OVERVIEW

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

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

Net sales in the third quarter and first nine months of 2008 were $1,084.1 million and $3,230.6 million, respectively, increases of 17% over both the third quarter and first nine months of 2007, led by growth in sales of our ICDs and pacemakers as well as products to treat atrial fibrillation. Our ICD and pacemaker net sales grew 20% and 10%, respectively, in the third quarter of 2008, and 21% and 11%, respectively, during the first nine months of 2008. Additionally, AF net sales increased nearly 35% and 33% during the three and nine months ended September 27, 2008 to $135.0 million and $389.2 million, respectively. Favorable foreign currency translation comparisons increased third quarter fiscal 2008 sales by $40.1 million and increased the first nine month fiscal 2008 sales by $149.8 million. Refer to the Segment Performance section below for a more detailed discussion of the results for the respective segments.

Net earnings and diluted net earnings per share for the third quarter of 2008 were $192.9 million and $0.55 per diluted share, increases of 20% and 21%, respectively, compared to the same prior year period. Net earnings and diluted net earnings per share for the first nine months of 2008 were $578.8 million and $1.65 per diluted share, increases of 31% and 32%, respectively, over the first nine months of 2007. These increases for both the third quarter and first nine months of 2008 compared to the same prior year periods were primarily driven by incremental profits resulting from higher sales, led by our CRM and AF operating segments. Additionally, the first nine months of 2007 were unfavorably impacted by an after-tax $21.9 million special charge, or $0.06 per diluted share, related to the settlement of the Guidant 2004 patent litigation.

We generated $648.4 million of operating cash flows for the first nine months of 2008, compared to $486.7 million of operating cash flows for the first nine months of 2007. We ended the third quarter with $579.2 million of cash and cash equivalents and $1,402.1 million of total debt. We have strong short-term credit ratings, with an A2 rating from Standard & Poor's and a P2 rating from Moody's. During the second quarter of 2008, Standard & Poor's raised our long-term debt rating to A- from BBB+.

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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We have adopted various accounting policies in preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States. Our significant accounting policies are disclosed in Note 1 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2007 (2007 Annual Report on Form 10-K).

Preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to adopt various accounting policies and to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates and assumptions, including those related to accounts receivable allowance for doubtful accounts; estimated useful lives of diagnostic equipment; valuation of purchased in-process research and development, other intangible assets and goodwill; income taxes; legal reserves and insurance receivables; and stock-based compensation. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, and the results form the basis for making judgments about the reported values of assets, liabilities, revenues and expenses. Actual results may differ from these estimates. There have been no material changes to our critical accounting policies and estimates from the information provided in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2007 Annual Report on Form 10-K.

ACQUISITIONS

On July 3, 2008, we completed our acquisition of EP MedSystems, Inc. (EP MedSystems) for $95.7 million (consisting of $59.0 million in net cash consideration and closing costs and 0.9 million shares of St. Jude Medical common stock). EP MedSystems had been publicly traded on the NASDAQ Capital Market under the ticker symbol EPMD. EP MedSystems develops, manufactures, and markets medical devices for the electrophysiology market which are used for visualization, diagnosis and treatment of heart rhythm disorders. The results of operations of EP MedSystems have been included in the results of our Atrial Fibrillation operating segment beginning in the third quarter of 2008. The Company acquired EP MedSystems to strengthen its portfolio of products used to treat heart rhythm disorders.

On August 7, 2008, we acquired Datascope Corporation's vascular closure business and collagen operations for $21.8 million in cash consideration and closing costs, and the results of operations have been included in the Cardiovascular operating segment. During the first nine months of 2008, we also acquired businesses involved in the distribution of our products for aggregate cash consideration of $12.9 million.

SEGMENT PERFORMANCE

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

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

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

                                          CRM/Neuro       CV/AF         Other          Total
Three Months ended September 27, 2008:
Net sales                                $   742,668   $   341,468   $          -   $ 1,084,136
Operating profit                             462,957       178,096       (363,222 )     277,831
Three Months ended September 29, 2007:
Net sales                                $   638,514   $   288,326   $          -   $   926,840
Operating profit                             390,264       141,247       (304,380 )     227,131

Nine Months ended September 27, 2008:
Net sales                                $ 2,198,384   $ 1,032,250   $          -   $ 3,230,634
Operating profit                           1,362,630       546,393     (1,078,339 )     830,684
Nine Months ended September 29, 2007:
Net sales                                $ 1,882,356   $   878,798   $          -   $ 2,761,154
Operating profit                           1,148,114       423,637       (949,756 )     621,995

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

Cardiac Rhythm Management



                                Three Months Ended                              Nine Months Ended
                         September 27,      September 29,       %        September 27,      September 29,       %
(in thousands)               2008               2007          Change         2008               2007          Change
ICD systems             $       381,062    $       317,769     19.9%    $     1,147,791    $       947,175     21.2%
Pacemaker systems               297,146            269,844     10.1%            873,991            784,410     11.4%
                        $       678,208    $       587,613     15.4%    $     2,021,782    $     1,731,585     16.8%

Cardiac Rhythm Management net sales increased 15% in the third quarter of 2008 compared to the third quarter of 2007 and increased 17% in the first nine months of 2008 over the same period one year ago. CRM net sales increases for both the third quarter and first nine months of 2008 were driven by volume growth. Foreign currency translation also had a $24.3 million and $89.9 million favorable impact on CRM net sales during the third quarter and first nine months of 2008, respectively, compared to the same periods in 2007.

ICD net sales increased 20% and 21% in the third quarter and first nine months of 2008, respectively, compared to the same periods in 2007, due to strong volume growth. The volume growth in ICD net sales in the third quarter and first nine months of 2008 was broad-based across both U.S. and international markets and reflects our continued market penetration into new customer accounts and strong market demand for our cardiac resynchronization therapy ICD devices. In the United States, third quarter 2008 ICD net sales of $247.9 million increased 12% over last year's third quarter. Internationally, third quarter 2008 ICD net sales of $133.2 million increased 39% compared to the third quarter of 2007. Foreign currency translation had a $10.5 million favorable impact on international ICD net sales during the third quarter of 2008 compared to the same period in 2007. In the United States, the first nine months of 2008 ICD net sales of $736.4 million increased 12% over the same period last year. Internationally, the first nine months of 2008 ICD net sales of $411.4 million increased 42% compared to the first nine months of 2007. Foreign currency translation had a $41.4 million favorable impact on international ICD net sales during the first nine months of 2008 compared to the same period in 2007.

Pacemaker net sales increased 10% and 11% in the third quarter and first nine months of 2008, respectively, compared to the same periods in 2007, driven by strong volume growth. In the United States, third quarter 2008 pacemaker net sales of $133.9 million increased 2% compared to the same period last year. Internationally, third quarter 2008 pacemaker net sales of $163.2 million increased nearly 18% compared to the third quarter of 2007. Foreign currency translation had a $13.8 million favorable impact on international pacemaker net sales in the third quarter of 2008 compared to the same period last year. In the United States, the first nine months of 2008 pacemaker net sales of $389.4 million increased 2% compared to the same period last year. Internationally, the first nine months of 2008 pacemaker net sales of $484.6 million increased 20% compared to the first nine months of 2007. Foreign currency translation had a $48.5 million favorable impact on international pacemaker net sales during the first nine months of 2008 compared to the same period last year.

Cardiovascular



                                         Three Months Ended                              Nine Months Ended
                                  September 27,      September 29,       %        September 27,      September 29,       %
(in thousands)                        2008               2007          Change         2008               2007          Change
Vascular closure devices         $        89,103    $        84,579      5.3%    $       276,146    $       263,457      4.8%
Heart valve products                      78,095             68,374     14.2%            242,938            215,816     12.6%
Other cardiovascular products             39,306             35,048     12.1%            123,928            106,044     16.9%
                                 $       206,504    $       188,001      9.8%    $       643,012    $       585,317      9.9%

Cardiovascular net sales increased 10% during both the third quarter and first nine months of 2008 compared to the same periods in 2007. CV net sales were favorably impacted by positive foreign currency translation impacts of $9.9 million and $37.5 million during the third quarter and first nine months of 2008, respectively, compared to the same periods last year.

Net sales of vascular closure devices increased 5% during both the third quarter and first nine months of 2008 compared to the same periods last year, driven by favorable foreign currency translation and increased sales volumes. Our Angio-Seal™ device continues to be the market share leader in the vascular closure device market. Heart valve net sales increased 14% and 13% during the third quarter and first nine months of 2008, respectively, compared to the same periods last year primarily due to increased sales volumes. Net sales of other cardiovascular products increased $4.3 million and $17.9 million during the third quarter and first nine months of 2008, respectively, compared to the same periods last year due to favorable foreign currency translation and increased sales volumes.

Atrial Fibrillation



                                Three Months Ended                              Nine Months Ended
                         September 27,      September 29,       %        September 27,      September 29,       %
(in thousands)               2008               2007          Change         2008               2007          Change
Atrial fibrillation             134,964            100,325     34.5%            389,238            293,481     32.6%
products                $                  $                            $                  $

Atrial Fibrillation net sales increased 35% and 33% during the third quarter and first nine months of 2008, respectively, compared to the same periods last year. The increases in AF net sales were driven by volume growth from continued market acceptance of device-based ablation procedures to treat the symptoms of atrial fibrillation. Our access, diagnosis, visualization and ablation products assist physicians in diagnosing and treating atrial fibrillation and other irregular heart rhythms. Foreign currency translation had a favorable impact on AF net sales of $5.1 million and $19.7 million during the third quarter and first nine months of 2008, respectively, compared to the same periods in 2007.

Neuromodulation



                                    Three Months Ended                              Nine Months Ended
                             September 27,      September 29,       %        September 27,      September 29,       %
(in thousands)                   2008               2007          Change         2008               2007          Change
Neurostimulation devices    $        64,460    $        50,901     26.6%    $       176,602    $       150,771     17.1%

Neuromodulation net sales increased 27% and 17% during the third quarter and first nine months of 2008, respectively, compared to the same prior year periods. The increases in Neuro net sales were driven by continued growth in the neuromodulation market.

RESULTS OF OPERATIONS



Net Sales

                                Three Months Ended                              Nine Months Ended
                         September 27,      September 29,       %        September 27,      September 29,       %
(in thousands)               2008               2007          Change         2008               2007          Change
Net sales               $     1,084,136    $       926,840     17.0%    $     3,230,634    $     2,761,154     17.0%

Overall, net sales increased 17% during both the third quarter and first nine months of 2008 compared to the same prior year periods. Net sales growth was favorably impacted by strong volume growth, driven primarily by our CRM and AF product sales. Additionally, foreign currency translation had a favorable impact on the third quarter and first nine months of 2008 of $40.1 million and $149.8 million, respectively, due primarily to the strengthening of both the Euro and the Japanese Yen against the U.S. Dollar. These amounts are not indicative of the net earnings impact of foreign currency translation for the third quarter and first nine months of 2008 due to partially offsetting unfavorable foreign currency translation impacts on cost of sales and operating expenses.

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

                       Three Months Ended                   Nine Months Ended
                 September 27,     September 29,     September 27,     September 29,
Net Sales            2008              2007              2008              2007
United States   $       587,784   $       526,171   $     1,707,794   $     1,565,427
International
Europe                  277,017           215,026           863,895           673,481
Japan                    90,923            82,070           276,211           224,236
Asia Pacific             60,631            52,358           176,824           141,257
Other (a)                67,781            51,215           205,910           156,753
                        496,352           400,669         1,522,840         1,195,727
                $     1,084,136   $       926,840   $     3,230,634   $     2,761,154

(a) No one geographic market is greater than 5% of consolidated net sales.

Gross Profit

                                              Three Months Ended                    Nine Months Ended
                                       September 27,      September 29,      September 27,      September 29,
(in thousands)                             2008               2007               2008               2007
Gross profit                          $       810,210    $       681,981    $     2,408,530    $     2,024,295
Percentage of net sales                         74.7%             73.6 %             74.6 %             73.3 %

Gross profit for the third quarter of 2008 totaled $810.2 million, or 74.7% of net sales, compared to $682.0 million, or 73.6% of net sales, for the third quarter of 2007. Gross profit for the first nine months of 2008 totaled $2,408.5 million, or 74.6% of net sales, compared to $2,024.3 million, or 73.3% of net sales, for the first nine months of 2007. The increase in our gross profit percentage for both the third quarter and first nine months of 2008 is due primarily to favorable foreign currency translation and favorable product mix.

Selling, General and Administrative (SG&A) Expense

                                               Three Months Ended                    Nine Months Ended
(in thousands)                          September 27,      September 29,      September 27,      September 29,
                                            2008               2007               2008               2007
Selling, general and administrative    $       401,325    $       337,823    $     1,184,702    $     1,014,857
Percentage of net sales                         37.0 %             36.4 %              36.7%             36.8 %

SG&A expense for the third quarter of 2008 totaled $401.3 million, or 37.0% of net sales, compared to $337.8 million, or 36.4% of net sales, for the third quarter of 2007. SG&A expense for the first nine months of 2008 totaled $1,184.7 million, or 36.7% of net sales, compared to $1,014.9 million, or 36.8% of net sales, for the first nine months of 2007. Our SG&A expense as a percent of net sales can fluctuate on a comparative quarter basis. For the first nine months of 2008, SG&A as a percent of net sales has remained consistent with the first nine months of 2007.

Research and Development (R&D) Expense

                                              Three Months Ended                    Nine Months Ended
(in thousands)                         September 27,      September 29,      September 27,      September 29,
                                           2008               2007               2008               2007
Research and development expense      $       131,054    $       117,027    $       393,144    $       352,443
Percentage of net sales                         12.1%              12.6%              12.2%              12.8%

R&D expense in the third quarter of 2008 totaled $131.1 million, or 12.1% of net sales, compared to $117.0 million, or 12.6% of net sales, for the third quarter of 2007. R&D expense in the first nine months of 2008 totaled $393.1 million, or 12.2% of net sales, compared to $352.4 million, or 12.8% of net sales, for the first nine months of 2007. While 2008 R&D expense as a percent of net sales has decreased compared to 2007, total R&D expense in absolute terms increased approximately 12% for both the third quarter and first nine months of 2008 compared to the same periods in 2007. These increases reflect our continuing commitment to fund future long-term growth opportunities. We continue to balance delivering short-term results with our investments in long-term growth drivers.

Special Charges

In June 2007, we settled the Guidant 2004 patent litigation and recorded a related pre-tax special charge of $35.0 million. This matter originated in February 2004, when Guidant sued us in federal district court in Delaware alleging that our Epic® HF ICD, Atlas® + HF ICD and Frontier™ devices infringe certain patents owned or licensed by Guidant.

Other Income (Expense), net

                                              Three Months Ended                    Nine Months Ended
                                       September 27,      September 29,      September 27,      September 29,
(in thousands)                             2008               2007               2008               2007
Interest income                       $         3,258    $           909    $        10,605    $         2,039
Interest expense                               (5,120 )           (7,997 )          (15,238 )          (32,811 )
Other                                          (3,079 )             (537 )           (2,747 )            7,529
Total other income (expense), net     $        (4,941 )  $        (7,625 )  $        (7,380 )  $       (23,243 )

The favorable change in other income (expense) during the third quarter and first nine months of 2008 compared with the same periods in 2007 was the result of lower interest expense driven by lower average outstanding debt balances during the third quarter of 2008 as well as lower interest rates during the first nine months of 2008 related to our 1.22% Convertible Senior Debentures due 2008 (1.22% Convertible Debentures) issued in April 2007. The increase in interest income during the third quarter and first nine months of 2008 was due to higher average invested cash balances compared to the same periods in 2007. During the first quarter of 2007, we also realized a $7.9 million gain associated with the sale of a common stock investment, which was recorded in the other income category.

Income Taxes

                                            Three Months Ended                Nine Months Ended
                                      September 27,    September 29,    September 27,    September 29,
(as a percent of pre-tax income)          2008             2007             2008             2007
Effective tax rate                            29.3%            27.0%            29.7%            26.4%

Our effective income tax rate was 29.3% and 27.0% for the third quarter of 2008 and 2007, respectively, and 29.7% and 26.4% for the first nine months of 2008 and 2007, respectively. The after-tax $21.9 million special charge related to the settlement of the Guidant 2004 patent litigation favorably impacted the effective tax rate for the nine months ended September 29, 2007 by 1.0%. Our 2008 effective tax rates for the three and nine months ended September 27, 2008 were unfavorably impacted by the absence of tax benefits related to the Federal Research and Development tax credit (R&D tax credit), which had not yet been extended for 2008 as of September 27, 2008. As legislation to retroactively reinstate the R&D tax credit for the full year of 2008 and also for 2009 was enacted and signed into law on October 3, 2008, the full year 2008 benefit of the R&D tax credit will be recorded in the fourth quarter of 2008.

LIQUIDITY

. . .