Non-Employee Director in writing to the Company prior to the Non-Employee Director’s death and such beneficiary shall succeed to the rights of the Non-Employee Director to the extent permitted by law. If no such designation of a beneficiary has been made, the Non-Employee Director’s legal representative shall succeed to such Award, which shall be transferable by will or pursuant to the laws of descent and distribution.

	(e)	Amendment, Modification and Termination of this Plan. Except as provided in this Section 9(e), the Board may at any time amend, modify, terminate or suspend this Plan or any or all Agreements under this Plan to the extent permitted by law. No termination, suspension or modification of this Plan may materially and adversely affect any right acquired by any Participant (or a Participant’s legal representative) or any Successor under an Award granted before the date of termination, suspension or modification, unless otherwise agreed by the Participant in the Agreement or otherwise or required as a matter of law. It is conclusively presumed that any adjustment for changes in capitalization provided for in Section 9(f) hereof does not adversely affect any right of a Participant under an Award.

	(f)	Adjustment for Changes in Capitalization. Appropriate adjustments in the aggregate number and type of Shares available for Awards under this Plan, in the number and type of Shares subject to Awards then outstanding, in the Award exercise or conversion price as to any outstanding Awards, and in the number of Deferred Stock Units in the Accounts, may be made by the Committee in its sole discretion to give effect to adjustments made in the number or type of Shares through a


	Fundamental Change, recapitalization, reclassification, stock dividend, stock split, stock combination, or other relevant change, provided that fractional Shares shall be rounded to the nearest whole Share.

(g)	Fundamental Change. In the event of a proposed Fundamental Change:
	(a) involving a merger, consolidation or statutory share exchange, unless appropriate provision shall be made (which the Board may, but shall not be obligated to, make) for the protection of the outstanding Awards by the substitution of appropriate voting common stock of the corporation surviving any such merger or consolidation or, if appropriate, the parent corporation of the Company or such surviving corporation, to be issuable upon the exercise of Awards, or (b) involving the dissolution or liquidation of the Company, the Board may, but shall not be obligated to, declare, at least twenty days prior to the occurrence of the Fundamental Change, and provide written notice to each holder of an Award granted pursuant to Section 5, 6 or 7 of the declaration, that each such outstanding Award, whether or not then exercisable, shall be canceled at the time of, or immediately prior to the occurrence of, the Fundamental Change in exchange for payment in cash to each holder of such Award, within 20 days after the Fundamental Change. At the time of the declaration provided for in the immediately preceding sentence, each such Award shall immediately become fully vested and each person holding such an Award shall have the right, during the period preceding the time of cancellation of the Award, to exercise the Award in full or any portion thereof. Payment to holders of Options for each Share covered by the canceled Option shall be equal to the amount, if any, by which the Fair Market Value (as defined in this Section 9(g)) per Share exceeds the exercise price per Share covered by such Option. Payment to holders of each cancelled Stock Appreciation Right shall be equal to the aggregate amount of appreciation, if any. In the event of a declaration pursuant to this Section 9(g), each outstanding Option or Stock Appreciation Right that shall not have been exercised prior to the Fundamental Change shall be canceled at the time of, or immediately prior to, the Fundamental Change, as provided in the declaration. Notwithstanding the foregoing, no person holding such an Award shall be entitled to the payment provided for in this Section 9(g) if such Award shall have previously expired. For purposes of this Section 9(g) only, “Fair Market Value” per Share means the cash plus the fair market value, as determined in good faith by the Board, of the non-cash consideration to be received per Share by the shareholders of the Company upon the occurrence of the Fundamental Change, notwithstanding anything to the contrary provided in this Plan.

(h)	Limits of Liability.

	(i)	Any liability of the Company to any Participant with respect to an Award shall be based solely upon contractual obligations created by this Plan and the Agreement.

	(ii)	Except as may be required by law, neither the Company nor any member or former member of the Board or of the Committee, nor any other person participating (including participation pursuant to a delegation of authority


			under Section 3(a) hereof) in any determination of any question under this Plan, or in the interpretation, administration or application of this Plan, shall have any liability to any party for any action taken, or not taken, in good faith under this Plan.

	(i)	Compliance with Applicable Legal Requirements. No certificate for Shares distributable pursuant to this Plan shall be issued and delivered unless the issuance of such certificate complies with all applicable legal requirements including, without limitation, compliance with the provisions of applicable state securities laws, the Securities Act of 1933, as amended and in effect from time to time or any successor statute, the Exchange Act and the requirements of the exchanges on which the Company’s Shares may, at the time, be listed.

	(j)	Removal for Cause. Notwithstanding any other provision of this Plan, this Section 9(j) shall apply in the event a Participant is removed from the Board for cause before a Change of Control. In such event: (i) all of the Participant’s Awards granted pursuant to Sections 5, 6 and 7 shall immediately expire and be forfeited, and (ii) unless the Board or Committee determines in connection with or after such removal to forfeit all or a portion of a Participant’s Account, the balance in such Participant’s Account shall be delivered to the Participant at the time and in the manner described in Section 8. In addition, if the Participant has received or been entitled to delivery of Shares within six months before such removal, the Board or the Committee, in its sole discretion, may require the Participant to return or forfeit all or a portion of such Shares and receive back the exercise price (if any) paid therefor, or may require the Participant to pay to the Company the economic value of such Shares less such exercise price, determined as of the date of the exercise of Awards in the event of any of the following occurrences (whether before or after such removal): competition with the Company or any Affiliate, unauthorized disclosure of material proprietary information of the Company or any Affiliate, a violation of applicable business ethics policies or business policies of the Company or any Affiliate, or any other action or event that the Board may determine warrants such a requirement. The Board’s or Committee’s right to require such return or forfeiture must be exercised within 90 days after the later of the date of such removal or the discovery of such an occurrence, but in no event later than 15 months after such removal.

10.	Governing Law. To the extent that federal laws do not otherwise control, this Plan and all determinations made and actions taken pursuant to this Plan shall be governed by the laws of Minnesota and construed accordingly.

11.	Severability. In the event any provision of this Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of this Plan, and this Plan shall be construed and enforced as if the illegal or invalid provision had not been included.

12.	Effect of Prior Plan. From and after the effective date of this Plan, no further awards shall be made to Non-Employee Directors under the Company’s 1994 Stock Award Plan (the

“Prior Plan”). All grants and awards made under the Prior Plan prior to the effective date of this Plan shall continue in accordance with the terms of the Prior Plan.

MEDTRONIC, INC.

2003 LONG-TERM INCENTIVE PLAN
(As amended and restated effective January 1, 2008)


1.	Purpose of the Plan

The purpose of the Plan is to aid the Company and its Affiliates in recruiting and retaining employees and to motivate such employees and other plan participants to exert their best efforts on behalf of the Company and its Affiliates by providing incentives through the granting of Awards. The Company expects that it will benefit from the stock ownership opportunities provided to such participants to encourage alignment of their interest in the Company’s success with that of other stakeholders. The Company hereby restates the Plan in its entirety effective January 1, 2008 to comply with the provisions of Section 409A of the Internal Revenue Code.


2.	Definitions

The following capitalized terms used in the Plan have the respective meanings set forth in this Section:


	(a)	“ *Act* ” means the Securities Exchange Act of 1934, as amended, or any successor thereto.

	(b)	“ *Affiliate* ” means any entity that is consolidated with the Company for financial reporting purposes or any other entity designated by the Board in which the Company or an Affiliate has a direct or indirect interest of at least forty percent (40%).

	(c)	“ *Award* ” means an Option, Stock Appreciation Right, Share of Restricted Stock, Other Stock-Based Award or Other Cash-Based Award granted pursuant to the Plan.

	(d)	“ *Board* ” means the Board of Directors of the Company.

	(e)	“ *Code* ” means the Internal Revenue Code of 1986, as amended, or any successor thereto.

	(f)	“ *Committee* ” means the Compensation Committee of the Board.

	(g)	“ *Company* ” means Medtronic, Inc., a Minnesota corporation.

	(h)	“ *Effective Date* ” means the date the adoption of the Plan by the Board of Directors is approved by the Company’s shareholders.

	(i)	“ *Exercise Price* ” means the purchase price per Share under the terms of an option as determined pursuant to Section 6(a).

	(j)	“ *Fair Market Value* ” means, on a given date, (i) if there should be a public market for the Shares on such date, the closing sale price of the Shares on The New York Stock Exchange, or, if the Shares are not listed or admitted on any national securities exchange, the arithmetic mean of the per Share closing bid price and per Share closing asked price on such date as quoted on the National Association of Securities Dealers Automated Quotation System (or such market in which such prices are regularly quoted) (the “NASDAQ”), or, if no sale of Shares shall have been reported on The New York Stock Exchange or quoted on the NASDAQ on such date, then the immediately preceding date on which sales of the Shares have been so reported or quoted shall be used, and (ii) if there should not be a public market for the Shares on such date, the Fair Market Value shall be the value established by the Committee in good faith.

	(k)	“ *ISO* ” means an Option that is an incentive stock option granted pursuant to Section 6(d).

	(l)	“ *Option* ” means a stock option granted pursuant to Section 6.

	(m)	“ *Other Stock-Based Awards* ” means Awards granted pursuant to Section 9(a) or 10.

	(n)	“ *Other Cash-Based Awards* ” means Awards granted pursuant to Section 9(b) or 10.

	(o)	“ *Participant* ” means an employee of the Company or an Affiliate who is selected by the Committee to participate in the Plan. An Award may also be granted to any consultant, agent, advisor or independent contractor who renders bona fide services to the Company or an Affiliate that (i) are not in connection with the offer and sale of the Company’s securities in a capital-raising transaction and (ii) do not directly or indirectly promote or maintain a market for the Company’s securities. Except where the context otherwise requires, references in this Plan to “employment” and related terms shall apply to services in any such capacity.

	(p)	“ *Performance-Based Awards* ” means certain Restricted Stock, Other Stock-Based Awards and Other Cash-Based Awards granted pursuant to Section 10.

	(q)	“ *Plan* ” means the 2003 Long-Term Incentive Plan, as amended from time to time.

	(r)	“ *Restricted Stock* ” means any Share granted under Section 8.


	(s)	“ *Shares* ” means shares of common stock of the Company, $.10 par value per share.

	(t)	“ *Stock Appreciation Right* ” means a stock appreciation right granted pursuant to Section 7.

	(u)	“ *Subsidiary* ” means a subsidiary corporation, as defined in Section 424(f) of the Code (or any successor section thereto), of the Company.


3.	Shares Subject to the Plan

The total number of Shares which may be issued under the Plan is 60,000,000, of which no more than 50% may be issued in the form of Restricted Stock or Other Stock-Based Awards payable in Shares, provided, however, that no more than 5% of the Shares reserved under the Plan shall be granted pursuant to Restricted Stock Awards if such Award (a) shall vest in full prior to three years from the Award date or (b) if a condition to such vesting is based, in whole or in part, upon performance of the Shares or any aspect of the Company’s operations and such vesting could occur over a period of less than one year from the Award date. The Shares may consist, in whole or in part, of unissued Shares. The issuance of Shares upon the exercise or satisfaction of an Award shall reduce the total number of Shares available under the Plan. Shares which are subject to Awards that terminate, lapse or are cancelled may be granted again under the Plan. Any Shares tendered by a Participant or retained by the Company as full or partial payment to the Company for the purchase price of an Award or to satisfy tax withholding obligations in connection with an Award shall be available for Awards under the Plan. No fractional Shares will be issued in payment for any Award, but instead the number of Shares will be rounded upward to the next whole Share.


4.	Administration


	(a)	*Delegation of Authority* . The Plan shall be administered by the Committee, which may delegate its duties and powers in whole or in part to (i) any subcommittee thereof consisting solely of at least two individuals who are intended to qualify as “non-employee directors” within the meaning of Rule 16b-3 under the Act (or any successor rule thereto) and, to the extent required by Section 162(m) of the Code (or any successor section thereto), “outside directors” within the meaning thereof and (ii) persons who are not non-employee directors for purposes of determining and administering Awards to those Participants who are not then subject to the reporting requirements of Section 16 of the Act.

	(b)	*Authority of Committee* . The Committee shall have exclusive power to make Awards and to determine when and to whom Awards shall be granted, and the form, amount and other terms and conditions of each Award, subject to the provisions of this Plan. The Committee may determine whether, to what extent and under what circumstances Awards may be settled, paid or exercised in cash, Shares or other Awards or other property, or cancelled, forfeited or suspended. The Committee shall have the authority to interpret this Plan and any Award or agreement made under this Plan, to establish, amend, waive and rescind any rules and regulations relating to the administration of this Plan, to determine the terms and provisions of any agreements entered into hereunder (not inconsistent with this Plan), and to make all other determinations necessary or advisable for the administration of this Plan. The Committee may correct any defect, supply any omission or reconcile any inconsistency in this Plan or in any Award or agreement in the manner and to the extent it shall deem desirable. The determinations of the Committee in the administration of this Plan, as described herein, shall be final, binding and conclusive.

	(c)	*Rule 16b-3* . It is the intent that this Plan and all Awards granted pursuant to it shall be administered by the Committee (or a subcommittee thereof) so as to permit this Plan and Awards to comply with Rule 16b-3 under the Act. If any provision of this Plan or any Award would otherwise frustrate or conflict with the intent expressed in this Section 4(c), that provision to the extent possible shall be interpreted and deemed amended in the manner determined by the Committee so as to avoid such conflict.

	(d)	*Indemnification* . To the full extent permitted by law, each member and former member of the Committee and each person to whom the Committee delegates or has delegated authority under this Plan shall be entitled to indemnification by the Company against and from any loss, liability, judgment, damages, cost and reasonable expense incurred by such member, former member or other person by reason of any action taken, failure to act or determination made in good faith under or with respect to this Plan.

	(e)	*Tax Withholding* . The Committee shall require payment of any amount it may determine to be necessary to withhold for federal, state, local, non-U.S. income, payroll or other taxes as a result of the exercise, grant or vesting of an Award. Notwithstanding anything in any Award agreement to the contrary, the employee may not elect to charge any tax amounts against his or her Award.

	(f)	*Dividends or Dividend Equivalents* . If the Committee so determines, any Award granted under the Plan may be credited with dividends or dividend equivalents paid with respect to the underlying shares. The


		Committee may apply any restrictions to the dividends or dividend equivalents that the Committee deems appropriate and may determine the form of payment, including cash, Shares, Restricted Stock or otherwise.

	(g)	*Code Section 409A* . Any Award agreement that is subject to Code Section 409A and provides for payment upon termination of employment or separation from service shall not be payable to a Participant that is a “specified employee” until six months following the date of such Participant’s “separation from service.” A “specified employee” and a “separation from service” shall be determined by the Company in accordance with the Company’s Capital Accumulation Plan and similar Code Section 409A arrangements.


5.	Limitations


	(a)	*Term of Plan* . No Award may be granted under the Plan after the tenth anniversary of the Effective Date, but Awards granted prior to such tenth anniversary may extend beyond that date.

	(b)	*No Repricing* . No Option or Stock Appreciation Right, once granted hereunder, may be repriced.

	(c)	*Maximum* . No Participant may be granted Options, Stock Appreciation Rights, Restricted Stock, Performance-Based Awards, Other Stock-Based Awards or any combination thereof relating to more than 2,000,000 Shares under the Plan during any fiscal year.


6.	Terms and Conditions of Options

Options granted under the Plan shall be, as determined by the Committee, non-qualified or incentive stock options for federal income tax purposes, as evidenced by the related Award agreements, and shall be subject to the foregoing and the following terms and conditions and to such other terms and conditions, not inconsistent therewith, as the Committee shall determine:


	(a)	*Exercise Price* . The Exercise Price per Share shall be determined by the Committee, but shall not be less than 100% of the Fair Market Value of the Shares on the date an Option is granted.

	(b)	*Exercisability* . Options granted under the Plan shall be exercisable at such time and upon such terms and conditions as may be determined by the Committee, but in no event shall an Option be exercisable more than ten years after the date it is granted, except as provided in Section 16 of the Plan.

	(c)	*Exercise of Options* . Except as otherwise provided in the Plan or in an Award agreement, an Option may be exercised for all, or from time to time any part, of the Shares for which it is then exercisable. For purposes of this Section 6, the exercise date of an Option shall be the date a notice of written or electronic exercise and full payment of the purchase price are received by the Company in accordance with this Section 6(c). The purchase price for the Shares as to which an Option is exercised shall be paid to the Company pursuant to one or more of the following methods, except as otherwise provided in an Award agreement: (i) in cash or its equivalent (e.g., by check); (ii) in Shares having a Fair Market Value equal to the aggregate Exercise Price for the Shares being purchased and satisfying such other requirements as may be imposed by the Committee; (iii) partly in cash and partly in such Shares; (iv) if there is a public market for the Shares at such time, through the delivery of irrevocable instructions to a broker to sell Shares obtained upon the exercise of the Option and to deliver promptly to the Company an amount out of the proceeds of such sale equal to the aggregate Exercise Price for the Shares being purchased; or (v) through the withholding of Shares having a Fair Market Value equal to the aggregate Exercise Price for the Shares being purchased from the number of Shares otherwise issuable upon the exercise of the Option (e.g., a net share settlement). No Participant shall have any rights of a shareholder with respect to Shares subject to an Option until the Participant has given written or electronic notice of exercise of the Option, paid in full for such Shares and, if applicable, has satisfied any other conditions imposed by the Committee pursuant to the Plan.

	(d)	I SOs . The Committee may grant Options under the Plan that are intended to be ISOs. Such ISOs shall comply with the requirements of Section 422 of the Code (or any successor section thereto). No ISO may be granted to any Participant who, at the time of such grant, owns more than ten percent of the total combined voting power of all classes of stock of the Company or of any Subsidiary, unless (i) the Exercise Price for such ISO is at least 110% of the Fair Market Value of a Share on the date the ISO is granted and (ii) the date on which such ISO terminates is a date not later than the day preceding the fifth anniversary of the date on which the ISO is granted Any Participant who disposes of Shares acquired upon the exercise of an ISO either (I) within two years after the date of grant of such ISO or (II) within one year after the transfer of such Shares to the Participant, shall notify the Company of such disposition and of the amount realized upon such disposition. All Options granted under the Plan are


		intended to be non-qualified stock options unless the applicable Award agreement expressly states that the Option is an ISO. If an Option is intended to be an ISO, and if for any reason such Option (or portion thereof) shall not qualify as an ISO, then, to the extent of such nonqualification, such Option (or portion thereof) shall be regarded as a non-qualified stock option granted under the Plan; provided that such Option (or portion thereof) otherwise complies with the Plan’s requirements relating to non-qualified stock options. In no event shall any member of the Committee, the Company or any of its Affiliates (or their respective employees, officers or directors) have any liability to any Participant (or any other person or entity) due to the failure of an Option to qualify for any reason as an ISO.

	(e)	*Attestation* . Wherever in this Plan or any agreement evidencing an Award a Participant is permitted to pay the Exercise Price of an Option or taxes relating to the exercise of an Option by delivering Shares, the Participant may, subject to procedures satisfactory to the Committee, satisfy such delivery requirement by presenting proof of beneficial ownership of such Shares rather than physical delivery, in which case the Company shall treat the Option as exercised without further payment and shall withhold such number of Shares from the Shares issued upon the exercise of the Option.


7.	Terms and Conditions of Stock Appreciation Rights


	(a)	*Grants* . The Committee may grant (i) a Stock Appreciation Right independent of an Option or (ii) a Stock Appreciation Right in connection with an Option, or a portion thereof. The Committee may impose such terms and conditions upon any Stock Appreciation Right as it deems fit. A Stock Appreciation Right granted pursuant to clause (ii) of the preceding sentence (A) may be granted at the time the related Option is granted or at any time prior to the exercise or cancellation of the related Option, (B) shall cover the same number of Shares covered by an Option (or such lesser number of Shares as the Committee may determine) and (C) shall be subject to the same terms and conditions as such Option except for such additional limitations as are contemplated by this Section 7 (or such additional limitations as may be included in an Award agreement).

	(b)	*Terms* . The exercise price per Share of a Stock Appreciation Right shall be an amount determined by the Committee but in no event shall such amount be less than the Fair Market Value of a Share on the date the Stock Appreciation Right is granted; provided, however, that, notwithstanding the foregoing, in the case of a Stock Appreciation Right granted in conjunction with an Option, or a portion thereof, the exercise price may not be less than the Exercise Price of the related Option. Each Stock Appreciation Right granted independent of an Option shall entitle a Participant upon exercise to an amount equal to (i) the excess of (A) the Fair Market Value on the exercise date of one Share over (B) the Exercise Price per Share, times (ii) the number of Shares covered by the Stock Appreciation Right. Each Stock Appreciation Right granted in conjunction with an Option, or a portion thereof, shall entitle a Participant to surrender to the Company the unexercised Option, or any portion thereof, and to receive from the Company in exchange therefor an amount equal to (I) the excess of (x) the Fair Market Value on the exercise date of one Share over (y) the Exercise Price per Share, times (II) the number of Shares covered by the Option, or portion thereof, which is surrendered. Payment shall be made in Shares or in cash, or partly in Shares and partly in cash (any such Shares valued at such Fair Market Value), all as set forth in the Award agreement. Stock Appreciation Rights may be exercised from time to time upon actual receipt by the Company of written or electronic notice of exercise stating the number of Shares with respect to which the Stock Appreciation Right is being exercised. The date a notice of exercise is received by the Company shall be the exercise date.


8.	Restricted Stock


	(a)	*Grant* . Subject to the provisions of the Plan, the Committee shall determine the number of Shares of Restricted Stock to be granted to each Participant, the duration of the period during which, and the conditions, if any, under which, the Restricted Stock may be forfeited to the Company, and the other terms and conditions of such Awards.

	(b)	*Transfer Restrictions* . Shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered, except as provided in the Plan or the applicable Award agreement. Shares of Restricted Stock shall be registered in the name of the Participant and held by the Company. After the lapse of the restrictions applicable to such Shares of Restricted Stock, the Company shall deliver such Shares to the Participant or the Participant’s legal representative.

	(c)	*Dividends* . Dividends or dividend equivalents paid on any Shares of Restricted Stock may be paid directly to the Participant, withheld by the Company subject to vesting of the Restricted Stock pursuant to the terms of the applicable Award agreement, or may be reinvested in additional Shares of Restricted


		Stock, as determined by the Committee in its sole discretion.

9.	Other Awards


	(a)	*Other Stock-Based Awards* . The Committee, in its sole discretion, may grant Awards of Shares and Awards that are valued in whole or in part by reference to, or are otherwise based on, Shares or on the Fair Market Value thereof (“Other Stock-Based Awards”). Such Other Stock-Based Awards shall be in such form, and dependent on such conditions, as the Committee shall determine, including, without limitation, the right to receive, or vest with respect to, one or more Shares (or the equivalent cash value of such Shares) upon the completion of a specified period of service, the occurrence of an event and/or the attainment of performance objectives. Other Stock-Based Awards may be granted alone or in addition to any other Awards granted under the Plan. Subject to the provisions of the Plan, the Committee shall determine the number of Shares to be awarded to a Participant under (or otherwise related to) such Other Stock-Based Awards; whether such Other Stock-Based Awards shall be settled in cash, Shares or a combination of cash and Shares; and all other terms and conditions of such Awards (including, without limitation, the vesting provisions thereof and provisions ensuring that all Shares so awarded and issued shall be fully paid and non-assessable).

	(b)	*Other Cash-Based Awards* . In addition to the Awards described above, and subject to the terms of the Plan, the Committee may grant such other incentives denominated in cash and payable in cash under the Plan as the Committee determines to be in the best interests of the Company and subject to such other terms and conditions as it deems appropriate. The maximum amount of Other Cash-Based Awards (including those that are performance-based) that may be granted during any fiscal year shall be $3,000,000; provided, however, that for such Awards with performance periods longer than one year the maximum shall be $3,000,000 for each fiscal year in the performance period.


10.	Performance-Based Awards.

Notwithstanding anything to the contrary herein, the Committee may grant performance-based Awards of Restricted Stock, Other Stock-Based Awards and Other Cash-Based Awards to Participants (“Performance-Based Awards”). Any such Awards granted to Participants who may be “covered employees” under Section 162(m) of the Code or any successor section thereto shall be consistent with the provisions thereof. In such cases, a Participant’s Performance-Based Award shall be determined based on the attainment of written performance goals approved by the Committee for a performance period established by the Committee (I) while the outcome for that performance period is substantially uncertain and (II) by the earlier of (A) 90 days after the commencement of the performance period to which the performance goal relates or (B) the number of days which is equal to 25 percent of the relevant performance period. The performance goals, which must be objective, shall be based upon one or more of the following criteria: (i) consolidated earnings before or after taxes (including earnings before interest, taxes, depreciation and amortization); (ii) net income; (iii) operating income; (iv) earnings per share; (v) book value per share; (vi) return on shareholders’ equity; (vii) expense management; (viii) return on investment; (ix) improvements in capital structure; (x) profitability of an identifiable business unit or product; (xi) maintenance or improvements of profit margins; (xii) stock price; (xiii) market share; (xiv) revenues or sales; (xv) costs; (xvi) cash flow; (xvii) working capital; (xviii) return on assets; (xix) asset turnover; (xx) inventory turnover; (xxi) economic value added (economic profit); and (xxii) total shareholder return. The foregoing criteria may relate to the Company, one or more of its Subsidiaries or one or more of its divisions or units, or any combination of the foregoing, and may be applied on an absolute basis and/or be relative to one or more peer group companies or indices, or any combination thereof, all as the Committee shall determine. In addition, to the degree consistent with Section 162(m) of the Code (or any successor section thereto), the performance goals may be calculated without regard to the negative effect of unusual or nonrecurring items, extraordinary items, discontinued operations or cumulative effects of accounting changes. The Committee shall determine whether, with respect to a performance period, the applicable performance goals have been met with respect to a given Participant who may be a covered employee and, if they have, shall so certify and ascertain the amount of the applicable Performance-Based Award. No Performance-Based Awards will be paid for such performance period until such certification is made by the Committee. The amount of the Performance-Based Award actually paid to a given Participant may be less than the amount determined by the applicable performance goal formula, at the discretion of the Committee. The amount of the Performance-Based Award determined by the Committee for a performance period shall be paid to the Participant within two and one-half months following the end of the performance period.


11.	Adjustments Upon Certain Events

Notwithstanding any other provisions in the Plan to the contrary, the following provisions shall apply to all Awards granted under the Plan:


	(a)	*Generally* . In the event of any change in the outstanding Shares after the Effective Date by reason of any Share dividend or split, reorganization, recapitalization, merger, consolidation, spin-off, combination or transaction or exchange of Shares or other corporate exchange, or any distribution to shareholders of Shares other than regular cash dividends or any transaction similar to the foregoing, the Committee in its sole discretion and without liability to any person may make such substitution or adjustment, if any, as it deems to be equitable, as to (i) the number or kind of Shares or other securities issued or reserved for issuance pursuant to the Plan or pursuant to outstanding Awards, (ii) the maximum number of Shares for which Awards (including limits established for Restricted Stock, Other Stock-Based Awards or Other Cash-Based Awards) may be granted during a fiscal year to any Participant, (iii) the Exercise Price or exercise price of any Stock Appreciation Right and/or (iv) any other affected term of such Awards.

	(b)	*Change in Control* . Notwithstanding anything contained in this Plan to the contrary, unless otherwise provided in the applicable Award agreement at the time of grant, in the event of a Change in Control, the following shall occur as of the effective date of such Change in Control with respect to any and all Awards outstanding as of the effective date of such Change in Control: (i) any and all Stock Options and Stock Appreciation Rights granted hereunder shall vest in full and become immediately exercisable, and shall remain exercisable throughout their entire term; (ii) any restrictions imposed on Restricted Stock (including Performance-Based Awards in Restricted Stock) shall lapse; (iii) a pro rata payment shall be made of all other Performance-Based Awards equal in each case to the number of Shares covered by the Award multiplied by the performance-based accrual percentage applicable to such Award, and multiplied by a fraction the numerator of which is the number of months elapsed from the date of grant through the effective date of the Change in Control and the denominator of which is the number of months from the date of grant through the originally scheduled maturity date; and (iv) the maximum payout opportunities attainable under all Other Stock-Based Awards and Other Cash-Based Awards that are not Performance-Based Awards shall be deemed to have been fully earned for the entire performance period(s). Such Awards shall be paid in cash, or in the sole discretion of the Committee in Shares to Participants within thirty (30) days following the effective date of the Change in Control, with any such Shares valued at the Fair Market Value as of the effective date of the Change in Control.

	(c)	Notwithstanding anything in Section 11(b) to the contrary, if an amount becomes payable with respect to an Award upon a Change in Control pursuant to Section 11(b), the amount is subject to Section 409A of the Code, and the Change in Control does not constitute a “change in the ownership or effective control” or a “change in the ownership of a substantial portion of the assets” of the Company within the meaning of Section 409A(a)(2)(A)(v) of the Code, then the amount shall not be paid upon the Change in Control, but shall instead be paid at the earliest to occur of: (i) the Participant’s “separation from service” with the Company (determined in accordance with Section 409A of the Code), provided, that if the Participant is a “specified employee” (within the meaning of Section 409A of the Code), the payment date shall be the date that is six months after the date of the Participant’s separation from service with the Company; (ii) the date payment otherwise would have been made in the absence of any provisions in this Plan to the contrary (provided such date is permissible under Section 409A of the Code); or (iii) the Participant’s death.

	(d)	*Definition of Change in Control* . For purposes of this Section 11, “Change in Control” means:


		(i)	Any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Act or any successor thereto (a “Person”) becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Act) of 30% or more of either (A) the then-outstanding Shares (the “Outstanding Company Common Stock”) or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided , however , that, for purposes of this clause (c)(i), the following acquisitions shall not constitute a Change in Control: (1) any acquisition directly from the Company, (2) any acquisition by the Company or any of its Subsidiaries, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its Subsidiaries, (4) any acquisition by an underwriter temporarily holding securities pursuant to an offering of such securities or (5) any acquisition


			pursuant to a transaction that complies with clauses (iii) (A), (B) and (C) below; or



	(e)	*Further Adjustment of Awards* . Subject to the above provisions, the Committee shall have the discretion, exercisable at any time before a sale, merger, consolidation, reorganization, liquidation, dissolution or Change in Control transaction to take such further action as it determines to be necessary or advisable with respect to Awards. Such authorized action may include (but shall not be limited to) establishing, amending or waiving the type, terms, conditions or duration of, or restrictions on, Awards so as to provide for earlier, later, extended or additional time for exercise, lifting of restrictions and other modifications, and the Committee may take such actions with respect to all Participants, to certain categories of Participants or only to individual Participants. The Committee may take such action before or after granting Awards to which the action relates and before or after any public announcement with respect to such sale, merger, consolidation, reorganization, liquidation, dissolution or change in control that is the reason for such action. Notwithstanding the foregoing, the Committee shall not take any action to change the terms of an Award in any manner that would cause the Award to violate Section 409A of the Code.


12.	No Right to Employment or Awards

The granting of an Award under the Plan shall impose no obligation on the Company or any Affiliate to continue the employment of a Participant and shall not lessen or affect the Company’s or Affiliate’s right to terminate the employment of such Participant. No Participant or other person shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of Participants, or holders or beneficiaries of Awards.

The terms and conditions of Awards and the Committee’s determinations and interpretations with respect thereto need not be the same with respect to each Participant.


13.	Other Benefit and Compensation Programs

Payments and other benefits received by a Participant under an Award shall not be deemed a part of a Participant’s regular, recurring compensation for purposes of any termination, indemnity or severance pay laws and shall not be included in, nor have any effect on, the determination of benefits under any other employee benefit plan, contract or similar arrangement provided by the Company or an Affiliate, unless expressly so provided by such other plan, contract or arrangement or the Committee determines that an Award or portion of an Award should be included to reflect competitive compensation practices or to recognize that an Award has been made in lieu of a portion of competitive cash compensation.


14.	Successors and Assigns

The Plan shall be binding on all successors and assigns of the Company and a Participant, including without limitation, the estate of such Participant and the executor, administrator or trustee of such estate, or any receiver or trustee in bankruptcy or representative of the Participant’s creditors.


15.	Nontransferability of Awards/Beneficiaries

No Award or interest in an Award may be sold, assigned, pledged (as collateral for a loan or as security for the performance of an obligation or for any other purpose) or transferred by the Participant or made subject to attachment or similar proceedings otherwise than by will or by the applicable laws of descent and distribution, except to the extent a Participant designates one or more beneficiaries on a Company-approved form who may exercise the Award or receive payment under the Award after the Participant’s death. During a Participant’s lifetime, an Award may be exercised only by the Participant. Notwithstanding the foregoing and to the extent permitted by Section 422 of the Code or any successor thereto, the Committee, in its sole discretion, may permit a Participant to assign or transfer an Award; provided, however, that any Award so assigned or transferred shall be subject to all the terms and conditions of the Plan and the agreement evidencing the Award.

A Participant may designate a beneficiary to succeed to the Participant’s Awards under the Plan in the event of the Participant’s death by filing a beneficiary form with the Company and, upon the death of the Participant, such beneficiary shall succeed to the rights of the Participant to the extent permitted by law and the terms of this Plan and the applicable agreement. In the absence of a validly designated beneficiary who is living at the time of the Participant’s death, the Participant’s executor or administrator of the Participant’s estate shall succeed to the Awards, which shall be transferable by will or pursuant to laws of descent and distribution.


16.	Amendments or Termination

The Board may amend, alter or discontinue the Plan, but no amendment, alteration or discontinuation shall be made, (a) without the approval of the shareholders of the Company, if such action would (except as is provided in Section 11 of the Plan), increase the total number of Shares reserved for the purposes of the Plan or increase the maximum number of Shares of Restricted Stock or Other Stock-Based Awards that may be awarded hereunder, or the maximum number of Shares for which Awards may be granted to any Participant, (b) without the consent of a Participant, if such action would diminish any of the rights of the Participant under any Award theretofore granted to such Participant under the Plan or (c) to Section 5(b), relating to repricing of Options or Stock Appreciation Rights; provided, however , that the Committee may amend the Plan in such manner as it deems necessary to permit the granting of Awards meeting the requirements of the Code or other applicable laws.


17.	International Participants

With respect to Participants who reside or work outside the United States of America, the Committee may, in its sole discretion, amend the terms of the Plan or adopt such modifications, procedures or subplans with respect to such Participants as are necessary or desirable to ensure the viability of the benefits of the Plan, comply with applicable foreign laws or obtain more favorable tax or other treatment for a Participant, the Company or an Affiliate; provided, however, that no such changes shall apply to the Awards to Participants who may be “covered employees” under Section 162(m) of the Code or any successor thereto unless consistent with the provisions thereof.


18.	General


	(a)	*Issuance of Shares* . Notwithstanding any other provision of the Plan, the Company shall have no obligation to issue or deliver any Shares under the Plan or make any other distribution of benefits under the Plan unless, in the opinion of the Company’s counsel, such issuance, delivery or distribution would comply with all applicable laws (including, without limitation, the requirements of the Securities Act of 1933, as amended, or any successor thereto (the “Securities Act”) or the laws of any state or foreign jurisdiction) and the applicable requirements of any securities exchange or similar entity.

		The Company shall be under no obligation to any Participant to register for offering or resale or to qualify for exemption under the Securities Act, or to register or qualify under the laws of any state or foreign jurisdiction, any Shares, security or interest in a security paid or issued under, or created by, the Plan, or to continue in effect any such registrations or qualifications if made.

		The Company may issue Shares with such legends and subject to such restrictions on transfer and stop-transfer instructions as counsel for the Company deems necessary or desirable for compliance by the Company with federal, state and foreign securities laws. The Company may also require such other action or agreement by the Participants as may from time to time be necessary to comply with applicable securities laws.

		To the extent the Plan or any Award agreement provides for issuance of stock certificates to reflect the issuance of Shares, the issuance may be effected on a noncertificated basis, to the extent not prohibited by applicable law or the applicable rules of any stock exchange.

	(b)	*No Rights as a Shareholder* . Unless otherwise provided by the Committee or in the agreement evidencing the Award or in any other written agreement between a Participant and the Company or an Affiliate, no Award shall entitle the Participant to any cash dividend, voting or other right of a shareholder unless and until the date of issuance under the Plan of the Shares that are the subject of such Award.

	(c)	*No Trust or Fund* . The Plan is intended to constitute an “unfunded” plan. Nothing contained herein shall require the Company to segregate any monies, other property, or Shares, or to create any trusts, or to make any special deposits for any immediate or deferred amounts payable to any Participant, and no Participant shall have any rights that are greater than those of a general unsecured creditor of the Company.

	(d)	*Severability* . In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.

	(e)	*Choice of Law* . The validity, construction, interpretation, administration and effect of the Plan, and rights relating to the Plan and to Awards granted under the Plan, shall be governed by the substantive laws, but not the choice of law rules, of the State of Minnesota.


19.	Effectiveness of the Plan

The Plan shall be effective as of the Effective Date.

MEDTRONIC, INC.

ISRAELI AMENDMENT

To The 2003 Long-Term Incentive Plan


1.	GENERAL

	1.1.	This Amendment (the “Amendment”) shall apply only to Participants who are residents of the State of Israel or those who are deemed to be residents of the State of Israel for the payment of tax. The provisions specified hereunder shall form an integral part of the 2003 Long-Term Incentive Plan, as amended (the “ Plan ”), of the Company as defined in the Plan.

	1.2.	This Amendment is effective with respect to Options, Stock Appreciation Rights, Shares of Restricted Stock, Other Stock-Based Awards or Other Cash-Based Awards; to be granted according to the resolution of the Committee, as such term is defined in the Plan and shall comply with Amendment no. 147 of the Israeli Tax Ordinance.

	1.3.	This Amendment is to be read as a continuation of the Plan and only refers to Awards granted to Israeli Participants so that they comply with the requirements set by the Israeli law in general, and in particular with the provisions of Section 102 of the Israeli Income Tax Ordinance (New Version), 1961 (the “ Ordinance ”), and any regulations, rules, orders or procedures promulgated thereunder, as may be amended or replaced from time to time. For the avoidance of doubt, this Amendment does not add to or modify the Plan in respect of any other category of Participants.

	1.4.	The Plan and this Amendment are complementary to each other and shall be deemed one. In any case of contradiction, whether explicit or implied, between the provisions of this Amendment and the Plan, the provisions set out in this Amendment shall prevail with respect to Awards granted to Israeli Participants.

	1.5.	Any capitalized terms not specifically defined in this Amendment shall be construed according to the interpretation given to them in the Plan.

2.	DEFINITIONS

	2.1	“Award” means an Option, Stock Appreciation Right, Share of Restricted Stock, Other Stock-Based Award or Other Cash-Based Award granted pursuant to the Plan .

	2.2	“Applicable Law” means the Israeli law in general, and in particular the Israeli Companies Law -1999, the Israeli Income Tax Ordinance (New Version), 1961 and any regulations, rules, orders or procedures promulgated thereunder, as may be amended or replaced from time to time.

	2.3	“ Approved 102 Award ” means an Award granted pursuant to Section 102(b) of the Ordinance and held in trust by a Trustee for the benefit of the Grantee.

	2.4	“ Capital Gain Award ” or “ CGA ” means an Approved 102 Award elected and designated by the Company to qualify under the capital gain tax treatment in accordance with the provisions of Section 102(b)(2) of the Ordinance.

	2.5	“ Controlling Shareholder ” means a controlling shareholder (Ba’al Shlita) as such term is defined in Section 32(9) of the Ordinance.


	2.6	“ Employee ” including an individual who is serving as a director or an office holder, but excluding any Controlling Shareholder.

	2.7	“ Employing corporation ” means any subsidiary or affiliated company or group within the meaning of Section 102(a) of the Ordinance.

	2.8	“ ITA ” means the Israeli Tax Authorities.

	2.9	“ Non-Employee ” means a consultant, adviser, service provider, Controlling Shareholder or any other person who is not an Employee.

	2.10	“ Office Holders ” [ “Nose Misra” ] - as such term is defined in the Companies Act, 1999, including, inter alia , any other person who is part of the upper management of the Company and who grants managerial services to the Company.

	2.11	“ Ordinary Income Award ” or “ OIA ”, which means an Approved 102 Award elected and designated by the Company to qualify under the ordinary income tax treatment in accordance with the provisions of Section 102(b)(1) of the Ordinance.

	2.12	“ 102 Award ” means an Award that the Board intends to be a “102 Award” which shall only be granted to employees of the Company who are not Ten Percent shareholders, and shall be subject to and construed consistently with the requirements of Section 102 of the Tax Ordinance. The Company shall have no liability to a Participant or to any other party, if an Award (or any part thereof), which is intended to be a 102 Award, is not a 102 Award. Approved 102 Awards may either be classified as Capital Gain Awards (“ CGA ”) or Ordinary Income Awards (“ OIA ”).

	2.13	“ 3(i) Award ” means Awards that do not contain such terms as will qualify under Section 102 of the Tax Ordinance.

	2.14	“ Ordinance ” means the Israeli Income Tax Ordinance (New Version) 1961, as now in effect or as hereafter amended.

	2.15	“ Section 102 ” means section 102 of the Ordinance and any regulations, rules, orders or procedures promulgated thereunder as now in effect or as hereafter amended.

	2.16	“ Trustee ” shall mean any individual appointed by the Company to serve as a trustee and approved by the ITA, all in accordance with the provisions of Section 102(a) of the Ordinance.

	2.17	“ Unapproved 102 Award ” means an Award granted pursuant to Section 102(c) of the Ordinance and not held in trust by a Trustee.

3.	ISSUANCE OF OPTIONS; ELIGIBILITY

	3.1.	The persons eligible for participation in the Plan as Participants shall include any Employees, Office Holders and/or Non-Employees of the Company as such term is defined in the Plan; provided, however, that (i) Employees may only be granted 102 Awards and Office Holders may be granted 102 Awards; and (ii)


		Non-Employees and/or Controlling Shareholders may only be granted 3(i) Awards (the “ Participants ”).

	3.2.	The Company may designate Awards granted to Israeli Employees pursuant to Section 102 as Unapproved 102 Awards or Approved 102 Awards.

	3.3.	The grant of Approved 102 Awards shall be made under this Amendment adopted by the Committee, and shall be conditioned upon the approval of this Amendment by the ITA.

	3.4.	Approved 102 Award may either be classified as Capital Gain Award (CGA) or Ordinary Income Award (OIA).

	3.5.	The Corporation’s election of the type of Approved 102 Awards as CGA or OIA granted to Israeli Employees (the “ Election ”), shall be appropriately filed with the ITA before the Date of Grant of an Approved 102 Award under such Election. Such Election shall become effective beginning the first Date of Grant of an Approved 102 Award under such Election and shall remain in effect until the end of the year following the year during which the Company first granted Approved 102 Awards under such Election. For the avoidance of doubt, such Election shall not prevent the Company from granting Unapproved 102 Awards simultaneously.

	3.6.	All approved 102 Awards, must be held in trust by a Trustee as described in Section 4 below.

	3.7.	For the avoidance of any doubt, the designation of Unapproved 102 Awards and Approved 102 Awards shall be subject to the terms and conditions set forth in Section 102 of the Ordinance and the regulations promulgated thereunder.

	3.8.	Anything in the Plan to the contrary notwithstanding, all grants of Awards to directors and office holders shall be authorized and implemented in accordance with the provisions of the Companies Law or any successor act or regulation, as in effect from time to time.

	3.9.	The Company shall notify the Income Tax Commissioner about the grant and the capital gain course chosen at least 30 days before the Date of Grant. Grant of Options shall be made pursuant to, (a) Section 102; and (b) the Trust Agreement, in addition to being made pursuant to the provisions of the Plan and this Agreement; (c) the ITA’s regulation.

	3.10.	The Company’s election of the tax track according to Section 102 of the Tax Ordinance with regards to 102 Options granted to Employees, as specified in the Notice of Grant (the “Election”) shall be appropriately filed with the Israeli Tax Authorities at least 30 days before the Date of Grant. The Election shall obligate the Company to grant only under that same tax track elected for 102 Options, and shall apply to all Grantees who are granted qualified 102 Options until the end of the year following the year during which the Company first granted the 102 Options, all in accordance with the instructions of Section 102 (g) of the Tax Ordinance. The tax track of 102 Options elected by the Company shall be noted in the Option Agreement.

	3.11.	Notwithstanding anything to the contrary, the Trustee shall not release any unexercised 102 award or any Share issued upon exercise of 102 Options prior to


		the full payment of the Grantee’s tax liabilities arising from 102 Options issued to the Grantee and/or any Shares issued upon exercise of such 102 Options.

4.	TRUSTEE

	4.1.	Approved 102 Awards which shall be granted under the Plan and/or any Shares allocated or issued upon exercise of such Approved 102 Awards and/or other shares received subsequently following any realization of rights including, without limitation, bonus shares, shall be allocated or issued to the Trustee (and registered in the Trustee’s name in the register of members of the Corporation) and held for the benefit of the Participants for such period of time as required by Section 102 (the “ Restricted Period ”). All certificates representing Shares issued to the Trustee under the Plan shall be deposited with the Trustee, and shall be held by the Trustee until such time that such Shares are released from the aforesaid trust as herein provided. In case the requirements for Approved 102 Awards are not met, then the Approved 102 Awards may be treated as Unapproved 102 Awards, all in accordance with the provisions of Section 102.

	4.2.	Notwithstanding anything to the contrary, the Trustee shall not release any Shares allocated or issued upon exercise of Approved 102 Awards prior to the full payment of the Participants’ tax liabilities arising from Approved 102 Awards, which were granted to such Participant, and/or any Shares allocated or issued upon exercise of such Awards.

	4.3.	With respect to any Approved 102 Award, subject to the provisions of Section 102, a Participant shall not be entitled to sell or release from trust any Share received upon the exercise of an Approved 102 Award and/or any share received subsequently following any realization of rights, including without limitation, bonus shares, until the lapse of the Restricted Period required under Section 102.

	4.4.	Upon receipt of Approved 102 Award, the Participant will sign an undertaking to release the Trustee from any liability in respect of any action or decision duly taken and bona fide executed in relation with the Plan and this Amendment, or any Approved 102 Award or Share granted to him thereunder.

5.	FAIR MARKET VALUE FOR TAX PURPOSES

	Without derogating from the above, solely for the purpose of determining the tax liability pursuant to Section 102(b)(3) of the Ordinance, if at the Date of Grant the Company’s shares are listed on any established stock exchange or a national market system or if the Company’s shares will be registered for trading within ninety (90) days following the Date of Grant, the Fair Market Value of a Share at the Date of Grant shall be determined in accordance with the average value of the Company’s shares on the thirty (30) trading days preceding the Date of Grant or on the thirty (30) trading days following the date of registration for trading, as the case may be.

6.	EXERCISE OF OPTIONS


	Options shall be exercised by the Participant’s giving a written notice and remitting payment of the Exercise Price to the Company or to any third party designated by the Company (the “ Representative ”), in such form and method as may be determined by the Company and the Trustee and when applicable, in accordance with the requirements of Section 102, which exercise shall be effective upon receipt of such notice by the Company or the Representative and the payment of the Exercise Price at the Corporation’s or the Representative’s principal office. The notice shall specify the nominal value of the Share with respect to which the Option is being exercised.

	With respect to Unapproved 102 Awads, if the Participant ceases to be employed by the Company or any Affiliate, the Participant shall extend to the Company and/or its Affiliate a security or guarantee for the payment of tax due at the time of Sale of Shares, all in accordance with the provisions of Section 102.

7.	INTEGRATION OF SECTION 102 AND TAX COMMISSIONER’S PERMIT

	7.1.	With regards to Approved 102 Awards, the provisions of the Plan and/or any Award Agreement entered into in conjunction with any Award Grant (the “ Award Agreement ”) shall be subject to the provisions of Section 102 and the Income Tax Commissioner’s permit, and the said provisions and permit shall be deemed an integral part of the Plan and of the Award Agreement.

	7.2.	Any provision of Section 102 and/or the said permit which is necessary in order to receive and/or to keep any tax benefit pursuant to Section 102, which is not expressly specified in the Plan or the Award Agreement, shall be considered binding upon the Company and the Participants.

8.	TAX CONSEQUENCES

	8.1.	To the extent permitted by Applicable laws, any tax consequences arising from the grant or exercise of any Award, from the payment for Shares covered thereby or from any other event or act (of the Company, and/or its Affiliates, and/or the Trustee or the Participant), hereunder, shall be borne solely by the Participant. The Company and/or its Affiliates and/or the Trustee shall withhold taxes according to the requirements under the applicable laws, rules, and regulations, including withholding taxes at source. Furthermore, the Participants agrees to indemnify the Company and/or its Affiliates and/or the Trustee and hold them harmless against and from any and all liability for any such tax or interest or penalty thereon, including without limitation, liabilities relating to the necessity to withhold, or to have withheld, any such tax from any payment made to the Participant.

	8.2.	The Company and/or the Trustee shall not be required to release any Share certificate to a Participant until all required payments have been fully made by the Participant.

	8.3.	In accordance with the Income Tax Rules (Tax Benefits Upon Issues of Shares to Employees) 2003 , the Grantee warrants and represents to the Company, the Trustee and the Israeli Income Tax Authorities that it agrees to the provisions of Section 102 of the Income Tax Ordinance shall apply to it and that it will not transfer the Option Shares nor any other shares received subsequently following any realization of rights, by a way of tax-exempt transfer or a transfer under sections 104 (a), 104 (b) or 97 (a) of the Income Tax Ordinance.


	8.4.	The Company and the Trustee shall be entitled to apply to the Israeli Income Tax Authorities for the purpose of ascertaining the income tax liability of the Grantee with respect to the Option Shares.

	8.5.	The Grantee acknowledges that, under the current law, if the date of termination of employment shall be prior to the second anniversary of the date of the issue of the Shares then (i) the tax benefits of Section 102 shall not apply (except in the opinion of the Israeli Income Tax Authorities the employment of the Grantee was ceased under special circumstances which were beyond its control) and (ii) the Grantee will be responsible to immediately settle on its own account all of the tax issues and liabilities that are related to the Options or the Option Shares.

	8.6.	The Grantee further acknowledges that the income that may be earned in connection with the issue of the Option Shares, their transfer in the name of the Grantee or sale thereof shall not be taken into account in calculation of the entitlement of the Grantee to any social benefits. Such social benefits shall include, without limitation, national insurance, managers’ insurance, study funds, pension funds, and severance pay and vacation payments. In the event that the Company or any of its subsidiaries shall be obligated by applicable law to include social benefits as income or profits of the Grantee then the Grantee shall indemnify and hold harmless the Company and the Trustee for any cost that they may incur in this regards.

9.	RESTRICTED PERIOD PER SECTION 102

	The following provisions shall apply for the purpose of the tax benefits under Section 102 of the ordinance:

	9.1.	Restricted Period Per Section 102. In accordance with the requirements of Section 102 as now in place and as may be amended in the future, the Option to be issued shall be issued to the Grantee and held in trust by the Trustee for the benefit of Grantee for a period of no less than twenty four (24) months from the date of which the Options were granted and placed with the Trustee (during the Restricted Period Per Section 102 the Grantee will not be allowed to order the Trustee to sell the Option held by him/her on behalf of the Grantee or transfer the Option from Trustee’s hands).

	9.2.	In order to apply the tax benefits of Section 102, the Options and or Shares may not be sold or transferred (other than through a transfer by will or by operation of law), and no power of attorney or transfer deed shall be given in respect thereof (other than a power of attorney for the purpose of participation in general meetings of shareholders).

	9.3.	End of Restricted Period per Section 102. Upon the completion of the Restricted Period Per Section 102 as now in place and as may be amended in the future, Grantee shall be entitled to receive from the Trustee the Options, or the Shares acquired in the exercise thereof, which have vested, subject to the provisions of the Plan concerning the continued employment of Grantee at the Company or any Parent or Subsidiary of the Company, and subject to any other provisions set forth herein or in the Plan, and Grantee shall be entitled to exercise the Option and sell the Options or Shares thereby obtained subject to the other terms and conditions of this Option Agreement and the Plan, including the provisions relating to the payment of tax set forth below.


10.	GRANTEE’S REPRESENTATIONS

	10.1.	The Grantee hereby agrees that the terms of Section 102 of the Tax Ordinance (“Section 102”) shall apply regarding to the Options and or Shares granted.

	10.2.	The Grantee is obliged not to sell or remove from the Trustee the Options/Shares granted to him prior to the end of restricted period as defined by Section 102.

	10.3.	The Grantee is aware of the directives set forth in Section 102, and of the tax track that was chosen under Section 102 and its implications.

	10.4.	The Grantee hereby accepts the terms of the Trust Agreement signed between the Company and the Trustee.

	10.5.	Grantee acknowledges that during the period in which Shares issued to the Trustee on behalf of an Grantee upon exercise of an Approved 102 Option, are held by the Trustee, if dividends payable in securities are declared on Approved 102 Options held by the Trustee, such securities shall also be subject to the provisions of Section 102 and the provision of this agreement and shall be held in trust by the Trustee. Notwithstanding anything to the contrary, in case that a Grantee of Approved 102 Options/Shares is entitled to receive dividend in cash, the proceeds of such dividend may be wired to the Grantee, after deduction of all applicable taxes.

11.	GOVERNING LAW & JURISDICTION

	The Amendment shall be governed by and construed and enforced in accordance with the laws of the State of Israel applicable to contracts made and to be performed therein, without giving effect to the principles of conflict of laws. Notwithstanding anything stated herein to the contrary, if and to the extent any issue or matter arises hereunder which involves the application of another jurisdiction or the requirements relating to the administration of share Award of any stock exchange or quotation system, then such laws and requirements shall apply and shall govern such issues or matters, with accordance with any Applicable Laws. The competent courts of Tel-Aviv, Israel shall have sole jurisdiction to adjudicate any dispute that may arise in connection with the application, interpretation or enforcement of Section 102 including (without limitation) matters involving the Trustee and the Israeli tax consequences of the Restricted of the Awards or the Shares in trust and the release and transfer of such Awards or Shares by the Trustee.

IN WITNESS WHEREOF , the Company executed this Amendment in duplicate on the day and year first above written.

Medtronic, Inc.

Pursuant to the resolution of the Board of Directors of Kyphon Inc. (the “ Company ”) dated October 18, 2007, from and after the Effective Time, as such term is defined in that certain Agreement and Plan of Mergerm (the “ Merger Agreement ”), dated as of July 26, 2007, by and among Medtronic, Inc., a Minnesota corporation (“ Medtronic ”), Jets Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of Medtronic (“ Merger Sub ”), and the Company, the Kyphon Inc. 2002 Stock Plan (the “ Plan ”) and each agreement evidencing outstanding awards thereunder shall be deemed amended to the extent necessary so that each reference to the Company (other than references relating to a “change in control” of the Company) shall refer to Medtronic. In addition, pursuant to the terms of the Merger Agreement and as required by Section 303A.08 of the New York Stock Exchange Listed Company Manual, the number of shares available under the Plan and all other limitations on the number of shares that may be granted under the Plan, shall be adjusted by the Exchange Ratio, as defined in the Merger Agreement.

MEDTRONIC, INC. — KYPHON INC. 2002 STOCK PLAN

(FORMERLY THE KYPHON INC. 2002 STOCK PLAN)
(Amended and Restated July 26, 2007, as further amended on October 18, 2007)


	1. Purposes of the Plan . The purposes of this 2002 Stock Plan are:


	•	to attract and retain the best available personnel for positions of substantial responsibility,

	•	to provide additional incentive to Employees, Directors and Consultants, and

	•	to promote the success of the Company’s business.

Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights and Restricted Stock Units may also be granted under the Plan.


	2. Definitions . As used herein, the following definitions shall apply:

(a) “ Administrator ” means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan.

(b) “ Applicable Laws ” means the requirements relating to the administration of stock option plans under U. S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options, Restricted Stock Units or Stock Purchase Rights are, or will be, granted under the Plan.

(d) “ Change in Control ” means the occurrence of any of the following events:

(i) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then outstanding voting securities; or

(ii) A change in the composition of the Board occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” will mean directors who either (A) are directors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but will not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); or

(iii) The consummation of the sale or disposition by the Company of all or substantially all of the Company’s assets; or

(iv) The consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger or consolidation.

(e) “ Code ” means the Internal Revenue Code of 1986, as amended.

(f) “ Committee ” means a committee of Directors appointed by the Board in accordance with Section 4 of the Plan.

(g) “ Common Stock ” means the common stock of the Company.

(h) “ Company ” means Kyphon Inc., a Delaware corporation.

(i) “ Consultant ” means any natural person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity.

(j) “ Director ” means a member of the Board.

(k) “ Disability ” means total and permanent disability as defined in Section 22(e)(3) of the Code.

(l) “ Employee ” means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to

be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, then three (3) months following the 90 ^th day of such leave, any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient to constitute “employment” by the Company.

(m) “ Equity Restructuring ” means a non-reciprocal transaction between the Company and its stockholders, such as a stock dividend, stock split, spin-off, rights offering or recapitalization through a large, nonrecurring cash dividend, that affects the shares of Common Stock (or other securities of the Company) or the share price of Common Stock (or other securities) and causes a change in the per share value of the Common Stock underlying outstanding Options, Restricted Stock Units and Stock Purchase Rights.

(n) “ Exchange Act ” means the Securities Exchange Act of 1934, as amended.

(o) “ Fair Market Value ” means, as of any date, the value of Common Stock determined as follows:

(i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(iii) For purposes of any awards granted on the first day the Company initially offers it equity securities to the public, the Fair Market Value shall be the initial price to the public as set forth in the final prospectus included within the registration statement in Form S-1 filed with the Securities and Exchange Commission for the initial public offering of the Company’s Common Stock.

(iv) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator.

(p) “ Incentive Stock Option ” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.

(q) “ Nonstatutory Stock Option ” means an Option not intended to qualify as an Incentive Stock Option.

(r) “ Notice of Grant ” means a written or electronic notice evidencing certain terms and conditions of an individual Option, Restricted Stock Units or Stock Purchase Right grant. The Notice of Grant is part of the Option Agreement, Restricted Stock Unit Agreement and Restricted Stock Purchase Agreement.

(s) “ Officer ” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(t) “ Option ” means a stock option granted pursuant to the Plan.

(u) “ Option Agreement ” means an agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan.

(v) “ Option Exchange Program ” means a program whereby outstanding Options are surrendered in exchange for Options with a lower exercise price.

(w) “ Optioned Stock ” means the Common Stock subject to an Option, Restricted stock Unit or Stock Purchase Right.

(x) “ Optionee ” means the holder of an outstanding Option, Restricted Stock Unit or Stock Purchase Right granted under the Plan.

(y) “ Parent ” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.

(z) “ Plan ” means this 2002 Stock Plan, as amended and restated herein.

(aa) “ Restricted Stock ” means shares of Common Stock acquired pursuant to a grant of Stock Purchase Rights under Section 11 of the Plan.

(bb) “ Restricted Stock Purchase Agreement ” means a written agreement between the Company and the Optionee evidencing the terms and restrictions applying to stock purchased under a Stock Purchase Right. The Restricted Stock Purchase Agreement is subject to the terms and conditions of the Plan and the Notice of Grant.

(cc) “ Restricted Stock Unit ” means an award granted under Section 12 of the Plan.

(dd) “ Restricted Stock Unit Agreement ” means a written agreement between the Company and the Optionee evidencing the terms and conditions of an award of Restricted Stock Units. The Restrictred Stock Unit Agreement is subject to the terms and conditions of the Plan and the Notice of Grant.

(ee) “ Rule 16b-3 ” means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan.

(ff) “ Section 16(b) “ means Section 16(b) of the Exchange Act.

(gg) “ Service Provider ” means an Employee, Director or Consultant.

(hh) “ Share ” means a share of the Common Stock, as adjusted in accordance with Section 14 of the Plan.

(ii) “ Stock Purchase Right ” means the right to purchase Common Stock pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.

(jj) “ Subsidiary ” means a “subsidiary corporation”, whether now or hereafter existing, as defined in Section 424(f) of the Code.

3. Stock Subject to the Plan . Subject to the provisions of Section 14 of the Plan, the maximum aggregate number of Shares that may be optioned and sold under the Plan is 2,500,000 Shares plus (a) any Shares which have been reserved but not issued under the Company’s 1996 Stock Option Plan (the “1996 Plan”) as of the date of stockholder approval of this Plan, (b) any Shares returned to the 1996 Plan as a result of termination of options or repurchase of Shares issued under the 1996 Plan and (c) an annual increase to be added on the first day of the Company’s fiscal year beginning in 2003, equal to the lesser of (i) 3,500,000 shares, (ii) 5% of the outstanding shares on such date or (iii) an amount determined by the Board. The Shares may be authorized, but unissued, or reacquired Common Stock.

If an Option, Restricted Stock Unit or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); provided , however, that Shares that have actually been issued under the Plan, whether upon exercise of an Option, Restricted Stock Unit or Stock Purchase Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan.


	4. Administration of the Plan .


	(a)	Procedure .

(i) Multiple Administrative Bodies . Different Committees with respect to different groups of Service Providers may administer the Plan.

(ii) Section 162(m) . To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as “performance-based compensation” within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more “outside directors” within the meaning of Section 162(m) of the Code.

(iii) Rule 16b-3 . To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3.

(iv) Other Administration . Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws.

(b) Powers of the Administrator . Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion:

(i) to determine the Fair Market Value;

(ii) to select the Service Providers to whom Options, Restricted Stock Units and Stock Purchase Rights may be granted hereunder;

(iii) to determine the number of shares of Common Stock to be covered by each Option, Restricted Stock Unit and Stock Purchase Right granted hereunder;

(iv) to approve forms of agreement for use under the Plan;

(v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option, Restricted Stock Unit or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option, Restricted Stock Unit or Stock Purchase Right or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine;

(vi) to institute an Option Exchange Program subject to shareholder approval;

(vii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan;

(viii) to establish, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of satisfying applicable foreign laws;

(ix) to modify or amend each Option, Restricted Stock Unit or Stock Purchase Right (subject to Section 16(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan;

(x) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option, Restricted Stock Unit or Stock Purchase Right that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable;

(xi) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option, Restricted Stock Unit or Stock Purchase Right previously granted by the Administrator;

(xii) to correct any defect, supply any omission, or reconcile any inconsistency in the Plan, or in any Option Agreement, Restricted Stock Unit Agreement or Restricted Stock Purchase Agreement, in a manner and to the extent it shall deem necessary, all of which determinations and interpretations made by the Administrator shall be conclusive and binding on all Optionees, any other holders of Options and on their legal representatives and beneficiaries; and

(xiii) except to the extent prohibited by, or impermissible in order to obtain treatment desired by the Administrator under, applicable law or rule, to allocate or delegate all or any portion of its powers and responsibilities to any one or more of its members or to any person(s) selected by it, subject to revocation or modification by the Administrator of such allocation or delegation.

(xiv) to make all other determinations deemed necessary or advisable for administering the Plan.

(c) Effect of Administrator’s Decision . The Administrator’s decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options, Restricted Stock Units or Stock Purchase Rights.

5. Eligibility . Nonstatutory Stock Options, Restricted Stock Units and Stock Purchase Rights may be granted to Service Providers. Incentive Stock Options may be granted only to Employees.

6. Limitations .

(a) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted.

(b) Neither the Plan nor any Option, Restricted Stock Unit or Stock Purchase Right shall confer upon an Optionee any right with respect to continuing the Optionee’s relationship as a Service Provider with the Company, nor shall they interfere in any way with the Optionee’s right or the Company’s right to terminate such relationship at any time, with or without cause.

(i) No Service Provider shall be granted, in any fiscal year of the Company, Options to purchase more than 750,000 Shares.

(ii) In connection with his or her initial service, a Service Provider may be granted Options to purchase up to an additional 2,000,000 Shares, which shall not count against the limit set forth in subsection (i) above.

(iii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company’s capitalization as described in Section 14.

(iv) If an Option is cancelled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 14), the cancelled Option will be counted against the limits set forth in subsections (i) and (ii) above. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option.

7. Term of Plan . Subject to Section 20 of the Plan, the Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 16 of the Plan.

8. Term of Option . The term of each Option shall be stated in the Option Agreement. In the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Option Agreement. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement.

9. Option Exercise Price and Consideration .

(a) Exercise Price . The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following:

(i) In the case of an Incentive Stock Option

(A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant.

(B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant.

(ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. In the case of a Nonstatutory Stock Option intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant.

(iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a merger or other corporate transaction.

(b) Waiting Period and Exercise Dates . At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions that must be satisfied before the Option may be exercised.

(c) Form of Consideration . The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of:

(i) cash;

(ii) check;

(iii) promissory note;

(iv) other Shares, provided Shares acquired directly or indirectly from the Company, (A) have been owned by the Optionee for more than six (6) months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised;

(v) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan;

(vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee’s participation in any Company-sponsored deferred compensation program or arrangement;

(vii) any combination of the foregoing methods of payment; or

(viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws.

10. Exercise of Option .

(a) Procedure for Exercise; Rights as a Stockholder . Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be suspended during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share.

An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse or in the name of a family trust of which the Optionee is a trustee. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised; provided that if the Company shall be advised by counsel that certain requirements under the Federal, state or foreign securities laws must be met before Shares may be issued under this Plan, the Company shall notify all persons who have been issued Options, and the Company shall have no liability for failure to issue Shares under any exercise of Options because of delay while such requirements are being met or the inability of the Company to comply with such requirements. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 14 of the Plan.

Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.

(b) Termination of Relationship as a Service Provider . If an Optionee ceases to be a Service Provider, other than upon the Optionee’s death or Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee’s termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

(c) Disability of Optionee . If an Optionee ceases to be a Service Provider as a result of the Optionee’s Disability, the Optionee may exercise his or her Option within such period

of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee’s termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

(d) Death of Optionee . If an Optionee dies while a Service Provider, the Option may be exercised following the Optionee’s death within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of death (but in no event may the Option be exercised later than the expiration of the term of such Option as set forth in the Option Agreement), by the Optionee’s designated beneficiary, provided such beneficiary has been designated prior to the Optionee’s death in a form acceptable to the Administrator. If no such beneficiary has been designated by the Optionee, then such Option may be exercised by the personal representative of the Optionee’s estate or by the person(s) to whom the Option is transferred pursuant to the Optionee’s will or in accordance with the laws of descent and distribution. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee’s death. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

11. Stock Purchase Rights .

(a) Rights to Purchase . Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically, by means of a Notice of Grant, of the terms, conditions and restrictions related to the offer, including the number of Shares that the offeree shall be entitled to purchase, the price to be paid, and the time within which the offeree must accept such offer. The offer shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator.

(b) Repurchase Option . Unless the Administrator determines otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser’s service with the Company for any reason (including death or Disability). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Administrator.

(c) Other Provisions . The Restricted Stock Purchase Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion.

(d) Rights as a Stockholder . Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a stockholder, and shall be a stockholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 14 of the Plan.

12. Restricted Stock Units . The Administrator is authorized to make awards of Restricted Stock Units to any Service Provider selected by the Administrator in such amounts and subject to such terms and conditions as determined by the Administrator. At the time of grant, the Administrator shall specify the date or dates on which the Restricted Stock Units shall become fully vested and nonforfeitable, and may specify such conditions to vesting as it deems appropriate. At the time of grant, the Administrator shall specify the maturity date applicable to each grant of Restricted Stock Units which shall be no earlier than the vesting date or dates of the Restricted Stock Units and may be determined at the election of the grantee. On the maturity date, the Company shall, subject to Section 17, transfer to the Participant one unrestricted, fully transferable share of Common Stock for each Restricted Stock Unit scheduled to be paid out on such date and not previously forfeited. The Restricted Stock Unit Agreement shall contain such terms, provisions and conditions as may be determined by the Administrator in its sole discretion.

13. Transferability of Options, Restricted Stock Units and Stock Purchase Rights . Unless determined otherwise by the Administrator, an Option, Restricted Stock Unit or Stock Purchase Right may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option, Restricted Stock Unit or Stock Purchase Right transferable, such Option, Restricted Stock Unit or Stock Purchase Right shall contain such additional terms and conditions as the Administrator deems appropriate.

14. Adjustments; Dissolution; Merger or Change in Control .

(a) Adjustments . In the event that any dividend or other distribution, reorganization, merger, consolidation, combination, repurchase, or exchange of Common Stock or other securities of the Company, or other change in the corporate structure of the Company affecting the Common Stock (other than an Equity Restructuring) occurs such that an adjustment is determined by the Administrator (in its sole discretion) to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Administrator shall, in such manner as it may deem equitable, adjust the number and class of Common Stock which may be delivered under the Plan, the purchase price per Share and the number of Shares covered by each Option which has not yet been exercised and each Restricted Stock Unit for wich a Share has not yet been issued, and the numerical limits of Sections 3 and 6.

(b) Dissolution or Liquidation . In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any

Company repurchase option applicable to any Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse as to all such Shares and that the vesting with respect to Restricted Stock Units shall fully accelerate, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent an Option or Stock Purchase Right has not been previously exercised or Shares subject to a Restricted Stock Unit have not been previously issued, such Option, Restricted Stock Unit or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action.

(c) In connection with the occurrence of any Equity Restructuring, and notwithstanding anything to the contrary in Section 14(a) and 14(b):

(i) The number and type of securities subject to each outstanding Option, Restricted Stock Unit or Stock Purchase Right and the exercise price or grant price thereof, if applicable, will be proportionately adjusted. The adjustments provided under this Section 14(c)(i) shall be nondiscretionary and shall be final and binding on the affected Service Provider and the Company.

(ii) The Administrator shall make such proportionate adjustments, if any, as the Administrator in its discretion may deem appropriate to reflect such Equity Restructuring with respect to the aggregate number and kind of shares that may be issued under the Plan (including, but not limited to, adjustments of the limitations in Sections 3 and 6).

(iii) Notwithstanding anything in this Section 14 to the contrary, this Section 14(c) shall not apply to, and instead Section 14(a) shall apply to, any Option to which the application of this Section 14(c) would (A) result in a penalty tax under Section 409A of the Code and the Department of Treasury proposed and final regulations and guidance thereunder or (B) cause any Incentive Stock Option to fail to qualify as an “incentive stock option” under Section 422 of the Code.

(d) Merger or Change in Control . In the event of a merger of the Company with or into another corporation, or a Change in Control, each outstanding Option, Restricted Stock Unit and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option, Restricted Stock Unit or Stock Purchase Right, the Optionee shall fully vest in and have the right to exercise the Option or Stock Purchase Right and to have Shares issued pursuant to the Restricted Stock Unit, in each case, as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option or Stock Purchase Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or Change in Control, the Administrator shall notify the Optionee in writing or electronically that the Option or Stock Purchase Right shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. If a Restricted Stock Unit becomes fully vested in lieu of assumption or substitution in the event of a merger or Change in Control, the Share subject to such Restricted Stock Unit shall be issued no later than immediately prior to the consummation of such merger or Change in Control.

For the purposes of this subsection (c), the Option, Restricted Stock Unit or Stock Purchase Right shall be considered assumed if, following the merger or Change in Control, the option, unit or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option, Restricted Stock Unit or Stock Purchase Right immediately prior to the merger or Change in Control, the consideration (whether stock, cash, or other securities or property) received in the merger or Change in Control by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or Change in Control is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right and upon the maturity of the Restricted Stock Unit, for each Share of Optioned Stock subject to the Option, Restricted Stock Unit or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or Change in Control.

15. Date of Grant . The date of grant of an Option, Restricted Stock Unit or Stock Purchase Right shall be, for all purposes, the date on which the Administrator makes the determination granting such Option, Restricted Stock Unit or Stock Purchase Right, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant.

16. Amendment and Termination of the Plan .

(a) Amendment and Termination . The Board may at any time amend, alter, suspend or terminate the Plan.

(b) Stockholder Approval . The Company shall obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws.

(c) Effect of Amendment or Termination . No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator’s ability to exercise the powers granted to it hereunder with respect to Options, Restricted Stock Units and Stock Purchase Rights granted under the Plan prior to the date of such termination.

17. Conditions Upon Issuance of Shares .

(a) Legal Compliance . Shares shall not be issued pursuant to the exercise of an Option, Restricted Stock Unit or Stock Purchase Right unless the exercise of such Option, Restricted Stock Unit or Stock Purchase Right and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance.

(b) Investment Representations . As a condition to the exercise of an Option or Stock Purchase Right or the issuance of Shares pursuant to a Restricted Stock Unit, the Company

may require the person exercising such Option, Restricted Stock Unit or Stock Purchase Right to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required.

18. Inability to Obtain Authority . The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

19. Reservation of Shares . The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

20. Stockholder Approval . The Plan shall be subject to approval by the stockholders of the Company within twelve (12) months after the date the Plan is adopted. Such stockholder approval shall be obtained in the manner and to the degree required under Applicable Laws.

Addendum: Medtronic, Inc. – Kyphon Inc. 2002 Stock Plan
Dated December 13, 2007

Effective from and after the date hereof (the “ Effective Date ”), this addendum (“ Addendum ”) to the Medtronic, Inc. – Kyphon Inc. 2002 Stock Plan, as such may be amended from time to time (the “ Plan ”), hereby amends the Plan and shall govern any award made pursuant to any Option Agreement, Restricted Stock Purchase Agreement or Restricted Stock Unit Agreement, or otherwise, issued thereunder on or after the Effective Date hereof. Capitalized terms contained but not defined in this Addendum shall have the meaning provided in the Plan.

1. The definition of “Change in Control” set forth in Section 2(d) is hereby replaced in its entirety with the following provision:

“Change in Control” means, except as otherwise provided in the applicable Option Agreement, Restricted Stock Purchase Agreement or Restricted Stock Unit Agreement, the occurrence of any of the following events:

(i) Any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Act or any successor thereto (a “Person”) becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Act) of 30% or more of either (A) the then outstanding Shares (the “Outstanding Company Common Stock”) or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided , however , that, the following acquisitions shall not constitute a Change in Control: (1) any acquisition directly from the Company, (2) any acquisition by the Company or any of its Subsidiaries, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its Subsidiaries, (4) any acquisition by an underwriter temporarily holding securities pursuant to an offering of such securities or (5) any acquisition pursuant to a transaction that complies with clauses (iii) (A), (B) and (C) below; or

(ii) Individuals who, as of the date hereof, constitute the Board (the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board; provided , however , that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the Incumbent Directors then on the Board shall be considered as though such individual was an Incumbent Director, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

(iii) Consummation of a reorganization, merger, statutory share exchange or consolidation (or similar corporate transaction) involving the Company or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of assets or stock of another entity by the Company or any of its subsidiaries (each, a “Business

Combination”), in each case, unless, immediately following such Business Combination, (A) substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then-outstanding shares of common stock (or, for a non-corporate entity, equivalent securities) and the then-outstanding voting securities entitled to vote generally in the election of directors (or, for a non-corporate entity, equivalent governing body), as the case may be, of (1) the entity resulting from such Business Combination (the “Surviving Corporation”) or (2) if applicable, the ultimate parent entity that directly or indirectly has beneficial ownership of 80% or more of the voting securities eligible to elect directors of the Surviving Corporation (the “Parent Corporation”), in substantially the same proportion as their ownership, immediately prior to the Business Combination, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 30% or more of the outstanding shares of common stock and the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Business Combination; or

(iv) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

2. Section 3 is hereby amended by deleting clause (c) in the first paragraph thereof in its entirety.

3. Section 14(d) of the Plan is hereby replaced in its entirety with the following provision:

Notwithstanding anything contained in this Plan to the contrary, unless otherwise provided in the applicable Option Agreement, Restricted Stock Purchase Agreement or Restricted Stock Unit Agreement, in the event of a Change in Control the following shall occur as of the effective date of such Change in Control with respect to any and all awards outstanding as of the effective date of such Change in Control: (i) any and all Options and Stock Purchase Rights granted hereunder shall vest in full and become immediately exercisable, and shall remain exercisable throughout their entire term; (ii) any restrictions imposed on Restricted Stock Units shall lapse. The awards shall be paid in cash, or in the sole discretion of the Committee, in Shares to Participants within thirty (30) days following the effective date of the Change in Control, with any such Shares valued at the Fair Market Value as of the effective date of the Change in Control. Notwithstanding anything to the contrary herein or in the Plan, with respect to any award subject to, and not exempt from, the provisions of Section 409A of the Code, the applicable award agreement shall provide for the acceleration of payment of such award only in the event of a

Change in Control that qualifies as a change in ownership or change in effective control of the Company under Section 409A of the Code.

4. The Plan and each Option Agreement, Restricted Stock Purchase Agreement or Restricted Stock Unit Agreement are intended to comply with the requirements of Section 409A of the Code and any regulations promulgated thereunder, and shall be construed accordingly.

EXHIBIT 12.1

MEDTRONIC, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

The ratio of earnings to fixed charges for the nine months ended January 25, 2008 and the fiscal years ended April 27, 2007, April 28, 2006, April 29, 2005, April 30, 2004, and April 25, 2003 was computed based on Medtronic’s historical consolidated financial information included in Medtronic’s most recent Annual Report incorporated by reference on
Form 10-K.


	Nine months ended January 25, 2008			Year ended April 27, 2007			Year ended April 28, 2006			Year ended April 29, 2005			Year ended April 30, 2004		Year ended April 25, 2003

Earnings:
Net earnings	$	1,418		$	2,802		$	2,547		$	1,804		$	1,959	$	1,600
Income taxes		463			713			614			740			838		742
Minority interest (loss)/income		—			—			—			(1	)		3		(1	)
Capitalized interest ⁽¹⁾		(2	)		(3	)		(3	)		(1	)		—		(1	)

	$	1,879		$	3,512		$	3,158		$	2,542		$	2,800	$	2,340

Fixed Charges:
Interest expense ⁽²⁾	$	193		$	229		$	116		$	55		$	56	$	47
Capitalized interest ⁽¹⁾		2			3			3			1			—		1
Amortization of debt issuance costs ⁽³⁾		9			14			4			1			—		—
Rent interest factor ⁽⁴⁾		30			34			26			24			21		18

	$	234		$	280		$	149		$	81		$	77	$	66

Earnings before income taxes and fixed charges	$	2,113		$	3,792		$	3,307		$	2,623		$	2,877	$	2,406

Ratio of earnings to fixed charges		9			14			22			32			37		36


(1)	Capitalized interest relates to construction projects in process.

(2)	Interest expense consists of interest on indebtedness.

(3)	Represents the amortization of debt issuance costs incurred in connection with the Company’s registered debt securities. See Note 6 to the condensed consolidated financial statements for further information regarding the debt securities.

(4)	Approximately one-third of rental expense is deemed representative of the interest factor.

Exhibit 31.1

Certification of Chief Executive Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

I, William A. Hawkins, certify that:


	1.	I have reviewed this Quarterly Report on Form 10-Q of Medtronic, Inc.;

	2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

	3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

	4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


			a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

			b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

			c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

			d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


	5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


			a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

			b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


		/s/ William A. Hawkins

		William A. Hawkins
Date: March 4, 2008		President and Chief Executive Officer

Exhibit 31.2

Certification of Chief Financial Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

I, Gary L. Ellis, certify that:


1.	I have reviewed this Quarterly Report on Form 10-Q of Medtronic, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

		a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

		b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

		c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

		d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

		a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

		b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


		/s/ Gary L. Ellis

		Gary L. Ellis
		Senior Vice President and
Date: March 4, 2008		Chief Financial Officer

Exhibit 32.1

Certification of Chief Executive Officer
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

In connection with this quarterly report on Form 10-Q of Medtronic, Inc. for the quarter ended January 25, 2008, the undersigned hereby certifies, in his capacity as Chief Executive Officer of Medtronic, Inc., for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:


	(1)	The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

	(2)	The information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Medtronic, Inc.


Date: March 4, 2008		/s/ William A. Hawkins

		William A. Hawkins
		President and
		Chief Executive Officer

Exhibit 32.2

Certification of Chief Financial Officer
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

In connection with this quarterly report on Form 10-Q of Medtronic, Inc. for the quarter ended January 25, 2008, the undersigned hereby certifies, in his capacity as Chief Financial Officer of Medtronic, Inc., for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:


	(1)	The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

	(2)	The information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Medtronic, Inc.


Date: March 4, 2008		/s/ Gary L. Ellis

		Gary L. Ellis
		Senior Vice President and
		Chief Financial Officer