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 (NMD). 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, heart valve replacement and repair products and pressure measurement guidewires; AF - electrophysiology introducers and catheters, advanced cardiac mapping, navigation and recording systems, ablation systems and implantable cardiac monitors; and NMD - neurostimulation devices. References to "St. Jude Medical," "St. Jude," "the Company," "we," "us" and "our" are to St. Jude Medical, Inc. and its subsidiaries.

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

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

Net sales in the first quarter of 2009 were $1,133.8 million, an increase of 12% over the first quarter of 2008, led by sales growth of our ICDs and pacemakers as well as products to treat atrial fibrillation. Our ICD and pacemaker net sales grew approximately 9% and 4%, respectively, while AF net sales increased 22%. Unfavorable foreign currency translation comparisons decreased first quarter 2009 net sales by $50.9 million. Refer to the Segment Performance section for a more detailed discussion of the results for the respective segments.

Our first quarter 2009 net earnings of $201.3 million and diluted net earnings per share of $0.58 increased 14% and 16%, respectively, compared to our first quarter 2008 net earnings of $176.6 million and diluted net earnings per share of $0.50. These increases were due to incremental profits resulting from higher sales, primarily driven by net sales growth in our CRM and AF operating segments. During the first quarter of 2009, we adopted a new accounting standard, which required us to retrospectively adjust our historical 2008 financial statements. The adoption of this new accounting standard resulted in a decrease of $8.2 million to first quarter 2008 net earnings and a $0.03 decrease to diluted earnings per share. Refer to Note 3 of the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further discussion of the new accounting standard.

We generated $133.7 million of operating cash flows during the first three months of 2009, compared to $194.8 million of operating cash flows during the first three months of 2008. We ended the first quarter with $325.3 million of cash and cash equivalents and $1,305.0 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, and a long-term credit rating from Standard & Poor's of A-.

NEW ACCOUNTING PRONOUNCEMENTS

Information regarding new accounting pronouncements is included in Note 2 and Note 3 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 January 3, 2009 (2008 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 2008 Annual Report on Form 10-K.

SEGMENT PERFORMANCE

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

We aggregate our four operating segments into two reportable segments based upon their similar operational and economic characteristics: CRM/NMD 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/NMD      CV/AF       Other         Total
   Three Months ended April 4, 2009:
   Net sales                            $ 748,768   $ 385,025   $        -   $ 1,133,793
   Operating profit                       461,030     190,885     (369,643 )     282,272
   Three Months ended March 29, 2008:
   Net sales                            $ 683,312   $ 327,426   $        -   $ 1,010,738
   Operating profit                       420,274     173,918     (334,692 )     259,500

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
                                      April 4,    March 29,       %
                 (in thousands)         2009         2008       Change
                 ICD systems         $  393,953   $  360,952        9.1 %
                 Pacemaker systems      282,368      270,837        4.3 %
                                     $  676,321   $  631,789        7.0 %

Cardiac Rhythm Management net sales increased by 7% in the first quarter of 2009 compared to the first quarter of 2008 due to volume growth. Foreign currency translation had a $30.9 million unfavorable impact on CRM net sales during the first quarter of 2009 compared to the same period in 2008.

ICD net sales increased 9% in the first quarter of 2009 compared to the first quarter of 2008, primarily due to volume growth. The improved volume growth in ICD net sales in the first quarter of 2009 was broad-based across both U.S. and international markets, reflecting our continued market penetration into new customer accounts and market demand for our cardiac resynchronization therapy ICD devices. In the United States, first quarter 2009 ICD net sales of $257.7 million increased 9% over last year's first quarter. Internationally, first quarter 2009 ICD net sales of $136.3 million increased 9% compared to the first quarter of 2008. Foreign currency translation had a $17.7 million negative impact on international ICD net sales in the first quarter of 2009 compared to the first quarter of 2008.

Pacemaker net sales increased 4% in the first quarter of 2009 compared to the first quarter of 2008 driven by volume growth in both our U.S. and international markets. In the United States, first quarter 2009 pacemaker net sales of $129.0 million increased 6% compared to the same period last year. Internationally, first quarter 2009 pacemaker net sales of $153.4 million increased 3% compared to the first quarter of 2008. Foreign currency translation had a $13.2 million negative impact on international pacemaker net sales in the first quarter of 2009 compared to the same period last year.

Cardiovascular


                                             Three Months Ended
                                            April 4,    March 29,       %
           (in thousands)                     2009         2008      Change
           Vascular closure devices        $   97,577   $   90,087       8.3 %
           Heart valve products                80,624       77,638       3.8 %
           Other cardiovascular products       61,586       40,808      50.9 %
                                           $  239,787   $  208,533      15.0 %

Cardiovascular net sales increased 15% in the first quarter of 2009 compared to the same period one year ago. CV net sales were unfavorably impacted by foreign currency translation impacts of approximately $11.9 million. Vascular closure device net sales increased 8% in the first quarter of 2009 compared to the first quarter of 2008 primarily driven by Angio-Seal™volume growth and incremental sales resulting from our acquisition of Radi Medical Systems AB in December 2008. Our Angio-Seal™ device continues to be the market share leader in the vascular closure device market. Heart valve product net sales increased 4% during the first quarter of 2009 over the same period in 2008 due primarily to increased sales volumes. Net sales of other cardiovascular products increased $20.8 million during the first quarter of 2009 over the first quarter of 2008 primarily due to incremental sales of pressure measurement guidewires acquired from Radi Medical System AB and increased sales volumes of other cardiovascular products.

Atrial Fibrillation


                                             Three Months Ended
                                            April 4,    March 29,       %
            (in thousands)                    2009         2008      Change
            Atrial fibrillation products   $  145,238   $  118,893      22.2 %

Atrial Fibrillation net sales increased 22% during the first quarter of 2009 compared to the same period one year ago. 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, recording and ablation products assist physicians in diagnosing and treating atrial fibrillation and other irregular heart rhythms. Foreign currency translation had an unfavorable impact on AF net sales of approximately $6.1 million in the first quarter of 2009 compared to the first quarter of 2008.

Neuromodulation


                                           Three Months Ended
                                         April 4,      March 29,       %
             (in thousands)                2009          2008       Change
             Neuromodulation products   $    72,447   $    51,523      40.6 %

Neuromodulation net sales increased 41% during the first quarter of 2009 compared to the same prior year period. The increases in NMD net sales were driven by strong volume growth and continued growth in the neuromodulation market. Foreign currency translation had an unfavorable impact on NMD net sales of approximately $2.0 million in the first quarter of 2009 compared to the first quarter of 2008.

RESULTS OF OPERATIONS

Net sales


                                      Three Months Ended
                                    April 4,      March 29,       %
                  (in thousands)      2009          2008       Change
                  Net sales        $ 1,133,793   $ 1,010,738      12.2 %

Overall, net sales increased 12% in the first quarter of 2009 over the first quarter of 2008. First quarter 2009 net sales were favorably impacted by volume growth, driven by CRM and AF product sales. Foreign currency translation had an unfavorable impact on first quarter 2009 net sales of $50.9 million due primarily to the strengthening of the U.S. Dollar against both the Euro and Japanese Yen. This amount is not indicative of the net earnings impact of foreign currency translation for the first quarter of 2009 due to partially offsetting 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
                                       April 4,      March 29,
                      Net Sales          2009          2008
                      United States   $   631,173   $   537,462
                      International
                      Europe              275,400       270,145
                      Japan               111,370        85,804
                      Asia Pacific         52,906        53,040
                      Other (a)            62,944        64,287
                                          502,620       473,276
                                      $ 1,133,793   $ 1,010,738

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

Gross profit

                                              Three Months Ended
                                             April 4,    March 29,
                  (in thousands)               2009         2008
                  Gross profit              $  839,298   $  750,251
                  Percentage of net sales         74.0 %       74.2 %

Gross profit for the first quarter of 2009 totaled $839.3 million, or 74.0% of net sales, compared to $750.3 million, or 74.2% of net sales, for the first quarter of 2008. The decrease in our gross profit percentage during the first quarter of 2009 compared to the same period in 2008 resulted from an unfavorable impact from foreign currency translation partially offset by productivity improvements.

Selling, general and administrative (SG&A) expense

                                                    Three Months Ended
                                                   April 4,    March 29,
            (in thousands)                           2009         2008
            Selling, general and administrative   $  417,675   $  367,116
            Percentage of net sales                     36.8 %       36.3 %

SG&A expense for the first quarter of 2009 totaled $417.7 million, or 36.8% of net sales, compared to $367.1 million, or 36.3% of net sales, for the first quarter of 2008. The increase in SG&A expense as a percent of net sales results from increased expenses from recent acquisitions and investments made in our selling organization and market development programs.

Research and development (R&D) expense

                                              Three Months Ended
                                             April 4,    March 29,
                 (in thousands)                2009         2008
                 Research and development   $  139,351   $  123,635
                 Percentage of net sales          12.3 %       12.2 %

R&D expense in the first quarter of 2009 totaled $139.4 million, or 12.3% of net sales, compared to $123.6 million, or 12.2% of net sales, for the first quarter of 2008. While first quarter 2009 R&D expense as a percent of net sales remained comparable to first quarter 2008, total R&D expense increased 13% compared to the same prior year period, reflecting 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.

Other income (expense), net

                                                   Three Months Ended
                                                  April 4,    March 29,
             (in thousands)                         2009         2008
             Interest income                     $      559   $    4,256
             Interest expense                        (6,951 )    (18,025 )
             Other                                     (920 )      3,342
             Total other income (expense), net   $   (7,312 ) $  (10,427 )

The Company's 2009 adoption of FSP APB No. 14-1 required retrospective application to all prior periods presented (see Note 3 to the Condensed Consolidated Financial Statements). As a result, interest expense for the first quarter of 2008 has been adjusted by $13.0 million to conform to the new accounting treatment. The favorable change in other income (expense) during the first quarter of 2009 compared to the first quarter of 2008 is primarily related to lower interest rates on our outstanding debt during the respective periods.

Income taxes

                                                   Three Months Ended
                                                 April 4,     March 29,
             (as a percent of pre-tax income)      2009          2008
             Effective tax rate                       26.8 %        29.1 %

Our effective income tax rate was 26.8% and 29.1% for the first quarter of 2009 and 2008, respectively. The first quarter 2008 effective tax rate was unfavorably impacted by 2.3 percentage points because the Federal Research and Development tax credit (R&D tax credit), which expired at the end of 2007, was not enacted and signed into law during the first quarter of 2008. This legislation, which provides a tax benefit on certain incremental R&D expenditures, was not signed into law until October 2008, when it was made retroactively effective for all of 2008 and effective through 2009. Accordingly, no 2008 benefit from the R&D tax credit was recognized until October 2008.

The impact of retrospectively applying the change in accounting for our convertible debentures (see Note 3 to the Condensed Consolidated Financial Statements) decreased the previously reported first quarter 2008 effective tax rate from 29.5% to 29.1%.

LIQUIDITY

We believe that our existing cash balances, available borrowing capacity under our commercial paper program and long-term committed credit facility and future cash generated from operations will be sufficient to meet our working capital, capital investment and debt service requirements over the next twelve months and in the foreseeable future thereafter. As of April 4, 2009, we had borrowed $500.0 million from our $1.0 billion long-term committed credit facility. Additionally, our 3-year, unsecured term loan totaled $513.0 million and our 3-year, unsecured Yen term loan totaled 8.0 billion Japanese Yen (the equivalent of $80.8 million at April 4, 2009). As of April 4, 2009, our short-term credit ratings were A2 from Standard & Poor's and P2 from Moody's, and our Standard & Poor's long-term debt rating was A-. The ratings are not a recommendation to buy, sell or hold our securities, may be changed, superseded or withdrawn at any time and should be evaluated independently of any other rating. Although we believe that our earnings, cash flows and balance sheet position will permit us to obtain additional debt financing or equity capital, should suitable investment opportunities arise, recent disruptions in the global financial markets may adversely impact the availability and cost of capital.

At April 4, 2009, a large portion of our cash and cash equivalents was held by our non-U.S. subsidiaries. These funds are only available for use by our U.S. operations if they are repatriated into the United States. The funds repatriated would be subject to additional U.S. taxes upon repatriation; however, it is not practical to estimate the amount of additional U.S. tax liabilities we would incur.

We use two primary measures that focus on accounts receivable and inventory - days sales outstanding (DSO) and days inventory on hand (DIOH). We use DSO as a measure that places emphasis on how quickly we collect our accounts receivable balances from customers. We use DIOH, which can also be expressed as a measure of the estimated number of days of cost of sales on hand, and as a measure that places emphasis on how efficiently we are managing our inventory levels. These measures may not be computed the same as similarly titled measures used by other companies. Our DSO (ending net accounts receivable divided by average daily sales for the quarter) were 89 days at April 4, 2009 compared to 88 days at January 3, 2009. Our DIOH (ending net inventory divided by average daily cost of sales for the most recent six months) decreased slightly from 160 days at January 3, 2009 to 158 days at April 4, 2009.

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

                                                                Three Months Ended
                                                             April 4,       March 29,
                                                               2009           2008
Net cash provided by (used in):
Operating activities                                        $   133,706    $   194,812
Investing activities                                            (89,712 )      (74,353 )
Financing activities                                            151,758         37,950
Effect of currency exchange rate changes on cash and
cash equivalants                                                 (6,944 )       10,765
Net increase in cash and cash equivalants                   $   188,808    $   169,174

Operating Cash Flows

Cash provided by operating activities was $133.7 million during the first three months of 2009 compared to $194.8 million during the first three months of 2008. Operating cash flows can fluctuate significantly from period to period due to payment timing differences of working capital accounts such as accounts receivable, accounts payable, accrued liabilities and income taxes payable.

Investing Cash Flows

Cash used in investing activities was $89.7 million during the first three months of 2009 compared to $74.4 million during the same period last year. Our purchases of property, plant and equipment, which totaled $80.8 million and $64.0 million in the first three months of 2009 and 2008, respectively, primarily reflect our continued investment in our product growth platforms currently in place.

Financing Cash Flows

Cash provided by financing activities was $151.8 million during the first three months of 2009 compared to $38.0 million of cash provided by financing activities in the first three months of 2008. Our financing cash flows can fluctuate significantly depending upon our liquidity needs and the amount of stock option exercises. During the first three months of 2009, we made borrowings under a 3-year unsecured term loan and also repaid all outstanding commercial paper borrowings. Total net proceeds provided by borrowings made in the first quarter of 2009 were $130.6 million.

DEBT AND CREDIT FACILITIES

We have a long-term $1.0 billion committed credit facility (Credit Facility) used to support our commercial paper program and for general corporate purposes. Borrowings under this facility bear interest at the United States Prime Rate
(Prime Rate) or the United States Dollar London InterBank Offered Rate (LIBOR)
plus 0.235%, at our election. In the event over half of the Credit Facility is drawn upon, an additional five basis points is added to the elected Prime or LIBOR rate. The interest rates are subject to adjustment in the event of a change in our credit ratings. Outstanding borrowings under the Credit Facility at April 4, 2009 and January 3, 2009 were $500.0 million.

Our commercial paper program provides for the issuance of short-term, unsecured commercial paper with maturities up to 270 days. During the first quarter of 2009, we repaid a net $19.4 million of our commercial paper borrowings resulting in no amounts outstanding at April 4, 2009. Any future commercial paper . . .