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 and neurological disorders. 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 and navigation systems and ablation systems; 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 cost containment pressure on healthcare systems as well as competitive pressures in the industry will continue to place downward pressure on prices for our products.
We participate in several different medical device markets, each of which has its own expected growth rate. A significant portion of our net sales relate to CRM devices - ICDs and pacemakers. Management remains focused on increasing our worldwide CRM market share, as we are one of three principal manufacturers and suppliers in the global CRM market. In order to help accomplish this objective, we have continued to expand our selling organizations and introduce new CRM products. We are also investing in our other three major growth platforms - atrial fibrillation, neuromodulation and cardiovascular - to increase our market share.
Net sales in the second quarter and first six months of 2009 were $1,184.4 million and $2,318.2 million, respectively, an increase of 4% and 8% over the second quarter and first six months of 2008, respectively, led by sales volume growth of our ICDs and pacemakers as well as products to treat atrial fibrillation. Unfavorable foreign currency translation comparisons decreased our 2009 net sales in the second quarter and first six months by $68.9 million and $119.8 million, respectively. Our ICD and pacemaker net sales both declined approximately 1% in the second quarter of 2009, and grew nearly 4% and 2%, respectively, during the first six months of 2009. Foreign currency translation unfavorably impacted ICD and pacemaker net sales by $22.4 million and $19.2 million, respectively, in the second quarter of 2009, and $40.0 million and $32.4 million, respectively, during the first six months of 2009. AF net sales increased approximately 16% and 19% during the second quarter and first six months of 2009, respectively, to $156.4 million and $301.6 million, respectively. Unfavorable foreign currency translation comparisons decreased our 2009 AF net sales during the second quarter and first six months by $10.2 million and $16.4 million, respectively. 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 second quarter of 2009 were $219.4 million and $0.63 per diluted share, increases of 14% and 15%, respectively, compared to the same prior year period. Net earnings and diluted net earnings per share for the first six months of 2009 were $420.6 million and $1.20 per diluted share, increases of 14% and 13%, respectively, over the first six months of 2008. These increases for both the second quarter and first six months of 2009 compared to the same prior year periods were primarily driven by incremental profits resulting from higher sales volumes, led by 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 decreased our 2008 net income and diluted earnings per share for the three and six months ended June 28, 2008 by $8.1 million and $0.03 per share, and $16.4 million and $0.04 per share, respectively. 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 $358.5 million of operating cash flows during the first six months of 2009, compared to $380.3 million of operating cash flows during the first six months of 2008. We ended the second quarter with $486.6 million of cash and cash

equivalents and $1,285.5 million of total debt. As of August 12, 2009, we had strong short-term credit ratings of A1 from Standard & Poor's, P2 from Moody's and F1 from Fitch; additionally, our long-term credit rating included an A rating from Standard & Poor's, a Baa1 rating from Moody's and an A rating from Fitch.
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 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 and navigation systems and ablation systems; 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 July 4, 2009:
 Net sales                           $   784,913     $ 399,499     $        -     $ 1,184,412
 Operating profit                        486,024       211,987       (393,364 )       304,647

 Three Months ended June 28, 2008:
 Net sales                           $   772,404     $ 363,356     $        -     $ 1,135,760
 Operating profit                        479,399       194,379       (380,425 )       293,353

 Six Months ended July 4, 2009:
 Net sales                           $ 1,533,681     $ 784,524     $        -     $ 2,318,205
 Operating profit                        947,054       402,872       (763,007 )       586,919

 Six Months ended June 28, 2008:
 Net sales                           $ 1,455,716     $ 690,782     $        -     $ 2,146,498
 Operating profit                        899,673       368,297       (715,117 )       552,853

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                         Six Months Ended
                        July 4,      June 28,         %          July 4,        June 28,         %
  (in thousands)         2009          2008        Change         2009            2008         Change

  ICD systems         $ 400,477     $ 405,777       (1.3 )%   $   794,430     $   766,729        3.6 %
  Pacemaker systems     303,759       306,008       (0.7 )%       586,127         576,845        1.6 %

                      $ 704,236     $ 711,785       (1.1 )%   $ 1,380,557     $ 1,343,574        2.8 %

Cardiac Rhythm Management net sales were flat in the second quarter of 2009 compared to the second quarter of 2008 and increased 3% in the first six months of 2009 over the same period one year ago. CRM net sales for both the second quarter and first six months of 2009 were driven by sales volume growth; however, unfavorable foreign currency translation comparisons decreased net sales by $41.6 million and $72.4 million during the second quarter and first six months of 2009, respectively, compared to the same periods in 2008. ICD net sales were flat in the second quarter of 2009 compared to the second quarter of 2008 and increased 4% in the first six months of 2009 compared to the same period in 2008. Net sales growth was driven by volume growth across both U.S. and international markets during the first six months of 2009, and our international markets during the second quarter of 2009. In the United States, second quarter 2009 ICD net sales of $255.2 million were flat over last year's second quarter. Internationally, second quarter 2009 ICD net sales of $145.3 million decreased 5% compared to the second quarter of 2008, due to the impact of unfavorable foreign currency translation of $22.4 million. In the United States, the first six months of 2009 ICD net sales of $512.8 million increased 5% over the same period last year. Internationally, the first six months of 2009 ICD net sales of $281.6 million remained relatively flat compared to the first six months of 2008. Foreign currency translation had a $40.0 million unfavorable impact on international ICD net sales during the first six months of 2009 compared to the same period in 2008.
Pacemaker net sales remained flat in the second quarter of 2009 compared to the second quarter of 2008 and increased approximately 2% in the first six months of 2009 compared to the same period in 2008, due to volume growth. In the second quarter of 2009, pacemaker net sales in both the United States ($132.0 million) and internationally ($171.8 million) were flat compared to the same prior year period. Foreign currency translation had a $19.2 million unfavorable impact on international pacemaker net sales in the second quarter of 2009 compared to the same period last year. In the United States, the first six months of 2009 pacemaker net sales of $261.0 million increased 2% compared to the same period last year. Internationally, the first six months of 2009 pacemaker net sales of $325.1 million were flat compared to the first half of 2008.

Foreign currency translation had a $32.4 million unfavorable impact on international pacemaker net sales during the first six months of 2009 compared to the same period last year.

Cardiovascular

                                   Three Months Ended                                     Six Months Ended
                               July 4,           June 28,             %              July 4,           June 28,             %
(in thousands)                  2009               2008             Change            2009               2008             Change

Vascular closure
devices                      $  98,884          $  96,956             2.0 %        $ 196,461          $ 187,043             5.0 %
Heart valve products            83,782             87,205            (3.9 )%         164,406            164,843            (0.3 )%
Other cardiovascular
products                        60,463             43,814            38.0 %          122,049             84,622            44.2 %

                             $ 243,129          $ 227,975             6.6 %        $ 482,916          $ 436,508            10.6 %

Cardiovascular net sales increased approximately 7% and 11% during the second quarter and first six months of 2009, respectively, compared to the same periods in 2008. CV net sales were driven by volume growth but were unfavorably impacted by foreign currency translation impacts of $14.8 million and $26.7 million during the second quarter and first six months of 2009, respectively, compared to the same periods last year.
Vascular closure device net sales increased 2% and 5% during the second quarter and first six months of 2009, respectively, compared to the same periods last year 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 net sales decreased 4% during the second quarter of 2009 and were flat during the first six months of 2009 compared to the same periods last year due to unfavorable foreign currency translation fully offsetting increased sales volumes. Net sales of other cardiovascular products increased $16.6 million and $37.4 million during the second quarter and first six months of 2009, respectively, compared to the same periods last year due to incremental sales of pressure measurement guidewires, a product line acquired from Radi Medical System AB in December 2008, and increased sales volumes of other cardiovascular products.

Atrial Fibrillation

                                   Three Months Ended                                     Six Months Ended
                               July 4,           June 28,             %              July 4,           June 28,             %
(in thousands)                  2009               2008             Change            2009               2008             Change

Atrial fibrillation
products                     $ 156,370          $ 135,381            15.5 %        $ 301,608          $ 254,274            18.6 %

Atrial Fibrillation net sales increased approximately 16% and 19% during the second quarter and first six months of 2009, 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 and our expanded product offerings. Our access, diagnosis, visualization 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 $10.2 million and $16.4 million during the second quarter and first six months of 2009, respectively, compared to the same periods in 2008.

Neuromodulation

                                  Three Months Ended                                 Six Months Ended
                               July 4,          June 28,            %            July 4,         June 28,            %
(in thousands)                   2009             2008           Change           2009             2008           Change

Neurostimulation devices      $   80,677        $  60,619           33.1 %      $ 153,124        $ 112,142           36.5 %

Neuromodulation net sales increased 33% and 37% during the second quarter and first six months of 2009, respectively, compared to the same prior year periods. 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 $2.3 million and $4.3 million during the second quarter and first six months of 2009, respectively, compared to the same periods in 2008.

RESULTS OF OPERATIONS
Net Sales

                        Three Months Ended                          Six Months Ended
                      July 4,        June 28,         %          July 4,        June 28,         %
  (in thousands)       2009            2008         Change        2009            2008         Change

  Net sales        $ 1,184,412     $ 1,135,760        4.3 %   $ 2,318,205     $ 2,146,498        8.0 %

Overall, net sales increased 4% and 8% in the second quarter and first six months of 2009, respectively, 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. Foreign currency translation had an unfavorable impact on net sales for the second quarter and first six months of 2009 of $68.9 million and $119.8 million, respectively, due primarily to the strengthening of the U.S. Dollar against the Euro. These amounts are not indicative of the net earnings impact of foreign currency translation for the second quarter and first six months 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               Six Months Ended
                            July 4,        June 28,         July 4,        June 28,
         Net Sales           2009            2008            2009            2008

         United States   $   630,658     $   582,548     $ 1,250,999     $ 1,120,010
         International
         Europe              299,552         316,733         584,320         586,878
         Japan               118,756          99,485         230,908         185,289
         Asia Pacific         65,027          63,153         118,601         116,193
         Other (a)            70,419          73,841         133,377         138,128

                             553,754         553,212       1,067,206       1,026,488

                         $ 1,184,412     $ 1,135,760     $ 2,318,205     $ 2,146,498

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

Gross Profit

                                   Three Months Ended             Six Months Ended
                                  July 4,      June 28,        July 4,        June 28,
      (in thousands)               2009          2008           2009            2008

      Gross profit              $ 878,868     $ 848,069     $ 1,718,166     $ 1,598,320
      Percentage of net sales        74.2 %        74.7 %          74.1 %          74.5 %

Gross profit for the second quarter of 2009 totaled $878.9 million, or 74.2% of net sales, compared to $848.1 million, or 74.7% of net sales, for the second quarter of 2008. Gross profit for the first six months of 2009 totaled $1,718.2 million, or 74.1% of net sales, compared to $1,598.3 million, or 74.5% of net sales, for the first six months of 2008. The decrease in our gross profit percentage for both the second quarter and first six months of 2009 compared to the same periods in 2008 resulted from unfavorable foreign currency translation impacts partially offset by sales mix and productivity improvements. Selling, General and Administrative (SG&A) Expense

                                           Three Months Ended           Six Months Ended
                                          July 4,      June 28,       July 4,      June 28,
  (in thousands)                           2009          2008          2009          2008

  Selling, general and administrative   $ 431,169     $ 416,261     $ 848,844     $ 783,377
  Percentage of net sales                    36.4 %        36.7 %        36.6 %        36.5 %

SG&A expense for the second quarter of 2009 totaled $431.2 million, or 36.4% of net sales, compared to $416.3 million, or 36.7% of net sales, for the second quarter of 2008. SG&A expense for the first six months of 2009 totaled $848.8 million, or 36.6% of net sales, compared to $783.4 million, or 36.5% of net sales, for the first six months of 2008. Overall, SG&A expense as a percentage of net sales has remained relatively flat year over year.

Research and Development (R&D) Expense

                                          Three Months Ended           Six Months Ended
                                         July 4,      June 28,       July 4,      June 28,
    (in thousands)                        2009          2008          2009          2008

    Research and development expense   $ 143,052     $ 138,455     $ 282,403     $ 262,090
    Percentage of net sales                 12.1 %        12.2 %        12.2 %        12.2 %

R&D expense in the second quarter of 2009 totaled $143.1 million, or 12.1% of net sales, compared to $138.5 million, or 12.2% of net sales, for the second quarter of 2008. R&D expense in the first six months of 2009 totaled $282.4 million, or 12.2% of net sales, compared to $262.1 million, or 12.2% of net sales, for the first six months of 2008. While 2009 R&D expense as a percent of net sales was flat compared to 2008, total R&D expense increased 3% and 8% for the second quarter and first six months of 2009, respectively, compared to the same periods in 2008. 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.

Other Income (Expense), net

                                                       Three Months Ended                         Six Months Ended
                                                                     June 28,                                  June 28,
                                                 July 4,               2008                July 4,               2008
                                                   2009            (As adjusted)            2009             (As adjusted)

Interest income                                 $    518          $       3,091          $   1,077          $       7,347
Interest expense                                  (5,619 )              (18,101 )          (12,570 )              (36,126 )
Other                                                140                 (3,010 )             (780 )                  332

Total other income (expense), net               $ (4,961 )        $     (18,020 )        $ (12,273 )        $     (28,447 )

The Company's 2009 adoption of Financial Accounting Standards Board (FASB) Staff Position (FSP) Accounting Principles Board (APB) Opinion No. 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB No. 14-1) required retrospective application to all prior periods presented (see Note 3 to the Condensed Consolidated Financial Statements). As a result, non-cash interest expense adjustments of $13.0 million and $26.0 million were recorded in the second quarter and first six months of 2008, respectively, increasing 2008 interest expense to conform to the new accounting treatment.

Income Taxes

                                         Three Months Ended                Six Months Ended
                                                      June 28,                        June 28,
                                     July 4,            2008           July 4,          2008
(as a percent of pre-tax income)       2009         (As adjusted)       2009        (As adjusted)

Effective tax rate                      26.8 %              29.9 %       26.8 %             29.5 %

Our effective income tax rate was 26.8% and 29.9% for the second quarter of 2009 and 2008, respectively, and 26.8% and 29.5% for the first six months of 2009 and 2008, respectively. The effective tax rate for the first six months of 2008 was unfavorably impacted by 2.1 percentage points due to the expiration of the Federal Research and Development tax credit (R&D tax credit) at the end of 2007, which was not signed into law until October 2008. The R&D tax credit was made retroactively effective for all of 2008 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 second quarter 2008 effective tax rate from 30.3% to 29.9% and first six months of 2008 effective tax rate from 29.9% to 29.5%.

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