10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 30, 2006

Commission File Number 0-8672

ST. JUDE MEDICAL, INC.

(Exact name of registrant as specified in its charter)

Minnesota	41-1276891
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
One Lillehei Plaza	(651) 483-2000
St. Paul, Minnesota 55117	(Registrant’s telephone number,
(Address of principal executive	including area code)
offices, including zip code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock ($.10 par value)	New York Stock Exchange
Preferred Stock Purchase Rights	New York Stock Exchange
(Title of class)	(Name of exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x     No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o     No x

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, and (2) has been subject to such filing requirements for the past 90 days.
Yes x     No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. 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 Act).
Yes o     No x

The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant was $11.4 billion at June 30, 2006 (the last trading day of the registrant’s most recently completed second fiscal quarter), when the closing sale price of such stock, as reported on the New York Stock Exchange, was $32.42 per share.

The registrant had 344,240,198 shares of its $0.10 par value Common Stock outstanding as of February 16, 2007.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s Annual Report to Shareholders for the fiscal year ended December 30, 2006, are incorporated by reference into Parts I and II. Portions of the Company’s Proxy Statement for the 2007 Annual Meeting of Shareholders are incorporated by reference into Part III.

TABLE OF CONTENTS

ITEM	DESCRIPTION	PAGE
	PART I
1.	Business	1
1A.	Risk Factors	13
1B.	Unresolved Staff Comments	20
2.	Properties	20
3.	Legal Proceedings	20
4.	Submission of Matters to a Vote of Security Holders	20
	PART II
5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	21
6.	Selected Financial Data	21
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
7A.	Quantitative and Qualitative Disclosures About Market Risk	21
8.	Financial Statements and Supplementary Data	21
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	21
9A.	Controls and Procedures	21
9B.	Other Information	22
	PART III
10.	Directors, Executive Officers and Corporate Governance	22
11.	Executive Compensation	22
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	22
13.	Certain Relationships and Related Transactions, and Director Independence	22
14.	Principal Accountant Fees and Services	22
	PART IV
15.	Exhibits and Financial Statement Schedules	23
	Signatures	30

PART I

Item 1. BUSINESS

General

St. Jude Medical, Inc., together with its subsidiaries (collectively St. Jude, St. Jude Medical, we, us or our), develops, manufactures and distributes cardiovascular medical devices for the global cardiac rhythm management, cardiac surgery, cardiology, and atrial fibrillation therapy areas and implantable neuromodulation devices for the management of chronic pain. In 2006, our five operating segments were Cardiac Rhythm Management (CRM), Cardiac Surgery (CS), Neuromodulation (Neuro), Cardiology (CD) and Atrial Fibrillation (AF). 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); CS – mechanical and tissue heart valves and valve repair products; Neuro – neurostimulation devices; CD – vascular closure devices, guidewires, hemostasis introducers and other interventional cardiology products; and AF – electrophysiology (EP) introducers and catheters, advanced cardiac mapping and navigation systems and ablation systems.

We market and sell our products through both a direct sales force and independent distributors. The principal geographic markets for our products are the United States, Europe and Japan. We also sell our products in Canada, Latin America, Australia, New Zealand and the Asia-Pacific region. St. Jude Medical was incorporated in Minnesota in 1976.

In August 2006, we announced that we were combining the Cardiac Surgery and Cardiology divisions into a new Cardiovascular division, effective January 1, 2007. This combination is expected to enhance operating efficiencies and thereby enable us to increase investment in product development. The Cardiovascular division will incorporate all activities previously managed by the Cardiac Surgery division and by the Cardiology division. Segment information will be reclassified in 2007 to reflect the new Cardiovascular division

We aggregate our five operating segments into two reportable segments based primarily upon their similar operational and economic characteristics: CRM/CS/Neuro and CD/AF. Our performance by reportable segment is included in Note 12 of the Consolidated Financial Statements in the Financial Report included in our 2006 Annual Report to Shareholders and filed as Exhibit 13 to this Form 10-K.

The table below shows net sales and percentage of total net sales contributed by each of our five operating segments for the fiscal years 2006, 2005 and 2004:

Net Sales (in thousands)	2006		2005		2004
Cardiac rhythm management	$	2,055,765	$	1,924,846	$	1,473,770
Cardiac surgery		289,317		273,873		274,979
Neuromodulation *		179,363		24,982		—
Cardiology		452,295		437,769		388,584
Atrial fibrillation		325,707		253,810		156,840
	$	3,302,447	$	2,915,280	$	2,294,173

Percentage of Total Net Sales	2006			2005			2004
Cardiac rhythm management		62.2	%		66.0	%		64.3	%
Cardiac surgery		8.8	%		9.4	%		12.0	%
Neuromodulation *		5.4	%		0.9	%		—
Cardiology		13.7	%		15.0	%		16.9	%
Atrial fibrillation		9.9	%		8.7	%		6.8	%

* The Neuromodulation operating segment was formed in November 2005 in connection with the acquisition of Advanced Neuromodulation Systems, Inc. (ANS).

Principal Products

Cardiac Rhythm Management: Our ICDs treat patients with hearts that beat inappropriately fast, a condition known as tachycardia. ICDs monitor the heartbeat and deliver higher energy electrical impulses, or “shocks,” to terminate ventricular tachycardia (VT) and ventricular fibrillation (VF). In VT, the lower chambers of the heart contract at an abnormally rapid rate and typically deliver less blood to the body’s tissues and organs. VT can progress to VF, in which the heart beats so rapidly

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and erratically that it can no longer pump blood. Like pacemakers, ICDs are typically implanted pectorally, connected to the heart by leads, and programmed non-invasively.

Our latest ICD offerings include the Epic® II+ DR and Epic® II VR/DR, which the U.S. Food and Drug Administration (FDA) approved in March 2006, and high energy Atlas® II+ DR and Atlas® II VR/DR ICDs (FDA approved in July 2006) that offer our unique vibratory patient alert feature designed for greater patient safety and enhanced telemetry speeds to facilitate faster patient follow-ups. Other ICD offerings include the Epic®+ VR/DR and Epic® VR/DR ICDs, and the Atlas®+ VR/DR. We received FDA approval and European CE Mark of the Epic®+ VR/DR ICDs in April 2003, and FDA approval and European CE Mark of the Atlas®+ VR/DR ICDs in October 2003. The Epic® ICD family devices are very small ICDs that deliver 30 joules of energy. The Atlas®+ ICD family devices offer high energy and small size without compromising charge times, longevity or feature set flexibility. The Epic® II+ DR ICD, Epic®+ DR ICD, Atlas® II +DR ICD and the Atlas®+ DR ICD contain St. Jude Medical’s AF Suppression™ algorithm, which is clinically proven to reduce atrial fibrillation burden.

In 2004, we received FDA approval for our line of products designed to treat heart failure. These products included the Atlas®+ HF, a high output cardiac resynchronization therapy device (CRT-D) with 36 joules delivered and 42 joules stored; the Epic® HF, with 30 joules delivered; the Aescula™ Model 1055K left-ventricular lead; and the QuickSite® Models 1056T and 1056K, left-ventricular leads with less than a 1% dislodgment rate. Our latest CRT-D product offerings, the Epic® II HF (FDA approved in March 2006) and high energy Atlas® II HF CRT-Ds (FDA approved in July 2006), contain the same unique patient vibratory alert and enhanced telemetry technology found in our Atlas® II VR/DR family of ICDs.

In November 2004, we received FDA approval for our Atlas®+ HF and Epic® HF ICDs with the ventricle to ventricle (V-V) timing feature. V-V timing allows the clinician to program the timing between the two ventricles to optimize ventricular function and cardiac output, which may further increase the number of responders to CRT. Full launch activities began in December 2004.

St. Jude Medical’s unique QuickOpt™ Timing Cycle Optimization technology was FDA approved in July 2006 and provides for automatic optimized V-V and atria to ventricle (A-V) timing in all St. Jude Medical CRT-Ds and dual-chamber ICDs.

Our ICDs are used with the single and dual-shock electrode Riata® transvenous defibrillation leads. The Riata® integrated bipolar single and dual-shock leads were FDA approved and launched in April 2004 and received European CE Mark in May 2004. The Riata® leads are an advanced family of small-diameter, steroid-eluting, active or passive fixation defibrillation leads. The Riata® ST leads, FDA approved in June 2005, are new models with a smaller lead diameter and are available in silicone lead bodies as well as a version using an advanced new polymer (Optim™). Riata® ST Optim was approved in July 2006 and is expected to be launched in early 2007.

Our QuickSite® Bipolar Model 1056T left-ventricular lead was launched in Europe in December 2004 and in the United States in mid-2005.

Our pacemakers treat patients with hearts that beat too slowly, a condition known as bradycardia. Typically implanted pectorally, just below the collarbone, pacemakers monitor the heart’s rate and, when necessary, deliver low-level electrical impulses that stimulate an appropriate heartbeat. The pacemaker is connected to the heart by one to three leads that carry the electrical impulses to the heart and information from the heart back to the pacemaker. An external programmer enables the physician to retrieve diagnostic information from the pacemaker and reprogram the pacemaker in accordance with the patient’s changing needs. Single-chamber pacemakers sense and stimulate only one chamber of the heart (atrium or ventricle), while dual-chamber devices can sense and pace in both the upper atrium and lower ventricle chambers. Bi-ventricular pacemakers can sense and pace in three chambers (atrium and both ventricle chambers).

Our current pacing products include the new Victory® product line as well as Team ADx® pacemakers, a group comprised of the Identity® ADx, Integrity® ADx and Verity™ ADx families of devices.

The Victory® line was approved by the FDA in December 2005. The Victory® and Victory® XL family models provide the enhancements of previous St. Jude Medical families, while adding new capabilities such as automatic P-wave and R-wave measurements with trends, lead monitoring and automatic polarity switch, follow-up electrograms, Ventricular Intrinsic Preference (VIP^TM) to reduce right ventricle pacing and a ventricular rate during automatic mode switch histogram.

The Identity® DR and Identity® XL DR devices were approved by the FDA in November 2001, with the rest of the Team ADx™ devices receiving FDA approval in May 2003. The Team ADx devices received European CE Mark in August 2003. The Identity® ADx family models maintain the therapeutic advancements of previous St. Jude Medical pacemakers,

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including the AF Suppression™ algorithm and the Beat-by-Beat™ AutoCapture™ Pacing System. This family offers atrial tachycardia and atrial fibrillation arrhythmia diagnostics. The Integrity® ADx devices offer programmable electrograms. These features are designed to help physicians better manage pacemaker patients suffering from atrial fibrillation – the world’s most common cardiac arrhythmia.

The Identity® pacemakers with enhanced electrograms are built on the Affinity® platform with its Beat-by-Beat™ AutoCapture™ Pacing System. We also offer the Microny® II SR+ and Microny® K. These are the world’s smallest pacemakers and are available worldwide. Another pacemaker, the Regency®, is offered outside of the United States.

The Identity® ADx, Integrity® ADx, Verity™ ADx, Identity®, and Microny® and Regency® families of pacemakers offer the unique Beat-by-Beat™ AutoCapture™ Pacing System. The AutoCapture™ Pacing System enables the pacemaker to monitor every paced beat to verify that the heart has been stimulated (known as capture), delivers a back-up pulse in the event of noncapture, continuously measures threshold, and makes adjustments in energy output to match changing patient needs. In addition, the Identity® ADx, Integrity® ADx and Identity® pacemakers include St. Jude Medical’s AF Suppression™ Algorithm, a therapy designed to suppress atrial fibrillation.

We also market low-voltage device-based ventricular resynchronization systems (bi-ventricular) designed for the treatment of heart failure and suppression of atrial fibrillation. Within the United States, our Frontier II™ CRT-P (FDA approved in August 2004 and CE Mark approved in September 2004) is the only bi-ventricular pacing device indicated for use in patients with chronic atrial fibrillation who have been treated with atrioventricular nodal ablation. The Frontier II™ system includes the QuickSite™ 1056 and 1058 LV pacing leads. For placement of these leads, we provide the following delivery systems and accessories: the CPS Direct™, CPA Aim™, CPS Luminary™, Alliance™, Seal-Away™ CS and Apeel™ Catheter Delivery Systems, and the CPS Venture™ wire.

Our current pacing leads include the Tendril® SDX (models 1688, 1488, 1788 and 1782) and Tendril® DX active-fixation lead families and the IsoFlex® S, IsoFlex P and Passive Plus® DX passive-fixation lead families, all available worldwide. All these lead families feature steroid elution, which helps suppress the body’s inflammatory response to a foreign object. Tendril 1888, which incorporates an advanced new polymer, is expected to be launched in 2007.

Our pacemakers and ICDs interact with an external device referred to as a programmer. A programmer has two general functions. First, a programmer is used at the time of pacemaker and ICD implants to establish the initial therapeutic settings of these devices as determined by the physician. A programmer is also used for follow-up patient visits, which usually occur every three to 12 months, to download stored diagnostic information from the implanted devices and to verify appropriate therapeutic settings.

Since the introduction of programmable pacemakers in about 1977, all pacemaker manufacturers, including St. Jude Medical, have retained title to their programmers which are used by their field sales force or by physicians and nurses or technicians. Although we derive no direct revenue from the use of our programmers, pacemakers and ICDs generally require the use of our programmer at the time of implant and follow-up.

In April 2006, we received FDA approval for the first software module for the Merlin™ Patient Care System, a universal programmer for St. Jude Medical ICDs and pacemakers. This completely redesigned programmer has a larger display, built-in full-size printer, touch screen and advanced new user interface. The programmer is a result of detailed customer research activities to optimize ease of use and to set new standards for efficient and effective in-clinic follow-up.

St. Jude’s Model 3510 universal series pacemaker and ICD programmer is an easy-to-use programmer that supports our pacemakers and ICDs. The Model 3510 universal series programmer allows the physician to utilize the diagnostic and therapeutic capabilities of our pacemakers and ICDs.

Housecall Plus, approved for use in the United States and Europe, is a remote monitoring system for St. Jude Medical ICDs (Atlas, Atlas+, Atlas+ HF, Epic, Epic+ and Epic HF) that works with standard analog telephone lines. It consists of a dedicated receiver (mini desktop computer) and a small answering machine sized transmitter. Physicians can better manage their increased number of ICD patients by conducting remote follow-up sessions efficiently, obtaining complete diagnostics in real time (similar to an in-office data interrogation), and choosing how they wish to use the system. Patients can use the device in their own home while interacting with a live technician to assist them in transmission.

Cardiac Surgery: Heart valve replacement or repair may be necessary because the natural heart valve has deteriorated due to congenital defects or disease. Heart valves facilitate the one-way flow of blood in the heart and prevent significant backflow of blood into the heart and between the heart’s chambers. We offer both mechanical and tissue replacement heart valves and heart valve repair products. St. Jude Medical® mechanical heart valves have been implanted in over 1.5 million patients

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worldwide. The year 2007 marks 30 years of St. Jude Medical’s leadership in the mechanical heart valve market. The SJM Regent® mechanical heart valve was approved for sale in Europe in December 1999 and received FDA approval for U.S. market release in March 2002. In the United States, we received FDA approval for U.S. market release of the SJM Biocor® stented tissue heart valve in August 2005. Outside the United States, we market the SJM Epic™ stented tissue heart valve and the SJM Biocor® stented tissue valve. The Epic™ tissue valve offers our customers a tissue valve with an anticalcification coating. The U.S. trial for Epic™ has been completed and we are anticipating U.S. approval in late 2007. We also offer a line of heart valve repair products, including the semi-rigid SJM® Séguin annuloplasty ring, the fully flexible SJM Tailor® annuloplasty ring and a St. Jude Medical® rigid saddle-shaped annuloplasty ring. Annuloplasty rings are prosthetic devices used to repair diseased or damaged mitral heart valves.

Neuromodulation: Effective with the acquisition of ANS in November 2005, we formed the Neuromodulation division to focus efforts on the related therapy areas. Within the neuromodulation market, there are two main categories of treatment: neurostimulation, in which an implantable device delivers electrical current directly to targeted nerve sites, and implantable drug infusion systems, in which an implanted pump delivers drugs through a catheter directly to targeted nerve sites.

Neurostimulation for the treatment of chronic pain involves delivering low-level electrical impulses via an implanted device (sometimes referred to as a “pacemaker for pain”) directly to the spinal cord or peripheral nerves. This stimulation interferes with the transmission of pain signals to the brain and inhibits or blocks the sensation of pain felt by the patient. This stimulation of nerves at or near the site where pain is perceived replaces the painful sensations with a sensation called paresthesia, which is often described as a tingling or massaging sensation. Neurostimulation for chronic pain is generally used to manage sharp, intense and constant pain arising from nerve damage or nervous system disorders. A neurostimulation system typically consists of three components: a pulse generator/receiver produces the electric current directed to the lead(s) and is generally implanted under the patient’s skin; a programmer/transmitter is used to program the power supply and to adjust the intensity, frequency and duration of the stimulation; and leads carry the electrical impulses to the targeted nerve sites. Clinical results demonstrate that many patients who are implanted with a neurostimulation system experience a substantial reduction in pain, an increase in activity level, a reduction in use of narcotics and a reduction in hospitalization.

We offer a wide array of neurostimulation systems including radio frequency (RF) powered systems, conventional implantable pulse generators (IPGs) and rechargeable implantable pulse generators. We currently market three neurostimulation product platforms worldwide: Renew® RF systems; Genesis® IPG systems, which include conventional and rechargeable battery models; and Eon™ IPG rechargeable systems.

Renew® is used for treatment of chronic pain of the trunk and limbs and features a small implanted component (an RF receiver). Renew® consists of the implanted RF receiver/pulse generator, leads and a transmitter containing a power source that is worn externally. The system is powered with the help of an antenna that is attached to the patient’s skin with a removable belt or an adhesive pad. Because Renew® has a rechargeable, external power source, we believe it is best suited for patients with complex, changing or multi-extremity pain patterns that require higher power levels for treatment when battery management, even when rechargeable systems are available, is problematic.

Genesis® is also used for treatment of chronic pain of the trunk and limbs and is a clinically proven system that offers a high battery capacity-to-size ratio and flexibility in addressing different pain patterns and other technological advances, which provide us with a competitive advantage in this class of product. The GenesisXP™ IPG system offers a greater battery capacity, resulting in enhanced longevity and/or additional power to treat more complex pain. Conventional IPGs like Genesis® and GenesisXP™ are well-suited for patients with relatively simple pain or modest power requirements and for patients who would have difficulty managing a rechargeable system or an RF system. The GenesisRC™ rechargeable IPG system, a rechargeable battery version in the Genesis® family, can be recharged externally, allowing for higher energy outputs for extended periods of time and resulting in greater patient convenience and treatment options for patients who need these features.

In the third quarter of 2006, ANS launched an upgraded version of the Eon™ with the new NeuroDynamix™ microchip technology and enhanced software. The upgraded Eon™ has greater power output, supplying 25% more power than its predecessor and enabling it to meet the varying power requirements of individual patients. Additionally, the new Eon™ stimulator provides enhanced longevity between recharges giving patients added flexibility in their recharging schedule. The device also has an extremely high frequency capability, allowing it to serve patients who need higher frequencies to control their pain. The enhanced Eon™ and the new Rapid Programmer® platform work together as an integrated system to provide clinicians greater speed, power, efficiency and precision for helping patients address complex pain.

We currently market Rapid Programmer®, an innovative programming platform designed to allow clinicians to quickly and efficiently test patients intraoperatively and to program postoperatively. Rapid Programmer® 3.0 features two new technologies for delivering stimulation to pain patients: Dynamic MultiStim™ and Active Balancing™. Dynamic

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MultiStim™ technology allows for real-time programming adjustments to multiple areas of pain, which better targets pain coverage and decreases programming time. This is especially useful when patients have complex pain patterns, such as a combination of back and leg pain. Active Balancing™ lets patients and clinicians fine-tune stimulation levels in multiple coverage areas, quickly establishing relief and giving patients sophisticated, yet easy-to-use, control over their therapy. This palm-sized programmer features a touch screen interface, which clinicians can navigate to create multiple programs, adjust variables and generate pain and stimulation maps while decreasing the average postoperative programming time.

We market a broad variety of leads, which are intended to give clinicians the flexibility to meet a range of patient needs. Our leads can be divided into two types: percutaneous and paddle leads. The percutaneous leads are headed by the 8-contact Octrode® and 4-contact Quattrode® lead designs. These leads are joined by the Axxess® percutaneous lead. With an extremely small diameter, the Axxess® lead is designed to facilitate implantation and steering during lead placement. Our paddle leads consist of the Lamitrode® family of leads, which, in addition to the Lamitrode® lead, includes the Lamitrode S-Series™ and C-Series™ leads. Lamitrode S-Series™ leads have a small paddle lead profile, which is intended to ease insertion, and an integrated stylet, which is engineered to improve steering and control during implantation. Lamitrode C-Series™ leads are shaped to mimic the curve of the epidural space of the spine, designed to facilitate lead placement and to help to reduce lead migration. Also notable among the Lamitrode® lead family is the Lamitrode® lead with the Tripole 8™ configuration. This lead features a unique three-column electrode array designed to focus stimulation more precisely.

The neurostimulation market is constantly changing with the emergence of potential indications like deep brain and cortical stimulation for the treatment of Parkinson’s disease, essential tremor, chronic migraine headaches, depression, obsessive compulsive disorder, obesity, angina, interstitial cystitis and tinnitus. We continue to implant in our pivotal studies for Parkinson’s disease and essential tremor to investigate the safety and efficacy of the Libra™ Deep Brain Stimulation system. We are also continuing enrollment for another pivotal study for chronic migraine. Approval was also received from the FDA for interstitial cystitis, angina and obesity pilot studies. We have conducted a multi-center trial for depression in Canada and the Netherlands and plan to file with the FDA for a pivotal trial in 2007. Other potential indications are in various stages of evaluation, regulatory review and trial.

Cardiology:  We produce specialized disposable cardiovascular devices, including vascular closure devices, patent foramen ovale (PFO) closure devices, embolic protection systems, wire control catheters, percutaneous catheter introducers and diagnostic guidewires.

Our vascular closure devices are used to close femoral artery puncture sites following percutaneous coronary interventions, diagnostic procedures and certain peripheral procedures. In 2006, we launched the Angio-Seal^TM VIP vascular closure system worldwide. In addition to the performance and ease of use benefits offered from Angio-Seal^TM STS and STS Plus, Angio-Seal^TM VIP features a larger collagen footprint and smoother deployment.

In 2005, we made a strategic decision to focus our resources on expanding into high growth market segments with highly differentiated technology that offers our customers clinical and/or cost benefits. In most cases, these markets are not fully developed, and therefore, our sales representatives are often acting in a consultative manner to physicians. As part of this decision, we decided to exit the angiographic catheter market and utilize our resources to pursue other opportunities such as the acquisition of the businesses of Velocimed LLC (Velocimed), a company that was focused on embolic protection, PFO closure and guidewire support systems.

During 2006, we received approval to market our Proxis™ Embolic Protection System (Proxis™ system) in the United States and Europe. The system was launched on a limited basis in the fourth quarter of 2006. The Proxis™ system provides embolic protection for saphenous vein grafts by placing the device proximal to the lesion. As opposed to distal systems, the Proxis™ system provides protection during guidewire crossing, side branches protection as well as unlimited debris capture. The system can also be used for those patients ineligible for distal filter systems due to anatomical considerations. Results of the U.S. Proxis™ randomized clinical trial were presented at the 2005 and 2006 Transcatheter Cardiovascular Therapeutics meetings in Washington, D.C. The data demonstrated a lower major adverse cardiac event rate in the Proxis™ arm versus the patients that utilized distal protection systems or no protection at all.

During 2005, we launched in Europe the Premere™ PFO Closure System (Premere™ system). A PFO is a congenital flap, or tunnel, that exists between the left and right atrium of the heart. Currently, certain physicians believe there may be a link between a PFO and recurrent strokes as well as migraine headaches. The Premere™ system is being investigated in the United States under an Investigational Device Exemptions (IDE) to determine if there is a reduction in the occurrence of migraine headaches between patients that have their PFO closed with the Premere™ system versus those that do not have their PFO closed. This trial was initiated in 2006. The Premere™ system differs from other currently available systems today. The key differences are independent anchors allow the system to conform to the anatomy, an adjustable tether that adapts to PFO tunnels of varying lengths and a smaller surface area in the left side of the heart which may reduce the likelihood of embolization.

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In 2006, we also launched worldwide the Venture™ Rx (Rapid Exchange) Wire Control catheter. This product provides the physician with the ability to navigate tortuous coronary anatomy by having a 90 degree deflectable tip as well as providing additional guidewire support that is sometimes necessary for crossing chronic total occlusions.

Percutaneous catheter introducers are used to create passageways for cardiovascular catheters from outside the human body through the skin into a vein, artery or other location inside the body. Our percutaneous catheter introducer products consist primarily of peel-away and non peel-away sheaths, sheaths with and without hemostasis valves, dilators, guidewires, repositioning sleeves and needles. These products are offered in a variety of sizes and packaging configurations. Diagnostic guidewires, such as the GuideRight™ and HydroSteer™ guidewires, are used in conjunction with percutaneous catheter introducers to aid in the introduction of intravascular catheters. Our diagnostic guidewires are available in multiple lengths and incorporate a surface finish for lasting lubricity.

Our bipolar temporary pacing catheters are inserted percutaneously for temporary use (ranging from less than one hour to a maximum of one week) with external pacemakers to provide patient stabilization prior to implantation of a permanent pacemaker, following a heart attack or during surgical procedures. We produce and market several designs of bipolar temporary pacing catheters, including our Pacel™ biopolar pacing catheters, which are available in both torque control and flow-directed models with a broad range of curve choices and electrode spacing options.

Atrial Fibrillation:  Atrial fibrillation is a rapid and inconsistent heart rhythm that occurs in the upper chambers of the heart. People suffering from atrial fibrillation may experience fatigue and shortness of breath, and atrial fibrillation has been shown to increase the risk of stroke. Atrial fibrillation and other irregular heart rhythms such as atrial flutter and Wolff-Parkinson-White Syndrome are often managed with medications that palliate the symptoms of atrial fibrillation. We are committed to developing device-based ablation therapies for these conditions that offer the potential for a cure.

We provide a complete system of products – for access, diagnosis, visualization and ablation - - that assist physicians in diagnosing and treating various irregular heart rhythms. Our products are designed to be used in the EP lab and the cardiac surgery suite.

Our access products enable clinicians to percutaneously reach areas of the heart where arrhythmias occur. These products include, among others, our Swartz™ and Swartz™ Braided Transseptal fixed-curve introducers which are designed to guide catheters to precise locations in the left atrium. In addition, our Agilis™ NxT Steerable Introducer was launched in mid-2006 to enable flexible mobility and stability of catheters in the heart while reducing the outside diameter of the introducer.

For diagnosing arrhythmias percutaneously, we offer a portfolio of fixed-curve and steerable catheters. Our Response™ and Supreme™ fixed curve catheters gather electrical information from the heart that indicates what may be causing an arrhythmia. Livewire™ and Reflexion™ Steerable Diagnostic Catheters allow clinicians to move the tip of the catheter in precise movements, and the Inquiry™ Optima™ PLUS steerable diagnostic catheter creates exceptional geometries in two planes when used in combination with the EnSite® Version 6.0 software. In addition, our EnSite Array™ Non-contact Mapping Catheter is a unique catheter that works with the EnSite® System, enabling physicians to record electrical activity for complex arrhythmias in a single heartbeat without touching the walls of the patient’s heart.

Our EnSite® System is a mapping and navigation system that, when used in conjunction with the EnSite® Array Non-contact Mapping Catheter or EnSite NavX™ Navigation and Visualization System, creates three-dimensional cardiac models, shows catheters moving within those models, and allows physicians to map and visualize electrical activity in the heart. During the second quarter of 2006, we launched the EnSite® System Version 6.0 software platform. EnSite Version 6.0 enables the creation of cardiac models with a higher level of detail than was previously possible. At the same time several modules were introduced to provide advanced diagnostic programs (Fractionation Mapping Module) and remote technical support of the EnSite® System (EnSite Connect^SM Remote Support Service).

We offer two general ablation product lines which focus on disabling abnormal tissue that causes or perpetuates arrhythmias: ablation catheters, which are used as part of a percutaneous procedure and are designed to apply RF energy to the inside of the heart; and surgical cardiac ablation devices, which are used to ablate cardiac tissue from the epicardium (outside the heart). Our Livewire™ TC Ablation Catheters include uni- and bi-directional models that offer stability and excellent tissue contact with cardiac tissue. In May 2006, we launched our Safire™ Bi-directional Ablation Catheter product line which is built on a handle platform designed for greater physician comfort and control during EP procedures. The Therapy™ line of ablation catheters also provides a range of curve options and temperature control. When used with the IBI-1500T6 Cardiac Ablation Generator, power can be effectively managed for the creation of longer ablation lines. Our surgical cardiac ablation product line is the Epicor™ Cardiac Ablation System (Epicor™ System). The Epicor™ System creates cardiac ablation lesions by applying high intensity focused ultrasound (HIFU) to the outside of a beating heart without the need to put the patient on a heart-lung bypass machine. The primary components of the Epicor™ System include the Epicor™ Ablation

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Control System that generates and controls the ultrasound energy, the UltraCinch™ Ablation Device that creates circumferential lesions in cardiac tissue and the UltraWand™ Handheld Ablation Device that allows for additional linear lesions to be created

Competition

The medical device market is intensely competitive and is characterized by extensive research and development and rapid technological change. Our competitors range from small start-up companies to larger companies which have significantly greater resources and broader product offerings, and we anticipate that in the coming years, other large companies will enter certain markets in which we currently hold a strong position. In addition, we expect that competition will continue to intensify with the increased use of strategies such as consigned inventory and reduced pricing. Our customers consider many factors when choosing suppliers, including product reliability, clinical outcomes, product availability, inventory consignment, price and product services provided by the manufacturer, and market share can shift as a result of technological innovation, product field actions and safety alerts and other business factors.

We are one of the three principal manufacturers and suppliers in the global bradycardia pacemaker market, with approximately 25% bradycardia market share in all major developed geographies. Our primary competitors in this market are Medtronic, Inc. and Boston Scientific Corporation. We are also one of three principal manufacturers and suppliers in the highly competitive global ICD market. Our other two competitors, Medtronic, Inc. and Boston Scientific Corporation, account for approximately 80% of the worldwide ICD sales. These two competitors are larger than us and have invested substantial amounts in ICD research and development.

We are the world’s leading manufacturer and supplier in the mechanical heart valve market, which includes two other principal manufacturers and suppliers (CarboMedics and ATS Medical, Inc.) and several smaller manufacturers. We also compete against two principal tissue heart valve manufacturers (Edwards Lifesciences Corporation and Medtronic, Inc.) and many other smaller manufacturers.

We are one of three principal manufacturers of neurostimulation devices. Our primary competitors are Medtronic, Inc. and Boston Scientific Corporation. The neuromodulation market is one of medical technology’s fastest growing segments. Competitive pressures will increase in the future as Medtronic, Inc. and Boston Scientific Corporation attempt to secure and grow their positions in the neuromodulation market.

The global cardiology therapy area is growing and has numerous competitors. Over 75% of our sales in this area are from vascular closure devices. We currently hold the number one market position in the highly competitive vascular closure device market. Our primary vascular closure device competitor is Abbott Laboratories. We anticipate other large companies will enter this market in the coming years, which will likely increase competition.

The atrial fibrillation therapy area is broadening to include multiple therapy methods. The marketplace currently embraces multiple methods of treating atrial fibrillation. Treatments include drugs, external electrical cardioversion and defibrillation, implantable defibrillators and open-heart surgery. As a result we have numerous competitors in the emerging atrial fibrillation market. Larger competitors may extend their presence in the atrial fibrillation market by leveraging their cardiac rhythm management capabilities.

Patents, Licenses and Trademarks

Our policy is to protect our intellectual property rights related to our medical devices. Where appropriate, we apply for U.S. and foreign patents. We own or hold license to numerous U.S. and foreign patents. U.S. patents are typically granted for a term of twenty years from the date a patent application is filed. The actual protection afforded by a foreign patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the country. In those instances where we have acquired technology from third parties, we have sought to obtain rights of ownership to the technology through the acquisition of underlying patents or licenses. We have a technology license agreement that provides access to a significant number of patents covering a broad range of technology used in our ICD and pacemaker systems. The related patents expire at various dates through the year 2014. The costs deferred under this technology license agreement are recorded on the balance sheet in other assets and are being recognized as an expense over the term of the underlying patents’ lives. The license had a net carrying value of $86.5 million and $109.2 million at December 30, 2006 and December 31, 2005, respectively.

We also have obtained certain trademarks and trade names for our products to distinguish our products from our competitors’ products. U.S. trademark registrations are for a term of ten years and are renewable every ten years as long as the trademarks are used in the regular course of trade. We register our trademarks in the U.S. and in a number of countries where we do business.

While we believe design, development, regulatory and marketing aspects of the medical device business represent the principal barriers to entry, we also recognize that our patents and license rights may make it more difficult for competitors to market products similar to those we produce. We can give no assurance that any of our patent rights, whether issued, subject to license, or in process, will not be circumvented or invalidated. Furthermore, there are numerous existing and pending patents on medical products and biomaterials. There can be no assurance that our existing or planned products do not or will not infringe such rights or that others will not claim such infringement. No assurance can be given that we will be able to prevent competitors from challenging our patents or entering markets we currently serve.

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Research and Development

We are focused on the development of new products and on improvements to existing products. Research and development expense reflects the cost of these activities, as well as the costs to obtain regulatory approvals of certain new products and processes and to maintain the highest quality standards with respect to existing products. Our research and development expenses were $431.1 million (13.1% of net sales) in 2006, $369.2 million (12.7% of net sales) in 2005 and $281.9 million (12.3% of net sales) in 2004. We also expensed $179.2 million and $9.1 million of purchased in-process research and development in connection with acquisitions we completed in 2005 and 2004, respectively.

Acquisitions and Minority Investments

In addition to generating growth internally through our own research and development activities, we also make strategic acquisitions and investments to access new technologies and therapy areas. We expect to continue to make acquisitions and investments in future periods to strengthen our business.

On November 29, 2005, we completed the acquisition of ANS for $1,353.9 million, net of cash acquired. ANS had been publicly traded on the NASDAQ market under the ticker symbol ANSI. ANS designed, developed, manufactured and marketed implantable neuromodulation devices used primarily to manage chronic severe pain. ANS has become the Neuromodulation division of St. Jude Medical.

On January 13, 2005, we completed the acquisition of Endocardial Solutions, Inc. (ESI) for $279.4 million, net of cash acquired. ESI had been publicly traded on the NASDAQ market under the ticker symbol ECSI. ESI developed, manufactured and marketed the EnSite® System used for the navigation and localization of diagnostic and therapeutic catheters used by physician specialists to diagnose and treat cardiac rhythm disorders.

On April 6, 2005, we completed the acquisition of Velocimed for $70.9 million, net of cash acquired, plus additional contingent payments tied to revenues in excess of minimum future targets, and a milestone payment upon FDA approval of the Premere™ system prior to December 31, 2010. Velocimed developed and manufactured specialty interventional cardiology devices.

On December 30, 2005, we completed the acquisition of Savacor, Inc. (Savacor) for $49.7 million, net of cash acquired, plus additional contingent payments related to product development milestones for regulatory approvals and related to revenues in excess of minimum future targets. Savacor was a development-stage company with a small implantable sensor device in clinical trials both in the United States and internationally that measures left atrial pressure and body temperature to help physicians detect and manage symptoms associated with progressive heart failure. Increased pressure in the left atrium is a predictor of pulmonary congestion, which is the leading cause of hospitalization for congestive heart failure patients.

On January 12, 2005, we made an initial equity investment of $12.5 million in ProRhythm, Inc. (ProRhythm), a privately-held company that is focused on the development of a HIFU catheter-based ablation system for the treatment of atrial fibrillation. The initial investment resulted in approximately a 9% ownership interest. In connection with making the initial equity investment, we also entered into a purchase and option agreement with ProRhythm. Under the terms of the agreement, we had the option to make an additional $12.5 million equity investment. On February 1, 2006 we made an additional $12.5 million investment in ProRhythm, increasing our total ownership interest to 18%. We also have the exclusive right, but not the obligation, through the later of three months after the date ProRhythm delivers certain clinical trial data or March 31, 2007, to acquire the remaining capital stock of ProRhythm for $125.0 million in cash, with additional cash consideration payable to the non-St. Jude Medical shareholders after the consummation of the acquisition if ProRhythm achieves certain performance-related milestones.

On October 7, 2004, we completed the acquisition of the remaining capital stock of Irvine Biomedical Inc. (IBI). IBI developed and sold EP catheter products used by physician specialists to diagnose and treat cardiac rhythm disorders. We had previously made a minority investment in IBI in April 2003 through our acquisition of Getz Bros. Co., Ltd. (Getz Japan). We paid $50.6 million in 2004 to acquire the remaining IBI capital stock. In December 2005, we made a contingent purchase consideration payment of $4.8 million to original IBI shareholders as a result of FDA approval of the Cardiac Ablation Generator and Therapy™ EP catheters. This ablation system is composed of catheters connected to a generator which delivers RF or ultrasound energy through the catheter to create lesions through ablation of cardiac tissue.

On June 8, 2004, we completed the acquisition of the remaining capital stock of Epicor, Inc. (Epicor). Epicor focused on developing products which use HIFU to ablate cardiac tissue. We had previously made a minority investment in Epicor in May 2003. We paid $185.0 million in 2004 to acquire the remaining Epicor capital stock.

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Marketing and Distribution

Our products are sold in more than 100 countries throughout the world. No distributor organization or single customer accounted for more than 10% of 2006, 2005 or 2004 consolidated net sales.

In the United States, we sell directly to hospitals primarily through a direct sales force. In Europe, we have direct sales organizations selling in 23 countries. In Japan, we sell directly to hospitals through a direct sales force and we also continue to use longstanding independent distributor relationships. Throughout the rest of the world, we use a combination of independent distributors and direct sales forces.

Group purchasing organizations (GPO), independent delivery networks (IDN) and large single accounts such as the Veterans Administration in the United States continue to consolidate purchasing decisions for some of our hospital customers. We have contracts in place with many of these organizations. In some circumstances, our inability to obtain a contract with a GPO or IDN could adversely affect our efforts to sell products to that organization’s hospitals.

International Operations

Our net sales and long-lived assets by significant geographic areas are presented in Note 12 of the Consolidated Financial Statements in the Financial Report included in St. Jude Medical’s 2006 Annual Report to Shareholders and filed as Exhibit 13 to this Form 10-K.

Our international business is subject to special risks such as: foreign currency exchange controls and fluctuations; the imposition of or increase in import or export duties, surtaxes, tariffs or customs duties; the imposition of import or export quotas or other trade restrictions; foreign tax laws and increased costs associated with overlapping tax structures; longer accounts receivable cycles; and other international regulatory, economic and political problems. Such risks are further described in Item 1A, Risk Factors of this Form 10-K. Currency exchange rate fluctuations relative to the U.S. Dollar can affect reported consolidated revenues and net earnings. We may hedge a portion of this exposure from time to time to reduce the effect of foreign currency rate fluctuations on net earnings. See the Market Risk section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Financial Report included in St. Jude Medical’s 2006 Annual Report to Shareholders and filed as Exhibit 13 to this Form 10-K.

Seasonality

Our quarterly net sales are influenced by many factors, including new product introductions, acquisitions, regulatory approvals, patient and physician holiday schedules and other factors. Net sales in the third quarter are typically lower than other quarters of the year as a result of patient tendencies to defer, if possible, cardiac procedures during the summer months and from the seasonality of the U.S. and European markets, where summer vacation schedules normally result in fewer procedures.

Suppliers

We purchase raw materials and other products from numerous suppliers. Our manufacturing requirements comply with the rules and regulations of the FDA, which mandates validation of materials prior to use in our products. We purchase certain supplies used in our manufacturing processes from single sources due to quality considerations, costs or constraints resulting from regulatory requirements. Agreements with certain suppliers are terminable by either party upon short notice and we have been advised periodically by some suppliers that in an effort to reduce their potential product liability exposure, they may terminate sales of products to customers that manufacture implantable medical devices. While some of these suppliers have modified their positions and have indicated a willingness to continue to provide a product temporarily until an alternative vendor or product can be qualified (or even to reconsider the supply relationship), where a particular single-source supply relationship is terminated, we may not be able to establish additional or replacement suppliers for certain components or materials quickly. A reduction or interruption by a sole-source supplier of the supply of materials or key components used in the manufacturing of our products or an increase in the price of those materials or components could adversely affect our business, financial condition and results of operations.

Government Regulation

Our products, development activities and manufacturing processes are subject to extensive and rigorous regulation by the FDA pursuant to the Federal Food, Drug, and Cosmetic Act (FDCA), by comparable agencies in foreign countries and by other regulatory agencies and governing bodies. Under the FDCA and associated regulations, manufacturers of medical devices must comply with certain regulations that cover the composition, labeling, testing, clinical study, manufacturing, packaging and distribution of medical devices. Medical devices must receive FDA clearance or approval before they can be commercially marketed in the United States. The most comprehensive level of approval requires the completion of an FDA-approved clinical evaluation program and submission and approval of a premarket approval (PMA) application before a device may be commercially marketed. Our mechanical and tissue heart valves, ICDs, pacemakers and certain leads, certain neurostimulation devices and certain EP catheter applications are subject to this level of approval or as a supplement to a PMA. Other leads and lead delivery tools, annuloplasty ring products, other neurostimulation devices and other EP and cardiology products are currently marketed under the less rigorous 510(k) pre-market notification procedure of the FDCA.

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Furthermore, our international business is subject to medical device laws in individual countries outside the United States. Most major markets for medical devices outside the United States require clearance, approval or compliance with certain standards before a product can be commercially marketed. The applicable laws range from extensive device approval requirements in some countries for all or some of our products, to requests for data or certifications in other countries. Generally, international regulatory requirements are increasing. In the European Union, the regulatory systems have been consolidated, and approval to market in all European Union countries (represented by the CE Mark) can be obtained through one agency. The process of obtaining marketing clearance from the FDA and foreign regulatory agencies for new products or with respect to enhancements or modifications to existing products can take a significant period of time, require the expenditure of substantial resources, involve rigorous pre-clinical and clinical testing, require changes to the products and result in limitations on the indicated uses of the product.

The FDA conducts inspections prior to approval of a PMA application to determine compliance with the quality system regulations that cover manufacturing and design. In addition, the FDA may require testing and surveillance programs to monitor the effects of approved products that have been commercialized, and may prevent or limit further marketing of products based on the results of these post-marketing programs. At any time after approval of a product, the FDA may conduct periodic inspections to determine compliance with both the FDA’s Quality System Regulation (QSR) requirements and/or current medical device reporting regulations. Product approvals by the FDA can be withdrawn due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial approval. The failure to comply with regulatory standards or the discovery of previously unknown problems with a product or manufacturer could result in fines, delays or suspensions of regulatory clearances, seizures or recalls of products (with the attendant expenses), the banning of a particular device, an order to replace or refund the cost of any device previously manufactured or distributed, operating restrictions and criminal prosecution, as well as decreased sales as a result of negative publicity and product liability claims.

We are required to register with the FDA as a device manufacturer and as a result, we are subject to periodic inspection by the FDA for compliance with the FDA’s QSR requirements, which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation procedures. In addition, the federal Medical Device Reporting regulations require us to provide information to the FDA whenever there is evidence that reasonably suggests that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by the FDA. In the European Community, we are required to maintain certain International Organization for Standardization (ISO) certifications in order to sell products, and we undergo periodic inspections by notified bodies to obtain and maintain these certifications.

The FDA also regulates recordkeeping for medical devices and reviews hospital and manufacturers’ required reports of adverse experiences to identify potential problems with FDA-authorized devices. Regulatory actions may be taken by the FDA due to adverse experience reports.

Diagnostic-related group (DRG) and Ambulatory Patient Classification (APC) reimbursement schedules dictate the amount that the U.S. government, through the Centers for Medicare and Medicaid Services, will reimburse hospitals for care of persons covered by Medicare. In response to rising Medicare and Medicaid costs, several legislative proposals are under consideration that would restrict future funding increases for these programs. Changes in current DRG and APC reimbursement levels could have an adverse effect on market demand and our domestic pricing flexibility.

More generally, major third-party payors for hospital services in the United States and abroad continue to work to contain healthcare costs and the introduction of cost containment incentives, combined with closer scrutiny of healthcare expenditures by both private health insurers and employers, has resulted in increased discounts and contractual adjustments to hospital charges for services performed and in the shifting of services between inpatient and outpatient settings. Initiatives to limit the growth of healthcare costs, including price regulation, are also underway in several countries in which we do business. Implementation of healthcare reforms in the United States and in significant overseas markets such as Germany, Japan and other countries may limit the price of, or the level at which, reimbursement is provided for our products.

The United States Medicare-Medicaid Anti-kickback law generally prohibits payments to physicians or other purchasers of medical products under these government programs as an inducement to purchase a product. Many foreign countries have similar laws. We subscribe to the AdvaMed Code (AdvaMed is a U.S. medical device industry trade association) which limits certain marketing and other practices in our relationship with product purchasers. We also adhere to many similar codes in countries outside the United States.

Federal and state laws protect the confidentiality of certain patient health information, including patient records, and restrict the use and disclosure of such information. In particular, in October 2002, the U.S. Department of Health and Human Services issued patient privacy rules under the Health Insurance Portability and Accountability Act of 1996 (HIPAA privacy

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rule). The HIPAA privacy rule governs the use and disclosure of protected health information by “covered entities,” which are healthcare providers that submit electronic claims, health plans and healthcare clearinghouses. Other than to the extent we self-insure part of our employee health benefits plans, the HIPAA privacy rule only affects us indirectly. Our policy is to work with customers and business partners in their HIPAA compliance efforts.

Some medical device regulatory agencies have begun to consider whether to continue to permit the sale of medical devices that incorporate any bovine material because of concerns about Bovine Spongiform Encephalopathy (BSE), sometimes referred to as “mad cow disease,” a disease which has sometimes been transmitted to humans through the consumption of beef. We are not aware of any reported cases of transmission of BSE through medical products. Some of our products (Angio-Seal™ and vascular grafts) use bovine collagen. In addition, some of the tissue heart valves we market incorporate bovine pericardial material. We are cooperating with the regulatory agencies considering these issues.

Product Liability

The design, manufacture and marketing of medical devices of the types we produce entail an inherent risk of product liability claims. Our products are often used in intensive care settings with seriously ill patients, and many of the medical devices we manufacture and sell are designed to be implanted in the human body for long periods of time or indefinitely. There are a number of factors that could result in an unsafe condition or injury to, or death of, a patient with respect to these or other products which we manufacture or sell, including component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information. Product liability claims may be brought by individuals or by groups seeking to represent a class.

We are currently the subject of various product liability claims, including several lawsuits which may be allowed to proceed as class actions in the United States and Canada. The outcome of litigation, particularly class action lawsuits, is difficult to assess or quantify. Plaintiffs in these types of lawsuits often seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. In addition, product liability claims may be asserted against us in the future, relative to events that are not known to management at the present time.

Insurance

Problems with our products can result in product liability claims or a field action, safety alert or advisory notice relating to the product. Our product liability insurance coverage is designed to help protect us against a catastrophic claim. Our current product liability policies (for the period June 15, 2006 through June 15, 2007) provide $350 million of insurance coverage, with a $100 million deductible per occurrence.

Our facilities could be materially damaged by earthquakes, hurricanes and other natural disasters or catastrophic circumstances. California earthquake insurance is currently difficult to obtain, extremely costly, and restrictive with respect to scope of coverage. Our earthquake insurance for our significant CRM facilities located in Sylmar and Sunnyvale, California, provides $10 million of insurance coverage in the aggregate, with a deductible equal to 5% of the total value of the facility and contents involved in the claim. Consequently, despite this insurance coverage, we could incur uninsured losses and liabilities arising from an earthquake near one or both of our California facilities as a result of various factors, including the severity and location of the earthquake, the extent of any damage to our facilities, the impact of an earthquake on our California workforce and on the infrastructure of the surrounding communities and the extent of damage to our inventory and work in process. While we believe that our exposure to significant losses from a California earthquake could be partially mitigated by our ability to manufacture some of our CRM products at our manufacturing facility in Sweden, the losses could have a material adverse effect on our business for an indeterminate period of time before this manufacturing transition is complete and operates without significant problem. Furthermore, our manufacturing facility in Puerto Rico may suffer damage as a result of hurricanes which are frequent in the Caribbean and which could result in lost production and additional expenses to us to the extent any such damage is not fully covered by our hurricane and business interruption insurance.

Employees

As of December 30, 2006, we had approximately 11,000 employees worldwide. Our employees are not represented by any labor organizations, with the exception of our employees in Sweden and certain employees in France. We have never experienced a work stoppage as a result of labor disputes. We believe that our relationship with our employees is generally good.

Executive Officers of the Registrant

The following is a list of our executive officers as of February 16, 2007. For each position, the dates in parentheses indicate the year during which each executive officer began serving in such capacity.

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Name	Age	Position
Daniel J. Starks	52	Chairman (2004), President (2001) and Chief Executive Officer (2004)
John C. Heinmiller	52	Executive Vice President (2004) and Chief Financial Officer (1998)
Christopher G. Chavez	51	President, Neuromodulation (2005)
Michael J. Coyle	44	President, Cardiac Rhythm Management (2001)
George J. Fazio	47	President, Cardiovascular (2007)
Joseph H. McCullough	57	President, International (2001)
Michael T. Rousseau	51	President, U.S. (2001)
Jane J. Song	44	President, Atrial Fibrillation (2004)
I. Paul Bae	42	Vice President, Human Resources (2006)
Angela D. Craig	35	Vice President, Corporate Relations (2006)
Pamela S. Krop	48	Vice President (2006), General Counsel (2006) and Secretary (2006)
William J. McGarry	49	Vice President, Information Technology (2005) and Chief Information Officer (2005)
Thomas R. Northenscold	49	Vice President, Administration (2003)
Donald J. Zurbay	39	Vice President (2006) and Corporate Controller (2004)

Mr. Starks has served on St. Jude Medical’s Board of Directors since 1996 and has been Chairman, President and Chief Executive Officer of St. Jude Medical since May 12, 2004. Previously, Mr. Starks was President and Chief Operating Officer of St. Jude Medical since February 1, 2001. From April 1998 to February 2001, he was President and Chief Executive Officer of our Cardiac Rhythm Management Division, and prior to that, Mr. Starks was Chief Executive Officer and President of Daig Corporation, a wholly-owned subsidiary of St. Jude Medical. Mr. Starks serves on the Board of Directors of Urologix, Inc., a urology medical device company.

Mr. Heinmiller joined St. Jude Medical in May 1996 as a part of our acquisition of Daig Corporation, where Mr. Heinmiller had served as Vice President of Finance and Administration since 1995. In May 1998, he was named Vice President of Corporate Business Development. In September 1998, he was appointed Vice President, Finance and Chief Financial Officer and in May 2004 was promoted to Executive Vice President.

Mr. Chavez joined St. Jude Medical as President, Neuromodulation Division, as part of our acquisition of ANS in November 2005. From April 1998 to 2005, he served as President, Chief Executive Officer and Director of ANS. Mr. Chavez serves on the Board of Directors of Advanced Medical Optics, Inc., an optical medical device company.

Mr. Coyle joined St. Jude Medical in 1994 as Director, Business Development. He served as President and Chief Operating Officer of Daig Corporation, a wholly-owned subsidiary of St. Jude Medical, from 1997 to 2001 and was appointed President, Cardiac Rhythm Management, in February 2001. Mr. Coyle serves on the Board of Directors of VNUS Medical Systems, Inc., a company that develops and markets medical devices to treat peripheral vein disorders.

Mr. Fazio joined St. Jude Medical in 1992 and served as the General Manager of St. Jude Medical Canada, Inc., based in Mississauga, Ontario, Canada, until being named President, Health Care Services in May 1999. In July 2001, he was appointed President of St. Jude Medical Europe and in August 2004 was named President, Cardiac Surgery Division. In January 2007, he became President of the newly formed Cardiovascular Division resulting from the combination of our Cardiology and Cardiac Surgery Divisions.

Mr. McCullough joined St. Jude Medical in 1994 as a Cardiac Rhythm Management Regional Sales Director. He became Director of Cardiac Rhythm Management Marketing in 1996 and was named Vice President of Cardiac Rhythm Management Marketing in January 1997. In December 1997, Mr. McCullough was appointed European Cardiac Rhythm Management Business Unit Director. He became Vice President, Cardiac Rhythm Management Europe and Managing Director of manufacturing operations in Veddesta, Sweden, in January 1999, and Senior Vice President, Cardiac Rhythm Management Europe in August 1999. He has served as President, International Division since July 2001.

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Mr. Rousseau joined St. Jude Medical in 1999 as Senior Vice President, Cardiac Rhythm Management Global Marketing. In August 1999, Cardiac Rhythm Management Marketing and Sales were combined under his leadership. In January 2001, he was named President, U.S. Cardiac Rhythm Management Sales, and in July 2001, he was named President, U.S. Division.

Ms. Song joined St. Jude Medical in 1998 as Senior Vice President, Cardiac Rhythm Management Operations. In May 2002, she was appointed President, Cardiac Surgery Division, and in August 2004, was appointed President, Atrial Fibrillation Division.

Mr. Bae joined St. Jude Medical in 2003 and most recently served as General Counsel and Vice President, Human Resources for the U.S. Division. In September 2006, he was appointed Vice President, Human Resources. Prior to joining St. Jude Medical, Mr. Bae was Director of Litigation for Alpha Therapeutic Corporation, a biopharmaceutical company.

Ms. Craig joined St. Jude Medical in May 2005 as Vice President of Communications and served in that position until being named Vice President, Corporate Relations, in January 2006. Prior to joining St. Jude Medical, Ms. Craig spent 12 years with Smith & Nephew plc, a medical device company headquartered in London, England, where she served as Director of Corporate Affairs from 2002 to 2003 prior to serving as Vice President of U.S. Public Relations and Investor Relations from 2003 to 2005.

Ms. Krop joined St. Jude Medical in July 2006 as Vice President, General Counsel and Corporate Secretary. She previously spent 15 years at General Electric (GE) Company, a diversified industrial corporation, most recently as General Counsel of GE Healthcare Bio-Sciences, a $3 billion business acquired by GE, formerly known as Amersham plc.

Mr. McGarry joined St. Jude Medical as Vice President, Information Technology and Chief Information Officer in September 2005. From 2001 to 2005, Mr. McGarry served as Vice President, Enterprise Applications, at Medtronic, Inc., a medical device company, where he was responsible for managing global enterprise applications development and deployment.

Mr. Northenscold joined St. Jude Medical in 2001 as Vice President, Finance and Administration of Daig Corporation, a wholly-owned subsidiary of St. Jude Medical. In March 2003, he was appointed Vice President, Administration.

Mr. Zurbay joined St. Jude Medical in 2003 as Director of Corporate Finance. In 2004, Mr. Zurbay was named Corporate Controller, and in January 2006 he was named Vice President and Corporate Controller. From 1999 to 2003, he served as Senior Audit Manager at PricewaterhouseCoopers LLP, a national public accounting firm.

Availability of SEC Reports

We make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act) as soon as reasonably practical after they are filed or furnished to the U.S. Securities and Exchange Commission (SEC). Such reports are available on our website (http://www.sjm.com) under Company Information section Investor Relations or can be obtained by contacting our Investor Relations group at 1.800.552.7664 or at St. Jude Medical, Inc., One Lillehei Plaza, St. Paul, Minnesota 55117. Information included on our website is not deemed to be incorporated into this Form 10-K.

Item 1A. RISK FACTORS

Our business faces many risks. Any of the risks discussed below, or elsewhere in this Form 10-K or our other SEC filings, could have a material impact on our business, financial condition or results of operations. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations.

We face intense competition and may not be able to keep pace with the rapid technological changes in the medical devices industry.

The medical device market is intensely competitive and is characterized by extensive research and development and rapid technological change. Our customers consider many factors when choosing suppliers, including product reliability, clinical outcomes, product availability, inventory consignment, price and product services provided by the manufacturer, and market share can shift as a result of technological innovation and other business factors. Major shifts in industry market share have occurred in connection with product problems, physician advisories and safety alerts, reflecting the importance of product quality in the medical device industry. Our competitors range from small start-up companies to larger companies which have significantly greater resources and broader product offerings than us, and we anticipate that in the coming years, other large companies will enter certain markets in which we currently hold a strong position. For example, Boston Scientific Corporation acquired one of our principal competitors, Guidant Corporation, in 2006. In addition, we expect that competition will continue to intensify with the increased use of strategies such as consigned inventory and we have seen increasing price competition as a result of

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managed care, consolidation among healthcare providers, increased competition and declining reimbursement rates. Product introductions or enhancements by competitors which have advanced technology, better features or lower pricing may make our products or proposed products obsolete or less competitive. As a result, we will be required to devote continued efforts and financial resources to bring our products under development to market, enhance our existing products and develop new products for the medical marketplace. If we fail to develop new products, enhance existing products or compete effectively, our business, financial condition and results of operations will be adversely affected.

We are subject to stringent domestic and foreign medical device regulation which may impede the approval process for our products, hinder our development activities and manufacturing processes and, in some cases, result in the recall or seizure of previously approved products.

Our products, development activities and manufacturing processes are subject to extensive and rigorous regulation by the FDA pursuant to the FDCA, by comparable agencies in foreign countries and by other regulatory agencies and governing bodies. Under the FDCA and associated regulations, manufacturers of medical devices must comply with certain regulations that cover the composition, labeling, testing, clinical study, manufacturing, packaging and distribution of medical devices. In addition, medical devices must receive FDA clearance or approval before they can be commercially marketed in the United States, and the FDA may require testing and surveillance programs to monitor the effects of approved products that have been commercialized and can prevent or limit further marketing of a product based on the results of these post-marketing programs. Furthermore, most major markets for medical devices outside the United States require clearance, approval or compliance with certain standards before a product can be commercially marketed. The process of obtaining marketing approval or clearance from the FDA and foreign regulatory agencies for new products or with respect to enhancements or modifications to existing products could take a significant period of time, require the expenditure of substantial resources, involve rigorous pre-clinical and clinical testing, require changes to the products and result in limitations on the indicated uses of the product. We cannot be certain that we will receive the required approval or clearance from the FDA and foreign regulatory agencies for new products or modifications to existing products on a timely basis. The failure to receive approval or clearance for significant new products on a timely basis could have a material adverse effect on our financial condition and results of operations.

At any time after approval of a product, the FDA may conduct periodic inspections to determine compliance with both the FDA’s QSR requirements and/or current medical device reporting regulations. Product approvals by the FDA can be withdrawn due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial approval. The failure to comply with regulatory standards or the discovery of previously unknown problems with a product, component or manufacturer could result in fines, delays or suspensions of regulatory clearances, seizures or recalls of products (with the attendant expenses), the banning of a particular device, an order to replace or refund the cost of any device previously manufactured or distributed, operating restrictions and criminal prosecution, as well as decreased sales as a result of negative publicity and product liability claims, and could have a material adverse effect on our financial condition and results of operations.

We may not be able to meet regulatory quality standards applicable to our manufacturing process.

We are required to register with the FDA as a device manufacturer and as a result, we are subject to periodic inspection by the FDA for compliance with the FDA’s QSR requirements, which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation procedures. In addition, the federal Medical Device Reporting regulations require us to provide information to the FDA whenever there is evidence that reasonably suggests that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by the FDA. In the European Community, we are required to maintain certain ISO certifications in order to sell products and we undergo periodic inspections by notified bodies to obtain and maintain these certifications. If we or our manufacturers fail to adhere to QSR or ISO requirements, this could delay production of our products and lead to fines, difficulties in obtaining regulatory clearances, recalls or other consequences, which could in turn have a material adverse effect on our financial condition and results of operations.

If we are unable to protect our intellectual property effectively, our financial condition and results of operations could be adversely affected.

Patents and other proprietary rights are essential to our business and our ability to compete effectively with other companies is dependent upon the proprietary nature of our technologies. We also rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop, maintain and strengthen our competitive position. We seek to protect these, in part, through confidentiality agreements with certain employees, consultants and other parties. We pursue

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a policy of generally obtaining patent protection in both the United States and in key foreign countries for patentable subject matter in our proprietary devices and also attempt to review third-party patents and patent applications to the extent publicly available to develop an effective patent strategy, avoid infringement of third-party patents, identify licensing opportunities and monitor the patent claims of others. We currently own numerous United States and foreign patents and have numerous patent applications pending. We are also a party to various license agreements pursuant to which patent rights have been obtained or granted in consideration for cash, cross-licensing rights or royalty payments. We cannot be certain that any pending or future patent applications will result in issued patents, that any current or future patents issued to or licensed by us will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide a competitive advantage to us or prevent competitors from entering markets which we currently serve. Any required license may not be available to us on acceptable terms, if at all. In addition, some licenses may be non-exclusive, and therefore our competitors may have access to the same technologies as us. In addition, we may have to take legal action in the future to protect our trade secrets or know-how or to defend them against claimed infringement of the rights of others. Any legal action of that type could be costly and time consuming to us and we cannot be certain that any lawsuit will be successful. The invalidation of key patents or proprietary rights which we own or an unsuccessful outcome in lawsuits to protect our intellectual property could have a material adverse effect on our financial condition and results of operations.

Pending and future patent litigation could be costly and disruptive to us and may have an adverse effect on our financial condition and results of operations.

We operate in an industry that is susceptible to significant patent litigation and, in recent years, it has been common for companies in the medical device field to aggressively challenge the rights of other companies to prevent the marketing of new devices. Companies that obtain patents for products or processes that are necessary for or useful to the development of our products may bring legal actions against us claiming infringement and at any given time, we generally are involved as both a plaintiff and a defendant in a number of patent infringement and other intellectual property-related actions. Among other matters, we are currently defending two significant ongoing patent infringement actions brought against us by one of our principal competitors, Guidant Corporation, which is now part of Boston Scientific Corporation. Defending intellectual property litigation is expensive and complex and outcomes are difficult to predict. Any pending or future patent litigation may result in significant royalty or other payments or injunctions that can prevent the sale of products and may cause a significant diversion of the efforts of our technical and management personnel. While we intend to defend any such lawsuits vigorously, we cannot be certain that we will be successful. In the event that our right to market any of our products is successfully challenged or if we fail to obtain a required license or are unable to design around a patent, our financial condition and results of operations could be materially adversely affected.

Pending and future product liability claims and litigation may adversely affect our financial condition and results of operations.

The design, manufacture and marketing of medical devices of the types we produce entail an inherent risk of product liability claims. Our products are often used in intensive care settings with seriously ill patients, and many of the medical devices we manufacture and sell are designed to be implanted in the human body for long periods of time or indefinitely. There are a number of factors that could result in an unsafe condition or injury to, or death of, a patient with respect to these or other products which we manufacture or sell, including component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information. Product liability claims may be brought by individuals or by groups seeking to represent a class.

We are currently the subject of various product liability claims, including several lawsuits which may be allowed to proceed as class actions in the United States and Canada. The outcome of litigation, particularly class action lawsuits, is difficult to assess or quantify. Plaintiffs in these types of lawsuits often seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. For example, in January 2000, we initiated a voluntary field action to replace products incorporating Silzone® coating, which was used in certain of our mechanical heart valves and heart valve repair products. After our voluntary field action, we were sued in various jurisdictions and now have cases pending in the United States, Canada, the United Kingdom and France which have been brought by some patients alleging complications and past or future costs arising either from the surgical removal or, alternatively, from the continued implantation and maintenance of products incorporating Silzone® coating over and above the medical monitoring all replacement heart valve patients receive. Some of the cases involving Silzone®-coated products have been settled, others have been dismissed and still others are ongoing. The complaints in the ongoing individual cases in the United States request damages ranging from $10,000 to $120.5 million and in some cases, seek an unspecified amount, and the complaints in the Canadian class actions request damages ranging from the equivalent of $1.3 million to $1.8 billion at December 30, 2006. We believe that the final resolution of the Silzone®-coated product cases will take several years and we cannot reasonably estimate the time frame in which any potential settlements or judgments would be paid out or the amounts of any such settlements or judgments. In addition, the cost to defend any future litigation, whether Silzone®-related or not, may be significant. While we believe that many settlements and judgments relating to the Silzone® litigation and our other litigation may be covered in whole or in part under our product liability insurance policies and existing reserves, any costs not so covered could have a material adverse effect on our financial condition and results of operations.

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We may be unable to obtain appropriate levels of product liability insurance.

Problems with our products can result in product liability claims or a field action, safety alert or advisory notice relating to the product. Our product liability insurance coverage is designed to help protect us against a catastrophic claim. Our current product liability policies provide $350 million of insurance coverage, with a $100 million deductible per occurrence. We cannot be certain that such insurance will be available or adequate to satisfy future claims or that our insurers will be able to pay claims on insurance policies which they have issued to us. If we are unable to secure appropriate levels of product liability insurance coverage, our financial condition and results of operations could be materially adversely affected.

Our product liability insurers may not be able to meet their current or future payment obligations to us.

Our remaining product liability insurance for Silzone® claims consists of a number of layers, each of which is covered by one or more insurance companies. Part of our final layer of insurance is covered by a unit of the Kemper Insurance Companies (Kemper), which is currently in “run off” and not issuing new policies or generating any new revenue that could be used to cover claims made under previously-issued policies such as ours. In the event that Kemper is unable to pay part or all of the claims directed to it, we believe that the other insurance carriers in above Kemper’s layer will take the position that we will be directly liable for any claims and costs that Kemper is unable to pay and that insurance carriers at policy layers following Kemper’s will not provide coverage for Kemper’s layer. If Kemper or any other insurance companies are unable to meet their respective obligations to us, we could incur substantial losses which could have an adverse effect on our financial condition and results of operations.

Our operations are subject to environmental, health and safety laws and regulations that could require us to incur material costs.

Our operations are subject to environmental, health and safety laws and regulations concerning, among other things, the generation, handling, transportation and disposal of hazardous substances or wastes, particularly ethylene oxide, the cleanup of hazardous substance releases, and emissions or discharges into the air or water. We have incurred and expect to incur expenditures in the future in connection with compliance with environmental, health and safety laws and regulations. New laws and regulations, violations of these laws or regulations, stricter enforcement of existing requirements, or the discovery of previously unknown contamination, could require us to incur costs or become the basis for new or increased liabilities that could be material.

The loss of any of our sole-source suppliers or an increase in the price of inventory supplied to us could have an adverse effect on our business, financial condition and results of operations.

We purchase certain supplies used in our manufacturing processes from single sources due to quality considerations, costs or constraints resulting from regulatory requirements. Agreements with certain suppliers are terminable by either party upon short notice and we have been advised periodically by some suppliers that in an effort to reduce their potential product liability exposure, they may terminate sales of products to customers that manufacture implantable medical devices. While some of these suppliers have modified their positions and have indicated a willingness to continue to provide a product temporarily until an alternative vendor or product can be qualified (or even to reconsider the supply relationship), where a particular single-source supply relationship is terminated, we may not be able to establish additional or replacement suppliers for certain components or materials quickly. This is largely due to the FDA approval system, which mandates validation of materials prior to use in our products, and the complex nature of manufacturing processes employed by many suppliers. In addition, we may lose a sole-source supplier due to, among other things, the acquisition of such a supplier by a competitor (which may cause the supplier to stop selling its products to us) or the bankruptcy of such a supplier, which may cause the supplier to cease operations. A reduction or interruption by a sole-source supplier of the supply of materials or key components used in the manufacturing of our products or an increase in the price of those materials or components could adversely affect our business, financial condition and results of operations.

Cost containment pressures and domestic and foreign legislative or administrative reforms resulting in restrictive reimbursement practices of third-party payors or preferences for alternate therapies could decrease the demand for products purchased by our customers, the prices which they are willing to pay for those products and the number of procedures using our devices.

Our products are purchased principally by hospitals or physicians which typically bill various third-party payors, such as governmental programs (e.g., Medicare and Medicaid), private insurance plans and managed care plans, for the healthcare services provided to their patients. The ability of customers to obtain appropriate reimbursement for their products and services from government and third-party payors is critical to the success of medical technology companies. The availability of reimbursement affects which products customers purchase and the prices they are willing to pay. Reimbursement varies

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from country to country and can significantly impact the acceptance of new technology. After we develop a promising new product, we may find limited demand for the product unless reimbursement approval is obtained from private and governmental third-party payors.

Major third-party payors for hospital services in the United States and abroad continue to work to contain healthcare costs. The introduction of cost containment incentives, combined with closer scrutiny of healthcare expenditures by both private health insurers and employers, has resulted in increased discounts and contractual adjustments to hospital charges for services performed and in the shifting of services between inpatient and outpatient settings. Initiatives to limit the growth of healthcare costs, including price regulation, are also underway in several countries in which we do business. Implementation of healthcare reforms in the United States and in significant overseas markets such as Germany, Japan and other countries may limit the price of, or the level at which, reimbursement is provided for our products and adversely affect both our pricing flexibility and the demand for our products. Hospitals or physicians may respond to such cost-containment pressures by substituting lower cost products or other therapies for our products.

Further legislative or administrative reforms to the U.S. or international reimbursement systems that significantly reduce reimbursement for procedures using our medical devices or deny coverage for such procedures, or adverse decisions relating to our products by administrators of such systems in coverage or reimbursement issues, would have an adverse impact on the products, including clinical products, purchased by our customers and the prices our customers are willing to pay for them. This in turn would have an adverse effect on our financial condition and results of operations.

Our failure to comply with restrictions relating to reimbursement and regulation of healthcare goods and services may subject us to penalties and adversely affect our financial condition and results of operations.

Our devices are subject to regulation regarding quality and cost by the United States Department of Health and Human Services, including the Centers for Medicare and Medicaid Services (CMS), as well as comparable state and foreign agencies responsible for reimbursement and regulation of healthcare goods and services. Foreign governments also impose regulations in connection with their healthcare reimbursement programs and the delivery of healthcare goods and services. U.S. federal government healthcare laws apply when we submit a claim on behalf of a U.S. federal healthcare program beneficiary, or when a customer submits a claim for an item or service that is reimbursed under a U.S. federal government funded healthcare program, such as Medicare or Medicaid. The principal U.S. federal laws implicated include those that prohibit the filing of false or improper claims for federal payment, those that prohibit unlawful inducements for the referral of business reimbursable under federally-funded healthcare programs, known as the anti-kickback laws, and those that prohibit healthcare service providers seeking reimbursement for providing certain services to a patient who was referred by a physician that has certain types of direct or indirect financial relationships with the service provider, known as the Stark law.

The laws applicable to us are subject to evolving interpretations. If a governmental authority were to conclude that we are not in compliance with applicable laws and regulations, we and our officers and employees could be subject to severe criminal and civil penalties, including, for example, exclusion from participation as a supplier of product to beneficiaries covered by CMS. If we are excluded from participation based on such an interpretation, it could adversely affect our financial condition and results of operations.

Consolidation in the healthcare industry could lead to demands for price concessions or to the exclusion of some suppliers from certain of our significant market segments.

The cost of healthcare has risen significantly over the past decade and numerous initiatives and reforms initiated by legislators, regulators and third-party payors to curb these costs have resulted in a consolidation trend in the medical device industry as well as among our customers, including hospitals. This in turn has resulted in greater pricing pressures and the exclusion of certain suppliers from important market segments, as group purchasing organizations, independent delivery networks and large single accounts, such as the Veterans Administration in the United States, continue to consolidate purchasing decisions for some of our hospital customers. We expect that market demand, government regulation, third-party reimbursement policies and societal pressures will continue to change the worldwide healthcare industry, resulting in further business consolidations and alliances which may exert further downward pressure on the prices of our products and adversely impact our business, financial condition and results of operations.

Failure to integrate acquired businesses into our operations successfully could adversely affect our business.

As part of our strategy to develop and identify new products and technologies, we have made several acquisitions in recent years, including our acquisition of ANS in November 2005, and we may make additional acquisitions in the future. Our integration of the operations of acquired businesses requires significant efforts, including the coordination of information technologies, research and development, sales and marketing, operations, manufacturing and finance. These efforts result in additional expenses and involve significant amounts of management’s time that cannot then be dedicated to other projects.

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Our failure to manage successfully and coordinate the growth of the combined company could also have an adverse impact on our business. In addition, we cannot be certain that some of the businesses we acquire will become profitable or remain so. If our acquisitions are not successful, we may record unexpected impairment charges. Factors that will affect the success of our acquisitions include:

• the presence or absence of adequate internal controls and/or significant fraud in the financial systems of acquired companies;

• adverse developments arising out of investigations by governmental entities of the business practices of acquired companies, such as the current investigation into certain sales and marketing, reimbursement, Medicare and Medicaid billing and certain other business practices of ANS by the U.S. Department of Health and Human Services, Office of the Inspector General;

• any decrease in customer loyalty and product orders caused by dissatisfaction with the combined companies’ product lines and sales and marketing practices, including price increases;

• our ability to retain key employees; and

• the ability of the combined company to achieve synergies among its constituent companies, such as increasing sales of the combined company’s products, achieving cost savings and effectively combining technologies to develop new products.

The success of many of our products depends upon strong relationships with physicians.

If we fail to maintain our working relationships with physicians, many of our products may not be developed and marketed in line with the needs and expectations of the professionals who use and support our products, which could cause a decline in earnings and profitability. The research, development, marketing and sales of many of our new and improved products is dependent upon our maintaining working relationships with physicians. We rely on these professionals to provide us with considerable knowledge and experience regarding our products and the marketing of our products. Physicians assist us as researchers, marketing consultants, product consultants, inventors and as public speakers. If we are unable to maintain our strong relationships with these professionals and continue to receive their advice and input, the development and marketing of our products could suffer, which could have a material adverse effect on our financial condition and results of operations.

Instability in international markets or foreign currency fluctuations could adversely affect our results of operations.

Our products are currently marketed in more than 100 countries around the world, with our largest geographic markets outside of the United States being Europe and Japan. As a result, we face currency and other risks associated with our international sales. We are exposed to foreign currency exchange rate fluctuations due to transactions denominated primarily in euros, Japanese Yen, Canadian Dollars, Brazilian Reals, British Pounds and Swedish Kronor, which may potentially reduce the U.S. Dollars we receive for sales denominated in any of these foreign currencies and/or increase the U.S. Dollars we report as expenses in these currencies, thereby affecting our reported consolidated revenues and net earnings. We do not currently hedge our foreign currency exposure. Consequently, fluctuations between the currencies in which we do business have caused and will continue to cause foreign currency transaction gains and losses. We cannot predict the effects of currency exchange rate fluctuations upon our future operating results because of the number of currencies involved, the variability of currency exposures and the volatility of currency exchange rates.

In addition to foreign currency exchange rate fluctuations, there are a number of additional risks associated with our international operations, including those related to:

• the imposition of or increase in import or export duties, surtaxes, tariffs or customs duties;

• the imposition of import or export quotas or other trade restrictions;

• foreign tax laws and potential increased costs associated with overlapping tax structures;

• longer accounts receivable cycles in certain foreign countries, whether due to cultural, exchange rate or other factors;

• changes in regulatory requirements in international markets in which we operate;

• inquiries into possible improprieties in our international operations, such as our inclusion in the report of the Independent Inquiry Committee into the United Nations (U.N.) Oil-For-Food Programme as allegedly having made payments to the Iraqi government in connection with certain product sales which we made to Iraq under this program from 2000 to 2003; and

• economic and political instability in foreign countries.

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The medical device industry is the subject of a governmental investigation into marketing and other business practices which could result in the commencement of civil and/or criminal proceedings, substantial fines, penalties and/or administrative remedies, divert the attention of our management and have an adverse effect on our financial condition and results of operations.

In January 2005, ANS received a subpoena from the U.S. Department of Health and Human Services, Office of the Inspector General (OIG), requesting documents related to certain of its sales and marketing, reimbursement, Medicare and Medicaid billing, and other business practices of ANS.

In October 2005, the U.S. Department of Justice, acting through the U.S. Attorney’s office in Boston, commenced an industry-wide investigation into whether the provision of payments and/or services by makers of implantable cardiac rhythm devices to doctors or other persons constitutes improper inducements under the federal health care program anti-kickback law. As part of this investigation, we received a civil subpoena from the U.S. Attorney’s office in Boston requesting documents on our practices related to pacemakers, ICDs, lead systems and related products marketed by our CRM segment during the period from January 2000 to date. We understand that our principal competitors in the CRM therapy areas received similar civil subpoenas. We received an additional subpoena from the U.S. Attorney’s office in Boston in September 2006, requesting documents related to certain employee expense reports and certain pacemaker and ICD purchasing arrangements for the period from January 2002 to date.

In February 2006, we received a subpoena from the SEC requesting that we produce documents concerning transactions under the U.N. Oil-for-Food Programme.

On January 16, 2007, the French Conseil de la Concurrence (one of the bodies responsible for the enforcement of antitrust/competition law in France) issued a Statement of Objections alleging that St. Jude Medicial had agreed with the four other main suppliers of ICDs in France to collectively refrain from responding to a 2001 tender for ICDs conducted by a group of 17 University Hospital Centers in France. This alleged collusion is said to be contrary to the French Commercial Code and Article 81 of the European Community Treaty.

We are fully cooperating with these investigations and are responding to these requests. However, we cannot predict when these investigations will be resolved, the outcome of these investigations or their impact on the Company. An adverse outcome in one or more of these investigations could include the commencement of civil and/or criminal proceedings, substantial fines, penalties and/or administrative remedies, including exclusion from government reimbursement programs. In addition, resolution of any of these matters could involve the imposition of additional compliance obligations. Finally, if these investigations continue over a long period of time, they could divert the attention of management from the day-to-day operations of our business and impose significant administrative burdens on us. These potential consequences, as well as any adverse outcome from these investigations, could have an adverse effect on our financial condition and results of operations.

Regulatory actions arising from the concern over Bovine Spongiform Encephalopathy may limit our ability to market products containing bovine material.

Our Angio-Seal™ vascular closure device, as well as our vascular graft products, contain bovine collagen. In addition, some of the tissue heart valves which we market incorporate bovine pericardial material. Certain medical device regulatory agencies have begun to consider whether to continue to permit the sale of medical devices that incorporate any bovine material because of concerns over BSE, sometimes referred to as “mad cow disease,” a disease which has sometimes been transmitted to humans through the consumption of beef. While we are not aware of any reported cases of transmission of BSE through medical products and while we are cooperating with regulatory agencies considering these issues, the suspension or revocation of authority to manufacture, market or distribute products containing bovine material, or the imposition of a regulatory requirement that we procure material for these products from alternate sources, could result in lost market opportunities, harm the continued commercialization and distribution of such products and impose additional costs on us. Any of these consequences could in turn have a material adverse effect on our financial condition and results of operations.

We are not insured against all potential losses and could be seriously harmed by natural disasters or other catastrophes.

Our facilities could be materially damaged by earthquakes, hurricanes and other natural disasters or catastrophic circumstances. For example, we have significant CRM facilities located in Sylmar and Sunnyvale, California. Earthquake insurance in California is currently difficult to obtain, extremely costly and restrictive with respect to scope of coverage. Our earthquake insurance for these California facilities provides $10 million of insurance coverage in the aggregate, with a deductible equal to 5% of the total value of the facility and contents involved in the claim. Consequently, despite this insurance coverage, we could incur uninsured losses and liabilities arising from an earthquake near one or both of our

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California facilities as a result of various factors, including the severity and location of the earthquake, the extent of any damage to our facilities, the impact of an earthquake on our California workforce and on the infrastructure of the surrounding communities and the extent of damage to our inventory and work in process. While we believe that our exposure to significant losses from a California earthquake could be partially mitigated by our ability to manufacture some of our CRM products at our manufacturing facility in Sweden, the losses could have a material adverse effect on our business for an indeterminate period of time before this manufacturing transition is complete and operates without significant problem. Furthermore, our manufacturing facility in Puerto Rico may suffer damage as a result of hurricanes which are frequent in the Caribbean and which could result in lost production and additional expenses to us to the extent any such damage is not fully covered by our hurricane and business interruption insurance.

Even with insurance coverage, natural disasters or other catastrophic events could cause us to suffer substantial losses in our operational capacity and could also lead to a loss of opportunity and to a potential adverse impact on our relationships with our existing customers resulting from our inability to produce products for them, for which we would not be compensated by existing insurance. This in turn could have a material adverse effect on our financial condition and results of operations.

Failure to successfully implement a new enterprise resource planning (ERP) system could adversely affect our business.

We are in the process of converting to a new ERP system. Implementation of the new ERP system is scheduled to occur in phases through 2009. Failure to smoothly execute the implementation of the ERP system could adversely affect the Company’s business, financial condition and results of operations.

Item 1B. UNRESOLVED STAFF COMMENTS

None.

Item 2. PROPERTIES

We own our principal executive offices, which are located in St. Paul, Minnesota. Our manufacturing facilities are located in California, Minnesota, Arizona, South Carolina, Texas, New Jersey, Oregon, Canada, Brazil, Puerto Rico and Sweden. We own approximately 60%, or 440,000 square feet, of our total manufacturing space. All of our owned manufacturing space is in the CRM/CS/Neuro reportable segment. We also maintain sales and administrative offices in the United States at 31 locations in 16 states and outside the United States at 80 locations in 32 countries. With the exception of five locations, all of these locations are leased.

We believe that all buildings, machinery and equipment are in good condition, suitable for their purposes and are maintained on a basis consistent with sound operations. We believe that we have sufficient space for our current operations and for foreseeable expansion in the next few years.

Item 3. LEGAL PROCEEDINGS

We are the subject of various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of our business. Such matters are subject to many uncertainties and to outcomes that are not predictable with assurance and that may not be known for extended periods of time. We record a liability in our consolidated financial statements for costs related to claims, including future legal costs, settlements and judgments, where we have assessed that a loss is probable and an amount can be reasonably estimated. Our significant legal proceedings are discussed in Note 5 of the Consolidated Financial Statements in the Financial Report included in St. Jude Medical’s 2006 Annual Report to Shareholders and filed as Exhibit 13 to this Form 10-K and incorporated herein by reference. While it is not possible to predict the outcome for most the legal proceedings discussed in Note 5, the costs associated with such proceedings could have a material adverse effect on our consolidated results of operations, financial position or cash flows of a future period.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the fourth quarter of the 2006 fiscal year.

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PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

There were no sales of unregistered securities during the 2006 fiscal year, and we did not repurchase any of our shares during the fourth quarter of the 2006 fiscal year. The information set forth under the Stock Exchange Listings caption in the Financial Report included in St. Jude Medical’s 2006 Annual Report to Shareholders and filed as Exhibit 13 to this Form 10-K is incorporated herein by reference.We have not declared or paid any cash dividends during the past two years. We currently intend to retain our earnings for use in the operation and expansion of our business and therefore do not anticipate paying any cash dividends in the foreseeable future.

Item 6. SELECTED FINANCIAL DATA

The information set forth under the caption Five-Year Summary Financial Data in the Financial Report included in St. Jude Medical’s 2006 Annual Report to Shareholders and filed as Exhibit 13 to this Form 10-K is incorporated herein by reference.

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information set forth under Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Financial Report included in St. Jude Medical’s 2006 Annual Report to Shareholders and filed as Exhibit 13 to this Form 10-K is incorporated herein by reference.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information set forth under the Market Risk section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Financial Report included in St. Jude Medical’s 2006 Annual Report to Shareholders and filed as Exhibit 13 to this Form 10-K is incorporated herein by reference.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements and Notes thereto and the Reports of Independent Registered Public Accounting Firm set forth in the Financial Report included in St. Jude Medical’s 2006 Annual Report to Shareholders and filed as Exhibit 13 to this Form 10-K are incorporated herein by reference.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act of 1934). Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of December 30, 2006.

Management’s annual report on our internal control over financial reporting is provided in the Financial Report included in St. Jude Medical’s 2006 Annual Report to Shareholders and filed as Exhibit 13 to this Form 10-K and incorporated herein by reference. Management’s assessment of the effectiveness of our internal control over financial reporting as of December 30, 2006 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is provided in the Financial Report included in St. Jude Medical’s 2006 Annual Report to Shareholders and filed as Exhibit 13 to this Form 10-K and incorporated herein by reference.

During the fiscal quarter ended December 30, 2006, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Item 9B. OTHER INFORMATION

None.

PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information set forth under the captions Board of Directors and Section 16(a) Beneficial Ownership Reporting Compliance in St. Jude Medical’s Proxy Statement for the 2007 Annual Meeting of Shareholders is incorporated herein by reference. The information set forth under the caption Executive Officers of the Registrant in Part I, Item 1 of this Form 10-K is incorporated herein by reference.

We have adopted a Code of Business Conduct for our principal executive officer, principal financial officer, principal accounting officer and all other employees. We have made our Code of Business Conduct available on our website (http://www.sjm.com) under the Company Information section About Us and is available in print to any shareholder who submits a request to St. Jude Medical, Inc., One Lillehei Plaza, St. Paul, Minnesota 55117, Attention: Corporate Secretary. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of our Code of Business Conduct by posting such information on our website at the web address and location specified above. Information included on our website is not deemed to be incorporated into this Form 10-K.

Item 11. EXECUTIVE COMPENSATION

The information set forth under the captions Compensation of Directors and Executive Compensation (except for information under the Compensation Committee Report) in St. Jude Medical’s Proxy Statement for the 2007 Annual Meeting of Shareholders is incorporated herein by reference.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information set forth under the captions Share Ownership of Management and Directors and Certain Beneficial Owners and Equity Compensation Plan Information in St. Jude Medical’s Proxy Statement for the 2007 Annual Meeting of Shareholders is incorporated herein by reference.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information set forth under the caption Related Person Transactions and Director Independence and Audit Committee Financial Experts in St. Jude Medical’s Proxy Statement for the 2007 Annual Meeting of Shareholders is incorporated herein by reference.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information set forth under the caption Proposal to Ratify the Appointment of Independent Registered Public Accounting Firm in St. Jude Medical’s Proxy Statement for the 2007 Annual Meeting of Shareholders is incorporated herein by reference.

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PART IV

Item 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)	List of documents filed as part of this Report
	(1)	Financial Statements
		The following Consolidated Financial Statements of St. Jude Medical and Reports of Independent Registered Public Accounting Firm as set forth in the Financial Report included in St. Jude Medical’s 2006 Annual Report to Shareholders are incorporated herein by reference from Exhibit 13 attached hereto:
			Reports of Independent Registered Public Accounting Firm
			Consolidated Statements of Earnings – Fiscal Years ended December 30, 2006, December 31, 2005 and January 1, 2005
			Consolidated Balance Sheets – December 30, 2006 and December 31, 2005
			Consolidated Statements of Shareholders’ Equity – Fiscal Years ended December 30, 2006, December 31, 2005 and January 1, 2005
			Consolidated Statements of Cash Flows – Fiscal Years ended December 30, 2006, December 31, 2005 and January 1, 2005
			Notes to Consolidated Financial Statements
	(2)	Financial Statement Schedules
		Schedule II – Valuation and Qualifying Accounts, is filed as part of this Form 10-K (see Item 15(c)).
		All other financial statement schedules not listed above have been omitted because the required information is included in the Consolidated Financial Statements or Notes thereto, or is not applicable.
	(3)	Exhibits
		Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of certain instruments defining the rights of holders of certain long-term debt of St. Jude Medical are not filed, and in lieu thereof, we agree to furnish copies thereof to the SEC upon request.

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Exhibit	Exhibit Index
2.1	Stock Purchase Agreement among St. Jude Medical, Inc., St. Jude Medical Japan K.K., Getz Bros. & Co. Zug Inc., Getz International, Inc. and Muller & Phipps (Japan) Ltd. dated as of September 17, 2002 (USA) is incorporated by reference from Exhibit 2.1 of St. Jude Medical’s Annual Report on Form 10-K from the year ended December 31, 2003.
2.2	Amendment, dated as of February 20, 2003, to Stock Purchase Agreement among St. Jude Medical, Inc., St. Jude Medical Japan K.K., Getz Bros. & Co. Zug Inc., Getz International, Inc. and Muller & Phipps (Japan) Ltd. dated as of September 17, 2002 (USA) is incorporated by reference from Exhibit 2.1 of St. Jude Medical’s Annual Report on Form 10-K from the year ended December 31, 2003.
2.3	Amended and Restated Agreement and Plan of Merger, dated as of September 29, 2004, among St. Jude Medical, Inc., Dragonfly Merger Corp., and Endocardial Solutions, Inc. is incorporated by reference from Exhibit 99.1 of St. Jude Medical’s Current Report on Form 8-K filed on September 29, 2004.
2.4	Stock Purchase Agreement between St. Jude Medical, Inc. and Velocimed, LLC, dated as of February 14, 2005, is incorporated by reference from Exhibit 2.4 of St. Jude Medical’s Annual Report on Form 10-K from the year ended December 31, 2004.
2.5	Agreement and Plan of Merger between St. Jude Medical, Inc. and Advanced Neuromodulation Systems, Inc., dated as of October 15, 2005, is incorporated by reference from Exhibit 2.1 of St. Jude Medical’s Current Report on Form 8-K filed on October 17, 2005.
3.1	Articles of Incorporation, as restated as of February 25, 2005, are incorporated by reference from Exhibit 3.1 of St. Jude Medical’s Annual Report on Form 10-K for the year ended December 31, 2004.
3.2	Bylaws, as amended and restated as of February 25, 2005, are incorporated by reference from Exhibit 3.1 of St. Jude Medical’s Current Report on Form 8-K filed on March 2, 2005.
4.1	Rights Agreement dated as of June 16, 1997, between St. Jude Medical and American Stock Transfer and Trust Company, as Rights Agent, including the Certificate of Designation, Preferences and Rights of Series B Junior Preferred Stock is incorporated by reference from Exhibit 1 of St. Jude Medical’s Form 8-A filed on August 7, 1997.
4.2	Amendment, dated as of December 20, 2002, to Rights Agreement, dated as of June 16, 1997, is incorporated by reference from Exhibit 2 of St. Jude Medical’s Form 8-A/A filed on March 21, 2003.
4.3	Indenture, dated as of December 12, 2005, between St. Jude Medical, Inc. and U.S. Bank National Association, as trustee, is incorporated by reference from Exhibit 4.1 of St. Jude Medical’s Current Report on Form 8-K filed on December 12, 2005.
10.1	Form of Indemnification Agreement that St. Jude Medical, Inc. has entered into with officers and directors is incorporated by reference from Exhibit 10(d) of St. Jude Medical’s Annual Report on Form 10-K for the year ended December 31, 1986. *

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Exhibit	Exhibit Index
10.2	St. Jude Medical, Inc. Management Incentive Compensation Plan is incorporated by reference from Exhibit 10.2 of St. Jude Medical’s Annual Report on Form 10-K for the year ended December 31, 2001. *
10.3	Management Savings Plan dated February 1, 1995, is incorporated by reference from Exhibit 10.7 of St. Jude Medical’s Annual Report on Form 10-K for the year ended December 31, 1994. *
10.4	Retirement Plan for members of the Board of Directors, as amended on March 15, 1995, is incorporated by reference from Exhibit 10.6 of St. Jude Medical’s Annual Report on Form 10-K for the year ended December 31, 1994. *
10.5	St. Jude Medical, Inc. 1991 Stock Plan is incorporated by reference from St. Jude Medical’s Registration Statement on Form S-8 filed June 28, 1991 (Commission File No. 33-41459). *
10.6	St. Jude Medical, Inc. 1994 Stock Option Plan is incorporated by reference from Exhibit 4(a) of St. Jude Medical’s Registration Statement on Form S-8 filed July 1, 1994 (Commission File No. 33-54435). *
10.7	St. Jude Medical, Inc. 1997 Stock Option Plan is incorporated by reference from Exhibit 4.1 of St. Jude Medical’s Registration Statement on Form S-8 filed December 22, 1997 (Commission File No. 333-42945). *
10.8	St. Jude Medical, Inc. 2000 Stock Plan, as amended, is incorporated by reference from Exhibit 10.4 of St. Jude Medical’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006. *
10.9	St. Jude Medical, Inc. 2000 Employee Stock Purchase Savings Plan is incorporated by reference from Exhibit 10.10 of St. Jude Medical’s Annual Report on Form 10-K for the year ended December 31, 2001. *
10.10	Amendment No. 1, dated as of August 3, 2006, to the St. Jude Medical, Inc. 2000 Employee Stock Purchase Savings Plan is incorporated by reference from Exhibit 10.5 of St. Jude Medical’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006. *
10.11	St. Jude Medical, Inc. 2002 Stock Plan, as amended, is incorporated by reference from Exhibit 10.5 of St. Jude Medical’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006. *
10.12	Form of Non-Qualified Stock Option Agreement under the St. Jude Medical, Inc. 2002 Stock Plan, as amended, is incorporated by reference from Exhibit 10.14 of St. Jude Medical’s Annual Report on Form 10-K for the year ended December 31, 2004. *
10.13	St. Jude Medical, Inc. 2006 Stock Plan is incorporated by reference to Exhibit 10.1 to St. Jude Medical’s Current Report on Form 8-K filed on May 16, 2006. *
10.14	Form of Non-Qualified Stock Option Agreement for Non-Employee Directors under the St. Jude Medical, Inc. 2006 Stock Plan is incorporated by reference to Exhibit 10.2 to St. Jude Medical’s Current Report on Form 8-K filed on May 16, 2006. *

25

Exhibit	Exhibit Index
10.15	Form of Non-Qualified Stock Option Agreement for Employees under the St. Jude Medical, Inc. 2006 Stock Plan is incorporated by reference from Exhibit 10.4 of St. Jude Medical’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006. *
10.16	St. Jude Medical, Inc. Amended and Restated 1995 Stock Option Plan (formerly the Quest Medical, Inc. 1995 Stock Option Plan) is incorporated by reference from Exhibit 10.12 of St. Jude Medical’s Annual Report on Form 10-K for the year ended December 31, 2005. *
10.17	St. Jude Medical, Inc. Amended and Restated 1998 Stock Option Plan (formerly the Quest Medical, Inc. 1998 Stock Option Plan) is incorporated by reference from Exhibit 10.13 of St. Jude Medical’s Annual Report on Form 10-K for the year ended December 31, 2005. *
10.18	St. Jude Medical, Inc. Amended and Restated 2000 Stock Option Plan (formerly the Advanced Neuromodulation Systems, Inc. 2000 Stock Option Plan) is incorporated by reference from Exhibit 10.14 of St. Jude Medical’s Annual Report on Form 10-K for the year ended December 31, 2005. *
10.19	St. Jude Medical, Inc. Amended and Restated 2001 Employee Stock Option Plan (formerly the Advanced Neuromodulation Systems, Inc. 2001 Employee Stock Option Plan) is incorporated by reference from Exhibit 10.15 of St. Jude Medical’s Annual Report on Form 10-K for the year ended December 31, 2005. *
10.20	St. Jude Medical, Inc. Amended and Restated 2002 Stock Option Plan (formerly the Advanced Neuromodulation Systems, Inc. 2002 Stock Option Plan) is incorporated by reference from Exhibit 10.16 of St. Jude Medical’s Annual Report on Form 10-K for the year ended December 31, 2005. *
10.21	St. Jude Medical, Inc. Amended and Restated 2004 Stock Incentive Plan (formerly the Advanced Neuromodulation Systems, Inc. 2004 Stock Incentive Plan) is incorporated by reference from Exhibit 10.17 of St. Jude Medical’s Annual Report on Form 10-K for the year ended December 31, 2005. *
10.22	Summary of Compensation for Daniel J. Starks is incorporated by reference from Item 1.01 of St. Jude Medical’s Current Report on Form 8-K filed on December 16, 2005. *
10.23	Summary of Compensation for Non-employee Directors. * #
10.24	Form of Severance Agreement between St. Jude Medical, Inc. and executive officers is incorporated by reference from Exhibit 10.1 to St. Jude Medical’s Current Report on Form 8-K filed on August 2, 2006. *
10.25	Employment Agreement dated as of April 1, 2002, between Advanced Neuromodulation Systems, Inc. and Christopher G. Chavez is incorporated by reference from Exhibit 10.16 of Advanced Neuromodulation Systems’ Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. *
10.26	Amendment, dated as of July 27, 2006, between Advanced Neuromodulation Systems, Inc. and Christopher G. Chavez, to Employment Agreement, effective as of April 1, 2002, between Advanced Neuromodulation Systems, Inc. and Christopher G. Chavez is incorporated by reference from Exhibit 10.2 to St. Jude Medical’s Current Report on Form 8-K filed on August 2, 2006. *

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Exhibit	Exhibit Index
10.27	Stock Purchase Plan Engagement Agreement between St. Jude Medical, Inc. and Banc of America Securities LLC dated as of April 21, 2006 is incorporated by reference from Exhibit 10.1 to St. Jude Medical’s Current Report on Form 8-K filed on April 21, 2006.
10.28	Settlement Agreement, dated as of July 29, 2006, by and between St. Jude Medical, Inc. and its affiliates named therein and Boston Scientific Corporation and its affiliates named therein is incorporated by reference from Exhibit 10.3 of St. Jude Medical’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.
10.29†	CRM License Agreement, effective as of July 29, 2006, between St. Jude Medical, Inc. and Boston Scientific Corporation is incorporated by reference from Exhibit 10.6 of St. Jude Medical’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.
10.30	SCS License Agreement, effective as of July 29, 2006, between St. Jude Medical, Inc. and Boston Scientific Corporation is incorporated by reference from Exhibit 10.7 of St. Jude Medical’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.
10.31	Multi-Year $350,000,000 Credit Agreement, dated as of September 11, 2003, among St. Jude Medical, Inc., as the Borrower, Bank of America, N.A., as Administrative Agent, L/C Issuer and Lender, the Bank of Tokyo-Mitsubishi, Ltd. and ABN Amro Bank N.V., as Co-Syndication Agents, Bank One, N.A. and Wells Fargo Bank, National Association, as Co-Documentation Agents, and the other lenders party thereto is incorporated by reference from Exhibit 4.1 of St. Jude Medical’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.
10.32	Amendment No. 1, effective as of September 28, 2004, to the Multi-Year $350,000,000 Credit Agreement, dated as of September 11, 2003, by and between St. Jude Medical, Inc., as the Borrower, Bank of America, N.A., as Administrative Agent, L/C Issuer and Lender, the Bank of Tokyo-Mitsubishi, Ltd. and ABN Amro Bank N.V., as Co-Syndication Agents, Bank One, NA and Wells Fargo Bank, N.A. (formerly known as Wells Fargo Bank, National Association), as Co-Documentation Agents, and the other lenders party thereto is incorporated by reference from Exhibit 10.26 of St. Jude Medical’s Annual Report on Form 10-K for the year ended December 31, 2005.
10.33	Amendment No. 2, effective as of November 7, 2005, to the Multi-Year $350,000,000 Credit Agreement, dated as of September 11, 2003, by and between St. Jude Medical, Inc., as the Borrower, Bank of America, N.A., as Administrative Agent, L/C Issuer and Lender, the Bank of Tokyo-Mitsubishi, Ltd. and ABN Amro Bank N.V., as Co-Syndication Agents, Bank One, NA and Wells Fargo Bank, N.A. (formerly known as Wells Fargo Bank, National Association), as Co-Documentation Agents, and the other lenders party thereto is incorporated by reference from Exhibit 10.27 of St. Jude Medical’s Annual Report on Form 10-K for the year ended December 31, 2005.
10.34	Multi-Year $400,000,000 Credit Agreement, dated as of September 28, 2004, among St. Jude Medical, Inc., as the Borrower, Bank of America, N.A., as Administrative Agent, L/C Issuer and Lender, the Bank of Tokyo-Mitsubishi, Ltd., as Syndication Agent, Bank One, NA, Wells Fargo Bank, N.A. and Suntrust Bank, as Co-Documentation Agents, and the other lenders party thereto is incorporated by reference from Exhibit 4.1 of St. Jude Medical’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.

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Exhibit	Exhibit Index
10.35	Amendment No. 1, effective as of November 7, 2005, to the Multi-Year $400,000,000 Credit Agreement, dated as of September 28, 2004, by and between St. Jude Medical, Inc., as the Borrower, Bank of America, N.A., as Administrative Agent, L/C Issuer and Lender, the Bank of Tokyo-Mitsubishi, Ltd., as Syndication Agent, Bank One, NA, Wells Fargo Bank, N.A. and Suntrust Bank, as Co-Documentation Agents, and the other lenders party thereto is incorporated by reference from Exhibit 10.29 of St. Jude Medical’s Annual Report on Form 10-K for the year ended December 31, 2005.
10.36	Multi-Year $1,000,000,000 Credit Agreement dated as of December 13, 2006 among St. Jude Medical, Inc., as the Borrower, Bank of America, N.A., as Administrative Agent, L/C Issuer and Lender, and the other Lenders Party thereto is incorporated by reference from Exhibit 10.1 to St. Jude Medical’s Current Report on Form 8-K filed on December 13, 2006.
13	Portions of St. Jude Medical’s 2006 Annual Report to Shareholders. #
21	Subsidiaries of the Registrant. #
23	Consent of Independent Registered Public Accounting Firm. #
24	Power of Attorney. #
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. #

*	Management contract or compensatory plan or arrangement.
#	Filed as an exhibit to this Annual Report on Form 10-K.
†	Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of this exhibit have been deleted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.

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(b)	Exhibits: Reference is made to Item 15(a)(3).
(c)	Schedules:

SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
(In thousands)

	Balance at Beginning of Year
			Additions				Deductions
Description			Charged to Expense		Other (1)		Write-offs (2)			Other (3)			Balance at End of Year
Allowance for doubtful accounts:
Fiscal year ended
December 30, 2006	$	33,319	$	2,037	$	563	$	(10,991	)	$	—		$	24,928
December 31, 2005	$	31,283	$	4,759	$	586	$	(1,896	)	$	(1,413	)	$	33,319
January 1, 2005	$	31,905	$	4,380	$	—	$	(2,477	)	$	(2,525	)	$	31,283

(1)	In 2006, the $563 of other additions represents the effects of changes in foreign currency translation. In 2005, the $586 of other additions represents the balance recorded as part of our 2005 acquisition of ANS.
(2)	Uncollectible accounts written off, net of recoveries.
(3)	In 2005, the $1,413 of other deductions represents the effects of changes in foreign currency translation. In 2004, $640 of other deductions represents the effects of changes in foreign currency translation, and the remaining $1,885 represents a reduction in the allowance for doubtful accounts.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

	ST. JUDE MEDICAL, INC.
Date: February 28, 2007	By	/s/ DANIEL J. STARKS
		Daniel J. Starks Chairman, President and Chief Executive Officer (Principal Executive Officer)
	By	/s/ JOHN C. HEINMILLER
		John C. Heinmiller Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on the 28^th day of February, 2007.

/s/ DANIEL J. STARKS	Chairman of the Board
Daniel J. Starks
/s/ JOHN W. BROWN	Director
John W. Brown
/s/ RICHARD R. DEVENUTI	Director
Richard R. Devenuti
/s/ STUART M. ESSIG	Director
Stuart M. Essig
/s/ THOMAS H. GARRETT III	Director
Thomas H. Garrett III
/s/ MICHAEL A. ROCCA	Director
Michael A. Rocca
/s/ DAVID A. THOMPSON	Director
David A. Thompson
/s/ STEFAN K. WIDENSOHLER	Director
Stefan K. Widensohler
/s/ WENDY L. YARNO	Director
Wendy L. Yarno

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EX-10.23

Exhibit 10.23

Summary of Compensation for Non-employee Directors

	Effective May 16, 2007, the compensation of each non-employee member of the Board of Directors will be:
1.	Annual retainer: $54,000 paid monthly (increased from $50,000)
2.	Per diem for each board meeting: $2,000 (excluding telephone board meetings)
3.	Annual non-qualified stock option grant:

a.	Date of grant: Annual shareholders meeting
b.	Term: 8 years
c.	Price: 100% of fair market value on date of grant
d.	Vesting: 6 months after date of grant
e.	Amount: 7,750 (increased from 5,600)

4.	Physical exam: Reimbursement for up to $1,500 for an annual physical exam
5.	Committee fees:

a. Chairperson:

i.	Compensation Committee and Governance and Nominating Committee: $9,000 per annum
ii.	Audit Committee: $12,000 per annum (increased from $9,000)

b.	Members: $4,000 per annum
c.	Presiding Director: $5,000 per annum

6.	Charitable contribution match: Directors are eligible for the Company’s standard program which matches certain charitable contributions up to a maximum of $1000 per year.
7.	Restricted stock in lieu of retainer: Each director can elect to take 100%, 50% or none of their retainer in the form of a restricted stock grant which is valued at fair market value on the date of grant, with the restriction lapsing six months after the date of grant.
8.	Terminated retirement plan: Under a retirement plan for non-employee directors that was terminated April 1, 1996, each non-employee director serving on the Board at that time who serves five years or more will receive payment of an annual benefit equal to the average of the annual retainers paid to the director during his or her service as a director, with a minimum annual benefit of $24,000. The retirement benefit will commence at the later of the time of retirement from the Board or when the director becomes 60 years old. The retirement benefit is payable over a number of years equal to the director’s years of service as a member of the Board of Directors prior to April 1, 1996.

EX-13

Exhibit 13

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

OVERVIEW

Our business is focused on the development, manufacturing and distribution of cardiovascular medical devices for the global cardiac rhythm management, cardiac surgery, cardiology and atrial fibrillation therapy areas and implantable neuromodulation devices for the management of chronic pain. We sell our products in more than 100 countries around the world. In 2006, our five operating segments were Cardiac Rhythm Management (CRM), Cardiac Surgery (CS), Neuromodulation (Neuro), Cardiology (CD) and Atrial Fibrillation (AF). 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); CS – mechanical and tissue heart valves and valve repair products; Neuro – neurostimulation devices; CD – vascular closure devices, guidewires, hemostasis introducers and other interventional cardiology products; and AF – electrophysiology (EP) introducers and catheters, advanced cardiac mapping and navigation systems and ablation systems.

In August 2006, we announced that we were combining the Cardiac Surgery and Cardiology divisions into a new Cardiovascular division, effective January 1, 2007. This combination is expected to enhance operating efficiencies and thereby enable us to increase investment in product development. The Cardiovascular division will incorporate all activities previously managed by the Cardiac Surgery division and by the Cardiology division.

We participate in several different medical device markets, each of which has its own expected rate of growth. Management is particularly focused on the ICD market, which includes congestive heart failure devices. The Centers for Medicare and Medicaid Services (CMS) have expanded the indications for these devices that would be reimbursed by Medicare and Medicaid. As a result of this decision, similar reimbursement decisions in international markets and clinical data from various studies of these devices, management estimates the global ICD market will grow at a compounded rate of 3% to 9% during 2007 and 10% to 15% over a period of multiple years thereafter. Management’s goal is to continue to increase our estimated 20% worldwide market share of the growing ICD market.

The global ICD market grew at an estimated compounded annual growth rate of approximately 28% from 2001 to 2005. We believe the rate of growth declined significantly in the second half of 2005 and fiscal year 2006 due to a number of factors, including adverse publicity relating to product recalls of a competitor during 2005 and 2006. Although the overall ICD market may remain depressed in the near term, we believe that it eventually will rebound. This is because data indicates the potential patient populations remain significantly underpenetrated. We also expect that we can continue to increase our ICD market share. In order to help accomplish this objective, we have expanded our United States selling organization and plan to continue to introduce new ICD products.

Our industry has undergone significant consolidation in the last decade and is very competitive. Our strategy requires significant investments in research and development in order to introduce new products. We are focused on improving our operating margins through a variety of techniques, including maintaining our average selling prices while improving the efficiency of our manufacturing operations. However, we expect cost containment pressure on healthcare systems as well as competitive pressures in the industry to continue to place downward pressure on prices for our products.

Net sales in 2006 increased approximately 13% over 2005 driven primarily by sales growth in ICD systems, neuromodulation products and products to treat atrial fibrillation. Our ICD net sales grew approximately 9% to $1.1 billion during 2006, resulting from increasing our estimated worldwide ICD market share from approximately 19% at the beginning of 2006 to approximately 20% at year-end 2006. The acquisition of Advanced Neuromodulation Systems, Inc. (ANS) in November 2005 contributed $154.4 million to our sales growth in 2006. Due to strong volume growth, our AF net sales increased approximately 28% to $325.7 million, strengthening our presence in the market of products to treat atrial fibrillation. Refer to the Segment Performance section below for a more detailed discussion of our net sales results.

Net earnings were $548.3 million in 2006, a 39% increase over 2005 net earnings of $393.5 million. Diluted net earnings per share were $1.47 in 2006, a 41% increase over 2005 diluted net earnings per share of $1.04. Net earnings for 2006 include an after-tax $22.0 million special charge, or $0.06 per diluted share, related to restructuring activities in our Cardiac Surgery and Cardiology divisions and international selling organization. Net earnings for 2006 also include after-tax stock-based compensation expense of $49.4 million, or $0.13 per diluted share, resulting from the adoption of

1

Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS No. 123(R)), on January 1, 2006.

Our results for 2005 include $179.2 million of purchased in-process research and development (IPR&D) charges and an after-tax $7.2 million special credit relating to a reversal of a portion of the Symmetry™ Bypass Aortic Connector (Symmetry™ device) product liability litigation special charge recorded in 2004, net of settlement costs. We recorded after-tax expense of $6.2 million as a result of our contribution to the St. Jude Medical Foundation (the Foundation). We also recorded the reversal of $13.7 million of previously recorded income tax expense due to the finalization of certain tax examinations. Additionally, in connection with the repatriation of $500.0 million of foreign earnings under the provisions of the American Jobs Creation Act of 2004, we recorded $26.0 million of income tax expense. In total, these after-tax charges and credits amounted to $190.5 million, or $0.50 per diluted share.

We generated $648.8 million of operating cash flows for the 2006, which was a decrease compared to 2005 that primarily resulted from a required change in classification of excess tax benefits from the exercise of stock options resulting from our adoption of SFAS No. 123(R) on January 1, 2006. We ended the year with $79.9 million of cash and cash equivalents and $859.4 million of total debt. We were required to repurchase $654.5 million of our 30-year 2.80% Convertible Senior Debentures, which we primarily financed through the issuance of commercial paper. We have short-term credit ratings of A2 from Standard & Poor’s and P2 from Moody’s.

In the second quarter of 2006, we repurchased $700.0 million, or 18.6 million shares, of our outstanding common stock, which we also primarily financed through the issuance of commercial paper. On January 25, 2007, our Board of Directors authorized a new share repurchase program of up to $1.0 billion of our outstanding common stock. We are funding the repurchases, which we started on January 29, 2007, with proceeds from the issuance of commercial paper and borrowings under a 3-month liquidity facility. As of February 16, 2007, 12.9 million shares had been repurchased for approximately $546 million.

NEW ACCOUNTING PRONOUNCEMENTS

Information regarding new accounting pronouncements is included in Note 1 to the Consolidated Financial Statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Preparation of our consolidated financial statements in accordance 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. Our significant accounting policies are disclosed in Note 1 to the Consolidated Financial Statements.

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 IPR&D, 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. We believe that the following represent our most critical accounting estimates:

Accounts Receivable Allowance for Doubtful Accounts: We grant credit to customers in the normal course of business, and generally do not require collateral or any other security to support our accounts receivable. We maintain an allowance for doubtful accounts for potential credit losses, which primarily consists of reserves for specific customer balances that we believe may not be collectible. We determine the adequacy of this allowance by regularly reviewing the age of accounts receivable, customer financial conditions and credit histories, and current economic conditions. In some developed markets and in many emerging markets, payments of certain accounts receivable balances are made by the individual countries’ healthcare systems for which payment is dependent, to some extent, upon the political and economic environment within those countries. Although we consider our allowance for doubtful accounts to be adequate, if the financial condition of our customers or the individual countries’ healthcare systems were to deteriorate and impair their ability to make payments to us, additional allowances may be required in future periods. The allowance for doubtful accounts was $24.9 million at December 30, 2006 and $33.3 million at December 31, 2005.

Estimated Useful Lives of Diagnostic Equipment: Diagnostic equipment is recorded at cost and is depreciated using the straight-line method over its estimated useful life of three to eight years. Diagnostic equipment primarily consists of

2

programmers that are used by physicians and healthcare professionals to program and analyze data from pacemaker and ICD devices. The estimated useful life of this equipment is determined based on our estimates of its usage by the physicians and healthcare professionals, factoring in new technology platforms and rollouts. To the extent that we experience changes in the usage of this equipment or there are introductions of new technologies to the market, the estimated useful lives of this equipment may change in a future period. If we had used an estimated useful life on diagnostic equipment that was one year less than our current estimate, our 2006 depreciation expense would have been approximately $4 million higher. Diagnostic equipment had a net carrying value of $156.3 million at December 30, 2006 and $88.6 million at December 31, 2005. The net carrying value of diagnostic equipment increased as a result of our 2006 U.S. market launch of our next-generation Merlin™ Patient Care System.

Valuation of IPR&D, Other Intangible Assets and Goodwill: When we acquire another company, the purchase price is allocated, as applicable, between IPR&D, other identifiable intangible assets, tangible assets and goodwill. Determining the portion of the purchase price allocated to IPR&D and other intangible assets requires us to make significant estimates.

IPR&D is defined as the value assigned to those projects for which the related products have not yet reached technological feasibility and have no future alternative use. The primary basis for determining the technological feasibility of these projects at the time of acquisition is obtaining regulatory approval to market the underlying products in an applicable geographic region. In accordance with accounting principles generally accepted in the United States, we expense the value attributed to those projects in conjunction with the acquisition. We recorded IPR&D of $179.2 million and $9.1 million in 2005 and 2004, respectively.

We use the income approach to establish fair values of IPR&D as of the acquisition date. This approach establishes fair value by estimating the after-tax cash flows attributable to a project over its useful life and then discounting these after-tax cash flows back to a present value. We base our revenue assumptions on estimates of relevant market sizes, expected market growth rates, expected trends in technology and expected product introductions by competitors. In arriving at the value of the projects, we consider, among other factors, the stage of completion, the complexity of the work completed as of the acquisition date, the costs already incurred, the projected costs of completion, the contribution of core technologies and other acquired assets, the expected introduction date and the estimated useful life of the technology. The discount rate used is determined at the time of acquisition and includes consideration of the assessed risk of the project not being developed to commercial feasibility. For the IPR&D we acquired in connection with our 2005 and 2004 acquisitions, we used risk-adjusted discount rates ranging from 16% to 22% in 2005 and 16% in 2004 to discount projected cash flows. We believe that the IPR&D amounts recorded represent the fair value at the date of acquisition and do not exceed the amount a third party would pay for the projects.

The fair value of other identifiable intangible assets is based on detailed valuations using the income approach. Other intangible assets consist of purchased technology and patents, customer lists and relationships, distribution agreements, trademarks and tradenames and licenses, which are amortized using the straight-line method over their estimated useful lives, ranging from 3 to 20 years. We review other intangible assets for impairment as changes in circumstance or the occurrence of events suggest the carrying value may not be recoverable. Other intangible assets, net of accumulated amortization, were $560.3 million at December 30, 2006 and $572.2 million at December 31, 2005.

Goodwill represents the excess of the aggregate purchase price over the fair value of net assets, including IPR&D, of the acquired businesses. Goodwill is tested for impairment annually for each reporting unit or more frequently if changes in circumstance or the occurrence of events suggest impairment exists. 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 consolidated balance sheets and the judgment required in determining fair value amounts, including projected future cash flows and the use of an appropriate risk-adjusted discount rate. Goodwill was $1,649.6 million at December 30, 2006 and $1,635.0 million at December 31, 2005.

Income Taxes: As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax expense as well as assessing temporary differences in the treatment of items for tax and accounting purposes. These timing differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent that we believe that recovery is not likely, a valuation allowance must be established. At December 30, 2006, we had $224.3 million of gross deferred tax assets, including net operating loss and tax credit carryforwards that will expire from 2018 to 2024 if not utilized. We believe that our deferred tax assets, including the net operating loss and tax credit carryforwards, will be fully realized based upon our estimates of future taxable income. As such, we have not recorded any valuation

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allowance for our deferred tax assets. If our estimates of future taxable income are not met, a valuation allowance for some of these deferred tax assets would be required.

We have not recorded U.S. deferred income taxes on certain of our non-U.S. subsidiaries’ undistributed earnings, because such amounts are intended to be reinvested outside the United States indefinitely. However, should we change our business and tax strategies in the future and decide to repatriate a portion of these earnings to one of our U.S. subsidiaries, including cash maintained by these non-U.S. subsidiaries (see Financial Condition – Liquidity), additional U.S. tax liabilities would be incurred. Our repatriation of $500.0 million of foreign earnings under the provisions of the American Jobs Creation Act of 2004 was deemed to be distributed entirely from foreign earnings that had previously been treated as indefinitely invested. However, this distribution from previously indefinitely reinvested earnings does not change our position going forward that future earnings of certain of our foreign subsidiaries will be indefinitely reinvested.

We operate within multiple taxing jurisdictions and are subject to audits in these jurisdictions. These audits can involve complex issues, including challenges regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. The IRS is currently in the process of examining our U.S. federal tax returns for the calendar years 2002 through 2005.

We record our income tax provisions based on our knowledge of all relevant facts and circumstances, including the existing tax laws, our experience with previous settlement agreements, the status of current IRS examinations and our understanding of how the tax authorities view certain relevant industry and commercial matters. Although we have recorded all probable income tax accruals in accordance with SFAS No. 5, Accounting for Contingencies (SFAS No. 5) and SFAS No. 109, Accounting for Income Taxes (SFAS No. 109), our accruals represent accounting estimates that are subject to the inherent uncertainties associated with the tax audit process, and therefore include certain contingencies. We believe that any potential tax assessments from the various tax authorities that are not covered by our income tax accruals will not have a material adverse impact on our consolidated financial position or cash flows. However, they may be material to our consolidated earnings of a future period. Our overall tax strategies have resulted in an effective tax rate of 23.9% for 2006. A one percentage point increase in our effective tax rate would result in additional income tax expense for 2006 of approximately $7 million.

Legal Reserves and Insurance Receivables: We operate in an industry that is susceptible to significant product liability and intellectual property claims. As a result, we are involved in a number of legal proceedings, the outcomes of which are not in our complete control and may not be known for extended periods of time. In accordance with SFAS No. 5, we record a liability in our consolidated financial statements for costs related to claims, including future legal costs, settlements and judgments where we have assessed that a loss is probable and an amount can be reasonably estimated. We record a receivable from our product liability insurance carriers for amounts expected to be recovered. Product liability claims may be brought by individuals seeking relief for themselves or, increasingly, by groups seeking to represent a class. In addition, claims may be asserted against us in the future related to events that are not known to us at the present time. Our significant legal proceedings are discussed in detail in Note 5 to the Consolidated Financial Statements. While it is not possible to predict the outcome for most of the legal proceedings discussed in Note 5, the costs associated with such proceedings could have a material adverse effect on our consolidated earnings, financial position or cash flows of a future period.

Stock-Based Compensation: Effective January 1, 2006, we adopted the provisions of, and account for stock-based compensation in accordance with, 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 the vesting period. We elected the modified-prospective method of adopting SFAS No. 123(R), under which prior periods are not retroactively revised. For St. Jude Medical, the valuation provisions of SFAS No. 123(R) apply to awards granted after the January 1, 2006 effective date. Estimated stock-based compensation expense for awards granted prior to the effective date but that remain unvested on the effective date will be recognized over the remaining service period using the compensation cost estimated for SFAS No. 123, Accounting for Stock-Based Compensation pro forma disclosures.

The adoption of SFAS No. 123(R) had a material impact on our consolidated results of operations and the presentation of our consolidated statement of cash flows. However, we believe that stock-based compensation aligns the interests of managers and non-employee directors with the interests of shareholders. As a result, we do not currently expect to significantly change our various stock-based compensation programs. See Note 7 to the Consolidated Financial Statements for further information regarding our stock-based compensation programs.

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We use the Black-Scholes standard option pricing model (Black-Scholes model) to determine the fair value of stock options and employee stock purchase rights. The determination of the fair value of the awards on the date of grant using the Black-Scholes model is affected by our stock price as well as assumptions of other variables, including projected employee stock option exercise behaviors, risk-free interest rate, expected volatility of our stock price in future periods and expected dividend yield.

We analyze historical employee exercise and termination data to estimate the expected life assumption. We believe that historical data currently represents the best estimate of the expected life of a new employee option. We also stratify our employee population based upon distinctive exercise behavior patterns. The risk-free interest rate we use is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected life of the options. We estimate the expected volatility of our stock price in future periods by using the implied volatility in market traded options. Our decision to use implied volatility was based on the availability of actively traded options for our common stock and our assessment that implied volatility is more representative of future stock price trends than the historical volatility of our common stock. Because we do not anticipate paying any cash dividends in the foreseeable future, we use an expected dividend yield of zero. 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 in future periods may differ significantly from what we have recorded in the current period and could materially affect our net earnings and net earnings per share of a future period.

ACQUISITIONS & MINORITY INVESTMENTS

Acquisitions and minority investments can have an impact on the comparison of our operating results and financial condition from year to year.

Acquisitions: On November 29, 2005, we completed the acquisition of ANS for $1,353.9 million, net of cash acquired. ANS had been publicly traded on the NASDAQ market under the ticker symbol ANSI. ANS designed, developed, manufactured and marketed implantable neuromodulation devices used primarily to manage chronic pain. We recorded an IPR&D charge of $107.4 million associated with this transaction. ANS has become the Neuromodulation division of St. Jude Medical.

On January 13, 2005, we completed the acquisition of Endocardial Solutions, Inc. (ESI) for $279.4 million, net of cash acquired. ESI had been publicly traded on the NASDAQ market under the ticker symbol ECSI. ESI developed, manufactured and marketed the EnSite® System used for the navigation and localization of diagnostic and therapeutic catheters used by physician specialists to diagnose and treat cardiac rhythm disorders. We recorded an IPR&D charge of $12.4 million associated with this transaction.

On April 6, 2005, we completed the acquisition of the businesses of Velocimed, LLC (Velocimed) for $70.9 million, net of cash acquired, plus additional contingent payments tied to revenues in excess of minimum future targets and a milestone payment upon U.S. Food and Drug Administration (FDA) approval of the Premere™ patent foramen ovale closure system prior to December 31, 2010. Velocimed developed and manufactured specialty interventional cardiology devices. We recorded an IPR&D charge of $13.7 million associated with this transaction. Certain funds held in escrow totaling $5.5 million were released in the fourth quarter of 2006.

On December 30, 2005, we completed the acquisition of Savacor, Inc. (Savacor) for $49.7 million, net of cash acquired, plus additional contingent payments related to product development milestones for regulatory approvals and to revenues in excess of minimum future targets. Savacor was a development-stage company focused on the development of a device that measures left atrial pressure and body temperature to help physicians detect and manage symptoms associated with progressive heart failure. Increased pressure in the left atrium is a predictor of pulmonary congestion, which is the leading cause of hospitalization for congestive heart failure patients. We recorded an IPR&D charge of $45.7 million associated with this transaction.

On October 7, 2004, we completed the acquisition of the remaining capital stock of Irvine Biomedical, Inc. (IBI). IBI developed and sold EP catheter products used by physician specialists to diagnose and treat cardiac rhythm disorders. We had previously made a minority investment in IBI in April 2003 through our acquisition of Getz Bros. Co., Ltd (Getz Japan). We paid $50.6 million in 2004 to acquire the remaining IBI capital stock. In connection with the acquisition of IBI, we recorded an IPR&D charge of $9.1 million. In December 2005, we made a contingent purchase consideration payment

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of $4.8 million to the applicable non-St. Jude Medical shareholders of IBI as a result of FDA approval of the Cardiac Ablation Generator and Therapy™ EP catheters.

On June 8, 2004, we completed the acquisition of the remaining capital stock of Epicor, Inc. (Epicor). Epicor focused on developing products which use high intensity focused ultrasound (HIFU) to ablate cardiac tissue. We had previously made a minority investment in Epicor in May 2003. We paid $185.0 million in 2004 to acquire the remaining Epicor capital stock.

Minority Investments: On January 12, 2005, we made an initial equity investment of $12.5 million in ProRhythm, Inc. (ProRhythm), a privately-held company that is focused on the development of a HIFU catheter-based ablation system for the treatment of atrial fibrillation. The initial investment resulted in approximately a 9% ownership interest. In connection with making the initial equity investment, we also entered into a purchase and option agreement with ProRhythm that provided us the ability to make an additional equity investment. In January 2006, we made an additional $12.5 million investment in ProRhythm, increasing our total ownership interest to 18%. We also have the exclusive right, but not the obligation, through the later of three months after the date ProRhythm delivers certain clinical trial data or March 31, 2007, to acquire the remaining capital stock of ProRhythm for $125.0 million in cash, with additional cash consideration payable to the non-St. Jude Medical shareholders after the consummation of the acquisition if ProRhythm achieves certain performance-related milestones.

SEGMENT PERFORMANCE

Our five operating segments are Cardiac Rhythm Management (CRM), Cardiac Surgery (CS), Neuromodulation (Neuro), Cardiology (CD) and Atrial Fibrillation (AF). We formed our Neuro operating segment in November 2005 in connection with the acquisition of ANS. Each operating segment focuses on developing and manufacturing products for its respective therapy area. The primary products produced by each operating segment are: CRM – ICDs and pacemakers; CS – mechanical and tissue heart valves and valve repair products; Neuro – neurostimulation devices; CD – vascular closure devices, hemostasis introducers, patent foramen ovale closure devices, guidewires, embolic protection devices and other cardiology products; and AF – EP introducers and catheters, advanced cardiac mapping and navigation systems and ablation systems.

We aggregate our five operating segments into two reportable segments based upon their similar operational and economic characteristics: CRM/CS/Neuro and CD/AF. Net sales of our reportable segments include end-customer revenue from the sale of products they each develop and manufacture or distribute. 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 of the reportable segments. 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. Because of this, reportable segment operating profit is not representative of the operating profit of the products in these reportable segments.

Effective January 1, 2007, we combined the Cardiac Surgery and Cardiology divisions into a new Cardiovascular division which will incorporate all activities previously managed by the Cardiac Surgery division and by the Cardiology division. Segment information will be reclassified in 2007 to reflect the new Cardiovascular division. In order to enhance segment comparability and reflect management’s focus on our ongoing operations, the related restructuring special charges have not been recorded in the individual reportable segments.

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

	CRM/CS/Neuro			CD/AF			Other			Total
Fiscal Year 2006
Net sales	$	2,524,445		$	778,002		$	—		$	3,302,447
Operating profit		1,523,339			316,384			(1,096,640	)		743,083
Fiscal Year 2005
Net sales	$	2,223,701		$	691,579		$	—		$	2,915,280
Operating profit		1,231,144	(a)		263,211	(b)		(881,625	)		612,730
Fiscal Year 2004
Net sales	$	1,748,749		$	545,424		$	—		$	2,294,173
Operating profit		1,015,621	(c)		254,270	(d)		(733,933	)		535,958

(a)	Included in CRM/CS/Neuro 2005 operating profit are IPR&D charges of $107.4 million and $45.7 million relating to the acquisitions of ANS and Savacor, respectively. Also included is an $11.5 million special credit relating to a reversal of a portion of the Symmetry™ device product liability litigation special charge recorded in 2004, net of settlement costs.
(b)	Included in CD/AF 2005 operating profit are IPR&D charges of $13.7 million and $12.4 million relating to the acquisitions of Velocimed and ESI, respectively.
(c)	Included in CRM/CS/Neuro 2004 operating profit are special charges of $35.4 million related to Symmetry™ device product line discontinuance and product liability litigation.
(d)	Included in CD/AF 2004 operating profit is an IPR&D charge of $9.1 million relating to the IBI acquisition.

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

Cardiac Rhythm Management

(dollars in thousands)	2006		2005		2004		2006 vs. 2005 % Change			2005 vs. 2004 % Change
ICD systems	$	1,099,906	$	1,006,896	$	583,694		9.2	%		72.5	%
Pacemaker systems		955,859		917,950		890,076		4.1	%		3.1	%
	$	2,055,765	$	1,924,846	$	1,473,770		6.8	%		30.6	%

Cardiac Rhythm Management 2006 net sales increased 7% due to volume growth from the continued market penetration of products into the cardiac resynchronization therapy (CRT) segments of the international pacemaker and ICD market. Foreign currency translation did not have a significant impact on 2006 net sales. Net sales of ICD systems increased 9% in 2006 due to a 12% increase in ICD unit sales that was partially offset by a slight decline in average selling price. Net sales of pacemaker systems increased 4% in 2006 due to a 9% increase in pacemaker unit sales that was partially offset by a decline in average selling price.

Cardiac Rhythm Management 2005 net sales increased 31% due to volume growth of sales of traditional ICD products and the continued market penetration of products into the CRT segments of the U.S. pacemaker and ICD market. Foreign currency translation had a $12.2 million favorable impact on 2005 net sales. Net sales of ICD systems increased 73% in 2005 due to a 68% increase in ICD unit sales, a slight increase in average selling price and $4.5 million of favorable impact from foreign currency translation. Net sales of pacemaker systems increased 3% during 2005 due to a 6% increase in pacemaker unit sales and $7.7 million favorable impact from foreign currency translation. These increases for the year were partially offset by a slight decline in average selling price.

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Cardiac Surgery

(dollars in thousands)	2006		2005		2004		2006 vs. 2005 % Change			2005 vs. 2004 % Change
Heart valves	$	270,507	$	254,445	$	253,236		6.3	%		0.5	%
Other cardiac surgery products		18,810		19,428		21,743		-3.2	%		-10.6	%
	$	289,317	$	273,873	$	274,979		5.6	%		-0.4	%

Cardiac Surgery 2006 net sales increased almost 6%, driven by volume growth of tissue heart valves net sales. Foreign currency translation had a $2.2 million unfavorable impact on 2006 net sales. Heart valve product net sales increased 6% in 2006 due to 9% volume growth driven by increased sales of tissue heart valves. This increase was partially offset by a 3% decline in average selling price driven by a change in geographic sales mix as a larger portion of our sales were in lower-priced international markets. Although we experienced slight sales growth in mechanical heart valves in 2006, we expect that future sales growth in tissue heart valves will be partially offset by declines in mechanical heart valve sales. Net sales of other cardiac surgery products remained relatively flat in 2006 compared to 2005.

Cardiac Surgery 2005 net sales remained essentially unchanged compared to 2004. Heart valve product net sales increased 1% in 2005 primarily due to 2% volume growth driven by increased sales of tissue heart valves and $3.6 million of favorable impact from foreign currency translation. These increases were partially offset by a 3% decline in average selling price driven by a change in geographic sales mix. Net sales of other cardiac surgery products decreased $2.3 million in 2005 compared to 2004.

Neuromodulation

(in thousands)	2006		2005		2004
Neuromodulation products	$	179,363	$	24,982	$	—

Neuromodulation 2006 net sales of $179.4 million represent a 17% increase over total ANS 2005 net sales of $153.1 million. Total ANS 2005 net sales include $128.1 million prior to our acquisition of ANS in November 2005 and $25.0 million after our acquisition. ANS’s historical net sales as a stand-alone company were $120.7 million for 2004.

Cardiology

(dollars in thousands)	2006		2005		2004		2006 vs. 2005 % Change			2005 vs. 2004 % Change
Vascular closure devices	$	341,259	$	329,901	$	287,930		3.4	%		14.6	%
Other cardiology products		111,036		107,868		100,654		2.9	%		7.2	%
	$	452,295	$	437,769	$	388,584		3.3	%		12.7	%

Cardiology 2006 net sales increased 3%, driven by volume growth of vascular closure devices for which we currently hold the leading market position in the highly competitive vascular closure device market. Foreign currency translation had a $3.7 million unfavorable impact on 2006 net sales. Net sales of vascular closure devices increased over 3% in 2006 due to volume growth that was partially offset by a slight decline in average selling price. Net sales of other cardiology products increased 3% in 2006 due to 10% volume growth which was partially offset by a 4% decline in average selling price driven by a change in geographic sales mix and a $3.5 million unfavorable impact from foreign currency translation.

Cardiology 2005 net sales increased 13% driven by volume growth of 15%. Foreign currency translation had a $1.7 million favorable impact on 2005 net sales. Net sales of vascular closure devices increased 15% during 2005 due to 16% volume growth driven by increased sales of our Angio-Seal™ device. This increase was partially offset by a 2% decline in average selling price driven by a change in geographic sales mix. Net sales of other cardiology products increased 7% in 2005 due to 12% volume growth that was partially offset by a 4% decline in average selling price driven by a change in geographic sales mix.

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Atrial Fibrillation

(dollars in thousands)	2006		2005		2004		2006 vs. 2005 % Change			2005 vs. 2004 % Change
Atrial fibrillation products	$	325,707	$	253,810	$	156,840		28.3	%		61.8	%

Atrial Fibrillation 2006 net sales increased 28% driven by volume growth of 30%. Atrial Fibrillation 2005 net sales increased 62% driven by sales of products related to recent acquisitions and unit volume increases of existing products. Foreign currency translation did not have a significant impact on 2006 or 2005 net sales.

RESULTS OF OPERATIONS

Net Sales

(dollars in thousands)	2006		2005		2004		2006 vs. 2005 % Change			2005 vs. 2004 % Change
Net sales	$	3,302,447	$	2,915,280	$	2,294,173		13.3	%		27.1	%

Overall, 2006 net sales increased 13% over 2005. The acquisition of ANS in November 2005 increased 2006 net sales by $154.4 million. The remaining volume growth of approximately 12% was driven by CRM and AF product sales. Foreign currency translation had a $6.7 million unfavorable impact on 2006 net sales due primarily to the strengthening of the U.S. Dollar against the Japanese Yen. Overall, average selling price declines negatively impacted 2006 net sales by approximately 3%.

Overall, 2005 net sales increased 27% driven by volume growth of approximately 28% and incremental revenue of approximately $25 million resulting from the ANS acquisition. Foreign currency translation had an $18.4 million favorable impact on 2005 net sales due primarily to the strengthening of the Euro against the U.S. Dollar. Overall, average selling price declines negatively impacted 2005 net sales by approximately 2%.

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

	2006		2005		2004
United States	$	1,920,623	$	1,709,911	$	1,264,756
International
Europe		806,544		683,014		577,058
Japan		289,716		286,660		267,723
Other		285,564		235,695		184,636
		1,381,824		1,205,369		1,029,417
	$	3,302,447	$	2,915,280	$	2,294,173

Foreign currency translation relating to our international operations can have a significant impact on our operating results from year to year. The two main currencies influencing our operating results are the Euro and the Japanese Yen. As discussed above, foreign currency translation had a $6.7 million unfavorable impact on 2006 net sales, while foreign currency translation favorably impacted 2005 net sales by $18.4 million. However, these impacts to net sales are not indicative of the net earnings impact of foreign currency translation due to partially offsetting foreign currency translation impacts on cost of sales and operating expenses.

Gross Profit

(dollars in thosands)	2006			2005			2004
Gross profit	$	2,388,934		$	2,118,519		$	1,615,123
Percentage of net sales		72.3	%		72.7	%		70.4	%

Gross profit for 2006 totaled $2,388.9 million, or 72.3% of net sales, as compared with $2,118.5 million, or 72.7% of net sales, for 2005. Gross profit percentage comparisons to last year were negatively impacted by a $15.1 million restructuring special charge recorded in the third quarter of 2006 which negatively impacted our 2006 gross profit percentage by 0.5 percentage points (see further details under Special Charges(Credits)). Stock-based compensation expense also reduced our 2006 gross profit percentage by 0.2 percentage points. Gross profit percentage for 2006 also reflects increased

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manufacturing efficiencies and lower inventory and warranty reserves compared to 2005 which were partially offset by unfavorable changes in product mix for our higher margin products and a slight decrease in the average selling price for these products. For 2007, we expect that our gross profit percentage will increase to a range of 73.0% to 73.5% due to the increased sales of higher margin ICD systems and continual efficiency improvements in our manufacturing processes.

Gross profit for 2005 totaled $2,118.5 million, or 72.7% of net sales, as compared with $1,615.1 million, or 70.4% of net sales, for 2004. Gross profit percentage comparisons to 2004 were positively impacted by a $12.1 million special charge recorded in the third quarter of 2004 for the write-off of inventory and return of products held by customers related to the discontinuance of the Symmetry™ device product line (see further details under Special Charges(Credits)). This special charge negatively impacted gross profit percentage by 0.5 percentage points for 2004. The remaining 1.8 percentage point increase in our 2005 gross profit percentage related to increased sales of higher margin ICDs, lower cost of sales in Japan from selling through, in 2004, the inventory acquired in the Getz Japan acquisition, increased manufacturing efficiencies and favorable impact from foreign currencies. These favorable items were partially offset by an increase in inventory reserves related to expiring inventory and an increase in warranty reserves.

Selling, General and Administrative (SG&A) Expense

(dollars in thousands)		2006			2005			2004
Selling, general and administrative	$	1,195,030		$	968,888		$	759,320
Percentage of net sales		36.2	%		33.2	%		33.1	%

SG&A expense for 2006 totaled $1,195.0 million, or 36.2% of net sales, as compared with $968.9 million, or 33.2% of net sales, for 2005. Approximately 1.4 percentage points of 2006 SG&A expense as a percent of net sales relates to $47.0 million of stock-based compensation expense. The remaining increase in SG&A expense as a percent of net sales relates to higher amortization expense resulting from intangible assets acquired as part of fiscal year 2005 acquisitions and higher costs related to the continued expansion of our selling organization infrastructure. For 2007, we expect that SG&A expense as a percentage of net sales will range from 36.0% to 36.5%.

SG&A expense for 2005 totaled $968.9 million, or 33.2% of net sales, as compared with $759.3 million, or 33.1% of net sales, for 2004. Approximately 0.3% of the percentage point impact in SG&A expense as a percent of net sales relates to a $10.0 million contribution to the Foundation in the third quarter of 2005. Excluding the Foundation contribution, the decrease in SG&A as a percentage of net sales was due to spreading certain relatively fixed elements of our selling and administrative costs over a revenue base that grew 27% in 2005.

Research and Development (R&D) Expense

(dollars in thosands)		2006			2005			2004
Research and development	$	431,102		$	369,227		$	281,935
Percentage of net sales		13.1	%		12.7	%		12.3	%

R&D expenses in 2006 totaled $431.1 million, or 13.1% of net sales, compared with $369.2 million, or 12.7% of net sales, for 2005. For 2006, stock-based compensation expense accounted for approximately 0.5 percentage points of R&D expense as a percent of net sales. After excluding the impact of 2006 stock-based compensation expense, R&D expense as a percent of net sales remained relatively flat compared to 2005. However, total 2006 R&D expense did increase approximately 17% over total 2005 R&D expense, reflecting our continuing commitment to fund future long-term growth opportunities. We will continue to invest in product development activities in 2007 and expect that R&D expense as a percentage of net sales will range from 12.5% to 13.5% in 2007.

R&D expenses in 2005 totaled $369.2 million, or 12.7% of net sales, compared with $281.9 million, or 12.3% of net sales, for 2004. The increase in R&D expense was due primarily to our increased spending on the development of new products and related clinical trials, including our CRT devices, tissue valves and other products to treat emerging indications including atrial fibrillation.

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Purchased In-Process Research and Development (IPR&D) Charges

(in thousands)		2006		2005		2004
Purchased in-process research and development	$	—	$	179,174	$	9,100

We are responsible for the valuation of IPR&D. The fair value assigned to IPR&D was estimated by discounting each project to its present value using the after-tax cash flows expected to result from the project once it has reached technological feasibility. We discount the after-tax cash flows using an appropriate risk-adjusted rate of return (ANS – 17%, Velocimed – 22%, ESI – 16%, IBI – 16%) that takes into account the uncertainty surrounding the successful development of the projects through obtaining regulatory approval to market the underlying products in an applicable geographic region. In estimating future cash flows, we also considered other tangible and intangible assets required for successful development of the resulting technology from the IPR&D projects and adjusted future cash flows for a charge reflecting the contribution of these other tangible and intangible assets to the value of the IPR&D projects.

At the time of acquisition, we expect all acquired IPR&D will reach technological feasibility, but there can be no assurance that the commercial viability of these projects 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, failure of clinical trials, delay or failure to obtain required market clearances, and patent litigation. If commercial viability were not achieved, we would not realize the original estimated financial benefits expected for these projects. We fund all costs to complete IPR&D projects with internally generated cash flows.

Fiscal Year 2005

Savacor, Inc.: In December 2005, we acquired privately-held Savacor to complement our development efforts in heart failure diagnostic and therapy guidance products. At the date of acquisition, $45.7 million of the purchase price was expensed as IPR&D related to projects that had not yet reached technological feasibility and had no future alternative use. The IPR&D acquired related to in-process projects for a device in clinical trials both in the United States and internationally that measures left atrial pressure and body temperature. Through December 30, 2006, we have incurred costs of approximately $6 million related to these projects. We expect to incur approximately $15 million to bring the device to commercial viability on a worldwide basis within four years. Because Savacor was a development-stage company, the excess of the purchase price over the fair value of the net assets acquired was allocated on a pro-rata basis to the net assets acquired. Accordingly, the majority of the excess purchase price was allocated to IPR&D, the principal asset acquired.

Advanced Neuromodulation Systems, Inc.: In November 2005, we acquired ANS to expand our implantable microelectronics technology programs and provide us immediate access to the neuromodulation segment of the medical device industry. At the date of acquisition, $107.4 million of the purchase price was expensed as IPR&D related to projects that had not yet reached technological feasibility and had no future alternative use. The majority of the IPR&D acquired related to in-process projects for next-generation Eon™ and Genesis® rechargeable IPG devices as well as next-generation leads that deliver electrical impulses to targeted nerves that are causing pain.

A summary of the fair values assigned to each in-process project at the acquisition date and the estimated total cost to complete each project as of December 30, 2006, is presented below (in millions):

Development Projects	Assigned Fair Value			Estimated Total Cost to Complete
Eon™	$	67.2	$	6.9
Genesis™		15.3		2.7
Leads		23.7		0.2
Other		1.2		0.9
	$	107.4	$	10.7

Through December 30, 2006, we have incurred costs of $7.2 million related to these projects. We expect to incur an additional $10.7 million through 2009 to bring these technologies to commercial viability.

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Velocimed, LLC: In April 2005, we acquired Velocimed to further enhance our portfolio of products in the interventional cardiology market. At the date of acquisition, $13.7 million of the purchase price was expensed as IPR&D related to projects for the Proxis™ embolic protection device that had not yet reached technological feasibility in the United States and other geographies and had no future alternative use. The device is used to help minimize the risk of heart attack or stroke if plaque or other debris is dislodged into the blood stream during interventional cardiology procedures. Through December 30, 2006, we had incurred $6.8 million in costs related to these projects. We expect to incur an additional $0.6 million in 2007 to bring this technology to commercial viability.

Endocardial Solutions, Inc.: In January 2005, we acquired ESI to further enhance our portfolio of products used to treat heart rhythm disorders. At the date of acquisition, $12.4 million of the purchase price was expensed as IPR&D related to system upgrades that had not yet reached technological feasibility and had no future alternative use. These major system upgrades are part of the EnSite® system which is used for the navigation and localization of diagnostic and therapeutic catheters used in atrial fibrillation ablation and other EP catheterization procedures. In 2005, we incurred $0.7 million in costs related to these projects and in the third quarter of 2005, we achieved commercial viability and launched EnSite® system version 5.1 and the EnSite® Verismo™ segmentation tool.

Fiscal Year 2004

Irvine Biomedical, Inc.: In October 2004, we acquired IBI to further enhance our portfolio of products used to treat heart rhythm disorders. At the date of acquisition, $9.1 million of the purchase price was expensed for IPR&D related to projects for an ablation system and therapeutic catheters that had not yet reached technological feasibility and had no future alternative use. The majority of the IPR&D related to devices that are part of an ablation system in which catheters are connected to a generator which delivers radio frequency or ultrasound energy through the catheter to create lesions through ablation of cardiac tissue. In 2005 and 2004, we incurred $0.5 million and $0.2 million, respectively, in costs related to these projects and in the fourth quarter of 2005, we achieved commercial viability and received FDA approval to market the Cardiac Ablation Generator and Therapy™ EP catheters, expanding our therapeutic EP portfolio. The remaining IPR&D relates to a therapeutic cool path ablation catheter that allows for the infusion of saline to cool the catheter tip electrode. Through December 30, 2006, we had incurred approximately $3 million in costs related to this device and expect to receive FDA approval in 2007 to market this product.

Special Charges (Credits)

(in thousands)	2006		2005			2004
Cost of sales special charges	$	15,108	$	—		$	12,073
Special charges (credits)		19,719		(11,500	)		28,810
	$	34,827	$	(11,500	)	$	40,883

Fiscal Year 2006

Restructuring Activities: During the third quarter of 2006, management performed a review of the organizational structure of our Cardiac Surgery and Cardiology divisions and our international selling organization. In August 2006, management approved restructuring plans to streamline our operations within our Cardiac Surgery and Cardiology divisions by combining them into one new Cardiovascular division and also to implement changes in our international selling organization by enhancing the efficiency and effectiveness of sales and customer service operations in certain international geographies. This strategic reorganization and operational restructuring will allow us to enhance operating efficiencies and increase our investment in product development.

As a result of these restructuring plans, we recorded pre-tax special charges totaling $34.8 million in the third quarter of 2006 consisting of employee termination costs ($14.7 million), inventory write-downs ($8.7 million), asset write-downs ($7.3 million) and other exit costs ($4.1 million). Of the total $34.8 million special charge, $15.1 million was recorded in cost of sales and $19.7 million was recorded in operating expenses. See Note 8 to the Consolidated Financial Statements for further detail on these charges. Total cash expenditures for the restructuring special charge will be approximately $19 million and will be funded by cash from operations.

In connection with these restructuring plans, approximately 140 individuals were identified for employment termination. In addition, in connection with these restructuring plans, management made the commitment to discontinue certain product lines and dispose of related assets. We also decided to discontinue the use of the Getz trademarks in Japan, and therefore wrote off the $4.2 million intangible asset that we acquired in connection with our 2003 acquisition of Getz Japan.

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We do not anticipate any material short-term or long-term net cost savings resulting from these restructuring activities as we intend to use the immediate savings to fund investments in research and development and productivity improvement. We also do not anticipate any material short-term or long-term impact on future revenue or gross profit percentage as a result of the product lines that we exited in connection with this reorganization because the associated products did not materially contribute to our revenue or gross profit percentage.

A summary of the activity relating to the restructuring accrual for fiscal year 2006 is as follows (in thousands):

		Employee termination costs			Inventory write-downs			Asset write-downs			Other			Total
Balance at December 31, 2005	$	—		$	—		$	—		$	—		$	—
Restructuring charges		14,710			8,694			7,361			4,062			34,827
Non-cash charges used		—			(8,694	)		(7,361	)		—			(16,055	)
Cash payments		(3,642	)		—			—			(586	)		(4,228	)
Balance at December 30, 2006	$	11,068		$	—		$	—		$	3,476		$	14,544

Fiscal Year 2005

Symmetry™ Bypass System Aortic Connector Litigation: During the third quarter of 2005, over 90% of the cases and claims asserted involving the Symmetry™ device were resolved. As a result, we reversed $14.8 million of the pre-tax $21.0 million special charge that was recorded in the third quarter of 2004 to accrue for legal fees in connection with claims involving the Symmetry™ device. Additionally, we recorded a pre-tax charge of $3.3 million in the third quarter of 2005 to accrue for settlement costs negotiated in these resolved cases. These adjustments resulted in a net pre-tax benefit of $11.5 million that we recorded in the third quarter of 2005 related to Symmetry™ device product liability litigation. See Note 5 of the Consolidated Financial Statements for further details on the outstanding litigation against us relating to the Symmetry™ device.

Fiscal Year 2004

Symmetry™ Bypass System Aortic Connector Product Line Discontinuance: On September 23, 2004, we committed to a plan to discontinue developing, manufacturing, marketing and selling the Symmetry™ device. The decision to discontinue developing, manufacturing, marketing and selling the Symmetry™ device was primarily based on operating losses incurred related to the product over the previous three years and the prospect of ongoing operating losses, resulting from a decrease in the number of coronary artery bypass graft surgery cases and an apparent slowdown in the adoption of off-pump procedures for which the Symmetry™ device was developed.

In conjunction with the plan, we recorded a pre-tax charge in the third quarter of 2004 of $14.4 million. The charge was comprised of $4.4 million of inventory write-offs, $4.1 million of fixed asset write-offs, $3.6 million of sales returns, $1.3 million of contract termination and other costs, primarily related to a leased facility and $1.0 million in workforce reduction costs. These activities and all payments required in connection with the charge have been completed.

Symmetry™ Bypass System Aortic Connector Litigation: We have been sued in various jurisdictions by claimants who allege that our Symmetry™ device caused bodily injury or might cause bodily injury. During the third quarter of 2004, the number of lawsuits involving the Symmetry™ device increased and the number of persons asserting claims outside of litigation increased as well. We determined that it was probable future legal fees to defend the cases would be incurred and that the amount of such fees was reasonably estimable. As a result, we recorded a pre-tax charge of $21.0 million in the third quarter of 2004 to accrue for legal fees in connection with claims involving the Symmetry™ device.

Edwards LifeSciences Corporation: In December 2004, we settled a patent infringement lawsuit with Edwards LifeSciences Corporation and recorded a pre-tax charge of $5.5 million.

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Other Income (Expense)

(in thousands)	2006			2005			2004
Interest income	$	9,266		$	19,523		$	10,093
Interest expense		(33,883	)		(10,028	)		(4,810	)
Equity method losses		—			—			(2,091	)
Other		2,175			(821	)		(1,958	)
Other income (expense)	$	(22,442	)	$	8,674		$	1,234

The decrease in other income (expense) during 2006 as compared with 2005 was due to higher interest expense resulting from our issuance of $660.0 million of 2.80% Convertible Senior Debentures in the fourth quarter of 2005 to fund a portion of the acquisition of ANS as well as higher commercial paper borrowings to finance the majority of the repurchase of $700.0 million of our common stock in the second quarter of 2006. We also funded a portion of the ANS acquisition and share repurchases with cash from operations, resulting in lower average invested cash balances and lower interest income during 2006 compared to 2005.

The increase in other income (expense) during 2005 as compared with 2004 was due primarily to higher levels of interest income as a result of higher average invested cash balances and the elimination of equity method losses related to Epicor as it was acquired during 2004. These increases were offset in part by an increase in interest expense as a result of higher amounts of borrowings and higher interest rates. Specifically, we issued convertible debt and commercial paper to fund a portion of the acquisition of ANS in the fourth quarter of 2005.

Income Taxes

(as a percent of pretax income)	2006		2005		2004
Effective tax rate		23.9%		36.7%		23.7%

Certain significant items negatively impacted our 2005 effective rate by 13.0 percentage points. Non-deductible IPR&D charges of $179.2 million recorded during 2005 negatively impacted the 2005 effective tax rate by 11.0 percentage points. Additionally, $26.0 million of income tax expense associated with the repatriation of $500 million of cash from outside the United States under the American Jobs Creation Act of 2004 negatively impacted the 2005 effective tax rate by 4.2 percentage points. Partially offsetting these negative impacts, we recorded a reversal of $13.7 million of previously recorded tax expense due to the finalization of certain tax examinations, resulting in a 2.2 percentage point benefit to the 2005 effective tax rate.

Net Earnings

(dollars in thousands)	2006		2005		2004		2006 vs. 2005 % Change		2005 vs. 2004 % Change
Net earnings	$	548,251	$	393,490	$	409,934		39.3%		-4.0%
Diluted net earnings per share	$	1.47	$	1.04	$	1.10		41.3%		-5.5%

Net earnings were $548.3 million in 2006, a 39% increase over 2005 net earnings of $393.5 million. Diluted net earnings per share were $1.47 in 2006, a 41% increase over 2005 diluted net earnings per share of $1.04. Net earnings for 2006 include an after-tax $22.0 million special charge, or $0.06 per diluted share, related to restructuring activities in our Cardiac Surgery and Cardiology divisions and international selling organization. Net earnings for 2006 also include after-tax stock-based compensation expense of $49.4 million, or $0.13 per diluted share, resulting from the adoption of SFAS No. 123(R) on January 1, 2006.

Net earnings were $393.5 million in 2005, a 4% decrease over 2004, and diluted net earnings per share were $1.04 in 2005, a 6% decrease over 2004. Our 2005 net earnings includes $179.2 million of IPR&D charges, an after-tax $7.2 million special credit relating to a reversal of a portion of the Symmetry™ device product liability litigation special charge recorded in 2004, net of settlement costs, an after-tax $6.2 million contribution to the Foundation, $13.7 million of income tax expense reversals and $26.0 million of income tax expense relating to repatriation of foreign earnings. In total, these after-tax charges and credits amounted to $190.5 million, or $0.50 per diluted share.

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LIQUIDITY

We believe that our existing cash balances, available borrowings under our commercial paper program, long-term committed credit facility, 3-month liquidity facility and future cash generated from operations will be sufficient to meet our working capital and capital investment needs over the next twelve months and in the foreseeable future thereafter. Should suitable investment opportunities arise, we believe that our earnings, cash flows and balance sheet position will permit us to obtain additional debt financing or equity capital, if necessary. Primary short-term liquidity needs are provided through our commercial paper program for which credit support is provided by a long-term $1.0 billion committed credit facility.

On January 25, 2007, our Board of Directors authorized a new share repurchase program of up to $1.0 billion of our outstanding common stock. We are funding the repurchases, which we started on January 29, 2007, with proceeds from the issuance of commercial paper and borrowings under a 3-month $700.0 million liquidity facility. We have utilized $300.0 million of the borrowing capacity under this facility as of February 16, 2007, and intend to refinance these borrowings with longer term debt financing upon completion of the share repurchase program.

At December 30, 2006, our short-term credit ratings were A2 from Standard & Poor’s and P2 from Moody’s. 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.

At December 30, 2006, substantially all of our cash and cash equivalents were 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 which could total as much as 31% of the amount repatriated. Our repatriation of $500.0 million in 2005 was completed in accordance with the provisions of the American Jobs Creation Act of 2004, which provided a one-time repatriation opportunity that was subject to U.S. taxes of approximately 5%.

A discussion of our cash flows from operating, investing and financing activities is provided in the paragraphs that follow.

Cash Flows from Operating Activities

Cash provided by operating activities was $648.8 million for 2006, a $67.5 million decrease from 2005. The decrease in 2006 operating cash flow when compared to 2005 results from changes in operating assets and liabilities as well as a required change in classification of excess tax benefits from the exercise of stock options that negatively impacted the year-over-year operating cash flow comparison.

Operating cash flows decreased $132.0 million due to changes in operating assets and liabilities, principally accounts receivable and inventory, which increased $54.9 million and $77.4 million, respectively. We use two primary measures that focus on accounts receivable and inventory – days sales outstanding (DSO) and days inventory on hand (DIOH). These measures may not be computed the same as similarly titled measures used by other companies. Accounts receivable increased in 2006 as the result of higher sales volume, and our DSO (calculated by dividing average quarterly daily sales by ending net accounts receivable) increased slightly to 93 days at December 30, 2006 from 91 days at December 31, 2005. We use DSO as a measure that places emphasis on how quickly we collect our accounts receivable balances from customers. Inventory increased to support new CRM and CD product introductions as well as to support our increased sales volumes. As a result, DIOH (calculated by dividing average six months-to-date daily cost of sales by ending net inventory) increased to 178 days at December 30, 2006 from 159 days at December 31, 2005. We use DIOH, which can also be expressed as a measure of the estimated number of days of cost of sales on hand, as a measure that places emphasis on how efficiently we are managing our inventory levels.

The required change in classification of excess tax benefits from the exercise of stock options resulted from our adoption of SFAS No. 123(R) on January 1, 2006. For 2005, these excess tax benefits were classified as operating cash flows as part of the change in income taxes payable; however, for 2006, such excess tax benefits are now classified as financing cash flows. These excess tax benefits had positively impacted our 2005 operating cash flows for 2005 by $89.1 million.

Cash Flows from Investing Activities

Cash used in investing activities was $325.6 million in 2006 compared to $1,810.8 million in 2005. Because we did not make any significant acquisitions in 2006, cash used in investing activities decreased when compared to 2005, when we paid almost $1.8 billion for the acquisitions of ANS, ESI, Velocimed and Savacor. In 2006, we did acquire certain businesses involved in the distribution of our products for $38.8 million. In January 2006, we made an additional $12.5 million investment in ProRhythm. Refer to the Acquisitions and Minority Investments section above for more detail on our investment in ProRhythm. We have also been focused on increasing our investments in property, plant and equipment, including next-generation diagnostic equipment such as our Merlin™ Patient Care System which is used by physicians and

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healthcare professionals to program and analyze data from ICDs and pacemakers. As a result, capital expenditures totaled $267.9 million in 2006, a 69% increase over 2005.

Cash Flows from Financing Activities

Cash used in financing activities was $786.2 million in 2006 compared to cash provided by financing activities of $968.2 million in 2005. We repurchased $700.0 million of our common stock in 2006 as well as $654.5 million of convertible debentures, both of which were primarily financed through proceeds from the issuance of commercial paper. As discussed previously, excess tax benefits from the exercise of stock options are now classified as financing cash flows, and this amount can fluctuate significantly in future periods as it is dependent upon, among other things, the level of stock option exercises by our employees as well as the fair market value of our common stock on the exercise dates.

DEBT AND CREDIT FACILITIES

Our commercial paper program provides for the issuance of short-term, unsecured commercial paper with maturities up to 270 days. We had outstanding commercial paper borrowings of $678.4 million at December 30, 2006 and $216.0 million at December 31, 2005 bearing weighted average effective interest rates of 5.4% and 4.2%, respectively. During 2006, we borrowed commercial paper at a weighted average effective interest rate of 5.3%. Any future commercial paper borrowings we make would bear interest at the applicable current market rates.

In December 2006, we entered into a 5-year, $1.0 billion committed credit facility that we may draw on for general corporate purposes and to support our commercial paper program. Borrowings bear interest at the United States Dollar London InterBank Offered Rate (LIBOR) plus 0.27%, or in the event over half of the facility is drawn on, LIBOR plus 0.32%. The interest rate is subject to adjustment in the event of a change in our credit ratings. We have the option for borrowings to bear interest at a base rate, as further described in the facility agreement. This credit facility replaced a $350.0 million credit facility that was scheduled to expire in September 2008 and a $400.0 million credit facility that was scheduled to expire in September 2009. There were no outstanding borrowings under our credit facilities during fiscal years 2006 and 2005.

On January 25, 2007, we entered into a 3-month, $700.0 million liquidity facility that we may draw on to finance purchases of our common stock under the $1.0 billion share repurchase program authorized by our Board of Directors on January 25, 2007. Any borrowings under this facility bear interest at LIBOR plus 0.35%, or in the event over half of the facility is drawn on, LIBOR plus 0.40%, in each case subject to adjustment upon the occurrence of an event of default. We have utilized $300.0 million of the borrowing capacity under this facility as of February 16, 2007 (see Share Repurchases below).

We have issued 1.02% unsecured Yen-denominated notes in Japan (Yen Notes) totaling 20.9 billion Yen, or $175.5 million at December 30, 2006 and $176.9 million at December 31, 2005. Interest payments are required on a semi-annual basis and the entire principal balance is due in May 2010. The principal amount recorded on our balance sheet fluctuates based on the effects of foreign currency translation.

Our long-term committed credit facility, 3-month liquidity facility and Yen Notes contain certain operating and financial covenants. Specifically, the credit facilities require that we have a leverage ratio (defined as the ratio of total debt to EBITDA (net earnings before interest, income taxes, depreciation and amortization)) not exceeding 3.0 to 1.0. The Yen Notes require that we have a ratio of total debt to total capitalization not exceeding 55% and a ratio of consolidated EBIT (net earnings before interest and income taxes) to consolidated interest expense of at least 3.0 to 1.0. Under the credit facilities and the Yen Notes we also have certain limitations on additional liens or indebtedness and limitations on certain acquisitions, investments and dispositions of assets. We were in compliance with all of our debt covenants during 2006 and 2005.

In December 2005, we issued 30-year $660.0 million aggregate principal amount of 2.80% Convertible Senior Debentures (Convertible Debentures). Holders of the Convertible Debentures had the option to require us to repurchase the Convertible Debentures for cash on December 15, 2006. On that date, we were required to repurchase $654.5 million of the Convertible Debentures for cash. We refinanced this cash repurchase through proceeds from the issuance of commercial paper. $5.5 million aggregate principal amount of the Convertible Debentures remains outstanding as of December 30, 2006. We have the right to redeem some or all of the remaining outstanding Convertible Debentures for cash at any time. We also may be required to repurchase some or all of the remaining outstanding Convertible Debentures for cash on various dates after December 15, 2008 and upon the occurrence of certain events. See Note 4 to the Consolidated Financial Statements for further details on the features of these Convertible Debentures.

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SHARE REPURCHASES

On April 18, 2006, our Board of Directors authorized a share repurchase program of up to $700.0 million of our outstanding common stock. The $700.0 million share repurchase program replaced our earlier share repurchase program, under which we were authorized to repurchase up to $300.0 million of our outstanding common stock. No stock had been repurchased under this earlier program. We began making share repurchases on April 21, 2006, and as of May 26, 2006, we had repurchased the maximum amount authorized by the Board of Directors under the repurchase program. We repurchased 18.6 million shares for a total of $700.0 million, which we funded through cash from operations and proceeds from the issuance of commercial paper.

On January 25, 2007, our Board of Directors authorized a new share repurchase program of up to $1.0 billion of our outstanding common stock. We began making share repurchases on January 29, 2007, and as of February 16, 2007, 12.9 million shares had been repurchased for approximately $546 million. The repurchases are being funded through borrowings under our existing commercial paper program and borrowings under our 3-month liquidity facility. Upon completion of our share repurchase program, we intend to refinance the related outstanding borrowings with longer term debt.

DIVIDENDS

We did not declare or pay any cash dividends during 2006, 2005 or 2004. We currently intend to retain our earnings for use in the operation and expansion of our business and therefore do not anticipate paying any cash dividends in the foreseeable future.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

We believe that our off-balance sheet arrangements do not have a material impact on our consolidated earnings, financial position or cash flows. Our off-balance sheet arrangements principally consist of operating leases for various facilities and equipment, purchase commitments and contingent acquisition commitments.

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. In addition, under our bylaws and indemnification agreements we have entered into with our executive officers and directors, we may be required to indemnify our executive officers and directors for losses arising from their conduct in an official capacity on behalf of St. Jude Medical. We may also be required to indemnify officers and directors of certain companies that we have acquired for losses arising from their conduct on behalf of their companies prior to the closing of our acquisition. Our maximum exposure under these indemnification obligations 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 indemnifications.

In connection with certain acquisitions, we may agree to provide additional consideration payments upon the achievement of certain product development milestones, which may include but are not limited to: successful clinical trials and certain product regulatory approvals. We may also provide for additional consideration payments to be made upon the achievement of certain levels of future product sales. Although the timing and/or amount of these additional consideration payments is not certain, we have included future contingent consideration payments in the below table based upon our best estimates as of December 30, 2006.

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Presented below is a summary of our contractual obligations and other commitments as of December 30, 2006:

	Payments Due by Period
(in thousands)	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Contractual obligations related to
off-balance sheet arrangements:
Operating leases	$	88,597	$	24,578	$	32,367	$	21,014	$	10,638
Purchase commitments (a)		293,636		276,233		17,403		—		—
Contingent consideration payments (b)		293,682		81,912		138,793		51,727		21,250
Total	$	675,915	$	382,723	$	188,563	$	72,741	$	31,888
Contractual obligations reflected
in the balance sheet:
Long-term debt (c)		1,055,734		39,932		85,208		930,594		—
Total	$	1,731,649	$	422,655	$	273,771	$	1,003,335	$	31,888

(a)	These amounts include commitments for inventory purchases and capital expenditures that do not exceed our projected requirements and are in the normal course of business. The purchase commitment amounts do not represent the entire anticipated purchases and capital expenditures in the future, but only those for which we are contractually obligated.
(b)	These amounts include contingent commitments to acquire various businesses involved in the distribution of our products, commitments to fund minority investments and other contingent acquisition consideration payments. While it is not certain if and/or when these payments will be made, we have included the payments in the table based on our best estimates of the dates when the milestones and/or contingencies may be met.
(c)	These amounts also include scheduled interest payments on our long-term debt. We have the ability to repay any short-term maturities of our commercial paper borrowings with available cash from our long-term committed credit facility that expires in 2011. See Note 4 to the Consolidated Financial Statements for additional information on our long-term debt obligations.

MARKET RISK

We are exposed to foreign currency exchange rate fluctuations due to transactions denominated primarily in Euros, Japanese Yen, Canadian Dollars, Brazilian Reals, British Pounds, and Swedish Kronor. Although we elected not to enter into any hedging contracts during 2006, 2005 or 2004, historically we have periodically hedged a portion of our foreign currency exchange rate risk through the use of forward exchange or option contracts. The gains or losses on these contracts are intended to offset changes in the fair value of the anticipated foreign currency transactions. We do not enter into contracts for trading or speculative purposes. We continue to evaluate our foreign currency exchange rate risk and the different mechanisms for use in managing such risk. We had no forward exchange or option contracts outstanding during 2006, 2005 or 2004. A hypothetical 10% change in the value of the U.S. Dollar in relation to our most significant foreign currency exposures would have had an impact of $124.3 million on our 2006 net sales. This amount is not indicative of the hypothetical net earnings impact due to partially offsetting impacts on cost of sales and operating expenses.

With our acquisition of Getz Japan during 2003, we significantly increased our exposure to foreign currency exchange rate fluctuations due to transactions denominated in Japanese Yen. We elected to naturally hedge a portion of our Yen-denominated net asset exposure by issuing long term Yen-denominated debt, the proceeds of which were used to repay the short-term bank debt that we used to fund a portion of the Getz Japan purchase price. Excess cash flows from our Japan operations will be used to fund principal and interest payments on the Yen Notes. We have not entered into any Yen-denominated hedging contracts to mitigate any remaining foreign currency exchange rate risk. We are also exposed to fair value risk on our Yen Notes. A hypothetical 10% change in interest rates would have an impact of approximately $1 million on the fair value of the Yen Notes, which is not material to our consolidated earnings or financial position.

In the United States, we issue short-term, unsecured commercial paper that bears interest at varying market rates. We also have one committed credit facility that has a variable LIBOR-based interest rate. Our variable interest rate borrowings had a notional value of $678.4 million at December 31, 2006. A hypothetical 10% change in interest rates assuming the current level of borrowings would have had an impact of approximately $4 million on our 2006 interest expense, which is not material to our consolidated earnings.

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We are also exposed to equity market risk on our marketable equity security investments. We hold certain marketable equity securities of emerging technology companies. Our investments in these companies had a fair value of $53.8 million at December 30, 2006, which are subject to the underlying price risk of the public equity markets.

COMPETITION AND OTHER CONSIDERATIONS

We expect that market demand, government regulation and reimbursement policies, and societal pressures will continue to change the worldwide healthcare industry resulting in further business consolidations and alliances. We participate with industry groups to promote the use of advanced medical device technology in a cost-conscious environment.

The global medical technology industry is highly competitive and is characterized by rapid product development and technological change. Our products must continually improve technologically and provide improved clinical outcomes due to the competitive nature of the industry. In addition, competitors have historically employed litigation to gain a competitive advantage.

The pacemaker and ICD markets are highly competitive. Rapid technological change in these markets is expected to continue, requiring us to invest heavily in R&D and to effectively market our products.

The cardiac surgery markets, which include mechanical heart valves, tissue heart valves and valve repair products, are also highly competitive. Cardiac surgery therapies have shifted to tissue valves and repair products from mechanical heart valves, resulting in an overall market share loss for us. Competition is anticipated to continue to place pressure on pricing and terms, including a trend toward vendor-owned (consignment) inventory at the hospitals. Also, healthcare reform is expected to result in further hospital consolidations over time with related pressure on pricing and terms.

The neuromodulation market is one of medical technology’s fastest growing segments. Competitive pressures will increase in the future as our two principal competitors attempt to secure and grow their positions in the neuromodulation market. Other companies are attempting and will attempt in the future to bring new products or therapies into this market. Barriers to entry for new competitors are high, due to a long and expensive product development and regulatory approval process and the intellectual property and patent positions existing in the market. However, other larger medical device companies may be able to enter the neuromodulation market by leveraging their capabilities into the neuromodulation field, thereby decreasing the time and resources required to enter the market.

The cardiology therapy area is also growing and has numerous competitors. Over 75% of our sales in this area are comprised of vascular closure devices. The market for vascular closure devices is highly competitive, and there are several companies, in addition to St. Jude Medical, that manufacture and market these products worldwide. Additionally, we anticipate other large companies will enter this market in the coming years, which will likely increase competition.

The atrial fibrillation therapy area is broadening to include multiple therapy methods. The marketplace currently embraces multiple methods of treating atrial fibrillation. Treatments include drugs, external electrical cardioversion and defibrillation, implantable defibrillators and open-heart surgery. As a result we have numerous competitors in the emerging atrial fibrillation market. Larger competitors may expand their presence in the atrial fibrillation market by leveraging their cardiac rhythm management capabilities.

We operate in an industry that is susceptible to significant product liability claims. These claims may be brought by individuals seeking relief for themselves or, increasingly, by groups seeking to represent a class. In addition, product liability claims may be asserted against us in the future relative to events that are not known to us at the present time. Our product liability insurance coverage is designed to help protect us against a catastrophic claim. Our product liability insurance coverage for the period June 15, 2006 through June 15, 2007 is $350 million, with a $100 million deductible per occurrence.

Group purchasing organizations, independent delivery networks and large single accounts, such as the Veterans Administration in the United States, continue to consolidate purchasing decisions for some of our hospital customers. We have contracts in place with many of these organizations. In some circumstances, our inability to obtain a contract with such an organization could adversely affect our efforts to sell our products to that organization’s hospitals.

19

CAUTIONARY STATEMENTS

In this discussion and in other written or oral statements made from time to time, we have included and may include statements that may constitute “forward-looking statements” with respect to the financial condition, results of operations, plans, objectives, future performance and business of St. Jude Medical and its subsidiaries. Statements preceded by, followed by or that include words such as “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “believes” or similar expressions are intended to identify some of the forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are included, along with this statement, for purposes of complying with the safe harbor provisions of that Act. These forward-looking statements involve risks and uncertainties. By identifying these statements for you in this manner, we are alerting you to the possibility that actual results may differ, possibly materially, from the results indicated by these forward-looking statements. We undertake no obligation to update any forward-looking statements. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the risks and uncertainties discussed in the previous sections entitled Off-Balance Sheet Arrangements and Contractual Obligations, Market Risk and Competition and Other Considerations and in Part I, Item 1A, Risk Factors of our Annual Report on Form 10-K as well as the various factors described below. Since it is not possible to foresee all such factors, you should not consider these factors to be a complete list of all risks or uncertainties. We believe the most significant factors that could affect our future operations and results are set forth in the list below.

1.	Any legislative or administrative reform to the U.S. Medicare or Medicaid systems or international reimbursement systems that significantly reduces reimbursement for procedures using our medical devices or denies coverage for such procedures, as well as adverse decisions relating to our products by administrators of such systems in coverage or reimbursement issues.
2.	Assertion, acquisition or grant of key patents by or to others that have the effect of excluding us from market segments or require us to pay royalties.
3.	Economic factors, including inflation, changes in interest rates, and changes in foreign currency exchange rates.
4.	Product introductions by competitors which have advanced technology, better features or lower pricing.
5.	Price increases by suppliers of key components, some of which are sole-sourced.
6.	A reduction in the number of procedures using our devices caused by cost-containment pressures or preferences for alternate therapies.
7.	Safety, performance or efficacy concerns about our products, many of which are expected to be implanted for many years, leading to recalls and/or advisories with the attendant expenses and declining sales.
8.	Changes in laws, regulations or administrative practices affecting government regulation of our products, such as FDA laws and regulations, that increase the time and/or expense of obtaining approval for products or impose additional burdens on the manufacture and sale of medical devices.
9.	Regulatory actions arising from concern over Bovine Spongiform Encephalopathy, sometimes referred to as “mad cow disease,” that have the effect of limiting our ability to market products using collagen, such as Angio-Seal™, or that impose added costs on the procurement of collagen.
10.	Difficulties obtaining, or the inability to obtain, appropriate levels of product liability insurance.
11.	The ability of our Silzone® product liability insurers to meet their obligations to us.
12.	Serious weather or other natural disasters that cause damage to the facilities of our critical suppliers or one or more of our facilities, such as an earthquake affecting our facilities in California or a hurricane affecting our facility in Puerto Rico.
13.	Healthcare industry consolidation leading to demands for price concessions or the exclusion of some suppliers from significant market segments.
14.	Adverse developments in the investigation of business practices in the cardiac rhythm management industry by the U.S. Attorney’s Office in Boston.
15.	Adverse developments in litigation, including product liability litigation, patent or other intellectual property litigation or shareholder litigation.
16.	Inability to successfully integrate the businesses that we have acquired in recent years, including ANS, and that we plan to acquire.
17.	Adverse developments arising out of the investigation by the U.S. Department of Health and Human Services, Office of the Inspector General into certain business practices of ANS.
18.	Failure to successfully complete clinical trials for new indications for our products and failure to successfully develop markets for such new indications.

20

Report of Management

Management’s Report on the Financial Statements

We are responsible for the preparation, integrity and objectivity of the accompanying financial statements. The financial statements were prepared in accordance with accounting principles generally accepted in the United States and include amounts which reflect management’s best estimates based on its informed judgment and consideration given to materiality. We are also responsible for the accuracy of the related data in the annual report and its consistency with the financial statements.

Audit Committee Oversight

The adequacy of our internal accounting controls, the accounting principles employed in our financial reporting and the scope of independent and internal audits are reviewed by the Audit Committee of the Board of Directors, consisting solely of outside directors. The independent registered public accounting firm meets with, and has confidential access to, the Audit Committee to discuss the results of its audit work.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of the Company’s management, including the CEO and the CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the CEO and CFO concluded that our internal control over financial reporting was effective as of December 30, 2006. Management’s assessment of the effectiveness of our internal control over financial reporting as of December 30, 2006 has been audited by Ernst & Young LLP, our independent registered public accounting firm, as stated in their report which is included herein.

/s/ DANIEL J. STARKS

Daniel J. Starks
Chairman, President and Chief Executive Officer

/s/ JOHN C. HEINMILLER

John C. Heinmiller
Executive Vice President and Chief Financial Officer

21

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
of St. Jude Medical, Inc.

We have audited management’s assessment, included in the section of the accompanying Report of Management entitled Management’s Report on Internal Control Over Financial Reporting, that St. Jude Medical, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 30, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). St. Jude Medical, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that St. Jude Medical, Inc. maintained effective internal control over financial reporting as of December 30, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, St. Jude Medical, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 30, 2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of St. Jude Medical, Inc and subsidiaries as of December 30, 2006 and December 31, 2005 and the related consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 30, 2006, and our report dated February 16, 2007 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Minneapolis, Minnesota
February 16, 2007

22

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
of St. Jude Medical, Inc.

We have audited the accompanying consolidated balance sheets of St. Jude Medical, Inc. and subsidiaries as of December 30, 2006 and December 31, 2005 and the related consolidated statements of earnings, shareholders’ equity, and cash flows for each of the three fiscal years in the period ended December 30, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of St. Jude Medical, Inc. and subsidiaries at December 30, 2006 and December 31, 2005 and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 30, 2006 in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements, effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, using the modified prospective method.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of St. Jude Medical, Inc.’s internal control over financial reporting as of December 30, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 16, 2007 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Minneapolis, Minnesota
February 16, 2007

23

CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)

Fiscal Year Ended	December 30, 2006			December 31, 2005			January 1, 2005
Net sales	$	3,302,447		$	2,915,280		$	2,294,173
Cost of sales:
Cost of sales before special charges		898,405			796,761			666,977
Special charges		15,108			—			12,073
Total cost of sales		913,513			796,761			679,050
Gross profit		2,388,934			2,118,519			1,615,123
Selling, general and administrative expense		1,195,030			968,888			759,320
Research and development expense		431,102			369,227			281,935
Purchased in-process research and development charges		—			179,174			9,100
Special charges (credits)		19,719			(11,500	)		28,810
Operating profit		743,083			612,730			535,958
Other income (expense)		(22,442	)		8,674			1,234
Earnings before income taxes		720,641			621,404			537,192
Income tax expense		172,390			227,914			127,258
Net earnings	$	548,251		$	393,490		$	409,934
Net earnings per share:
Basic	$	1.53		$	1.08		$	1.16
Diluted	$	1.47		$	1.04		$	1.10
Weighted average shares outstanding:
Basic		359,252			363,612			353,454
Diluted		372,830			379,106			370,992

See notes to consolidated financial statements.

24

CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

	December 30, 2006			December 31, 2005
ASSETS
Current Assets
Cash and cash equivalents	$	79,888		$	534,568
Accounts receivable, less allowances for doubtful accounts		882,098			793,929
Inventories		452,812			378,456
Deferred income taxes, net		117,330			100,272
Other		158,037			133,916
Total current assets		1,690,165			1,941,141
Property, Plant and Equipment
Land, buildings and improvements		252,285			176,413
Machinery and equipment		626,150			566,258
Diagnostic equipment		282,831			187,923
Property, plant and equipment at cost		1,161,266			930,594
Less accumulated depreciation		(543,415	)		(492,178	)
Net property, plant and equipment		617,851			438,416
Other Assets
Goodwill		1,649,581			1,634,973
Other intangible assets, net		560,276			572,246
Other		271,921			258,064
Total other assets		2,481,778			2,465,283
TOTAL ASSETS	$	4,789,794		$	4,844,840
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Current portion of long-term debt	$	—		$	876,000
Accounts payable		162,954			169,296
Income taxes payable		121,663			108,910
Accrued expenses
Employee compensation and related benefits		217,694			204,089
Other		173,896			176,087
Total current liabilities		676,207			1,534,382
Long-term debt		859,376			176,970
Deferred income taxes, net		163,336			157,443
Other liabilities		121,888			93,000
Total liabilities		1,820,807			1,961,795
Commitments and Contingencies (Notes 2 and 5)		—			—
Shareholders’ Equity
Preferred stock		—			—
Common stock (353,932,000 and 367,904,418 shares issued and outstanding at December 30, 2006 and December 31, 2005, respectively)		35,393			36,790
Additional paid-in capital		100,173			514,360
Unearned compensation		—			(5,641	)
Retained earnings		2,787,092			2,345,311
Accumulated other comprehensive income (loss):
Cumulative translation adjustment		23,243			(29,231	)
Unrealized gain on available-for-sale securities		23,086			21,456
Total shareholders’ equity		2,968,987			2,883,045
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	4,789,794		$	4,844,840

See notes to consolidated financial statements.

25

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands, except share amounts)

	Common Stock						Additional Paid-In Capital			Unearned Compensation			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	Number of Shares			Amount
Balance at January 4, 2004		346,028,334		$	34,602		$	18,326		$	—		$	1,541,887		$	6,820		$	1,601,635
Comprehensive income:
Net earnings														409,934
Other comprehensive income:																				409,934
Unrealized gain on investments, net of taxes of $3,034																	4,167			4,167
Foreign currency translation adjustment, net of taxes of $(8,270)																	58,097			58,097
Other comprehensive income																				62,264
Comprehensive income																				472,198
Common stock issued under stock plans and other, net		12,732,359			1,274			144,869												146,143
Tax benefit from stock plans								113,952												113,952
Balance at January 1, 2005		358,760,693			35,876			277,147			—			1,951,821			69,084			2,333,928
Comprehensive income:
Net earnings														393,490						393,490
Other comprehensive income (loss):
Unrealized gain on investments, net of taxes of $3,988																	6,223			6,223
Foreign currency translation adjustment, net of taxes of $1,809																	(83,082	)		(83,082	)
Other comprehensive loss																				(76,859	)
Comprehensive income																				316,631
Options assumed in business combinations								21,997			(6,152	)								15,845
Stock-based compensation								944			511									1,455
Common stock issued under stock plans and other, net		9,143,725			914			125,199												126,113
Tax benefit from stock plans								89,073												89,073
Balance at December 31, 2005		367,904,418			36,790			514,360			(5,641	)		2,345,311			(7,775	)		2,883,045
Comprehensive income:
Net earnings														548,251						548,251
Other comprehensive income:
Unrealized gain on investments, net of taxes of $929																	1,630			1,630
Foreign currency translation adjustment, net of taxes of $(2,179)																	52,474			52,474
Other comprehensive income																				54,104
Comprehensive income																				602,355
Repurchases of common stock		(18,579,390	)		(1,858	)		(591,672	)					(106,470	)					(700,000	)
Stock-based compensation								70,402												70,402
Reclassification upon adoption of SFAS 123(R)								(5,641	)		5,641									—
Common stock issued under stock plans and other, net		4,606,972			461			76,901												77,362
Tax benefit from stock plans								35,823												35,823
Balance at December 30, 2006		353,932,000		$	35,393		$	100,173		$	—		$	2,787,092		$	46,329		$	2,968,987

See notes to consolidated financial statements.

26

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

Fiscal Year Ended	December 30, 2006			December 31, 2005			January 1, 2005
OPERATING ACTIVITIES
Net earnings	$	548,251		$	393,490		$	409,934
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation		94,002			76,364			68,294
Amortization		72,810			53,845			17,461
Stock-based compensation		70,402			1,455			—
Excess tax benefits from stock-based compensation		(28,577	)		—			—
Equity method losses of minority investments, net of income taxes		—			—			1,742
Purchased in-process research and development charges		—			179,174			9,100
Special charges (credits)		34,827			(11,500	)		40,883
Deferred income taxes		(10,927	)		4,833			(9,340	)
Changes in operating assets and liabilities, net of business acquisitions:
Accounts receivable		(54,945	)		(138,846	)		(102,405	)
Inventories		(77,444	)		(23,695	)		(14,209	)
Other current assets		(18,329	)		11,767			164
Accounts payable and accrued expenses		(29,175	)		69,458			25,793
Income taxes payable		47,916			99,968			156,865
Net cash provided by operating activities		648,811			716,313			604,282
INVESTING ACTIVITIES
Purchases of property, plant and equipment		(267,896	)		(158,768	)		(89,468	)
Proceeds from sale of marketable securities		—			153,389			—
Business acquisition payments, net of cash acquired		(38,797	)		(1,775,527	)		(249,941	)
Other		(18,946	)		(29,864	)		(68,399	)
Net cash used in investing activities		(325,639	)		(1,810,770	)		(407,808	)
FINANCING ACTIVITIES
Proceeds from exercise of stock options and stock issued		77,362			126,113			146,143
Excess tax benefits from stock-based compensation		28,577			—			—
Common stock repurchased, including related costs		(700,000	)		—			—
Net payments under short-term debt facilities		—			—			(11,964	)
Issuance (repayment) of convertible debentures		(654,502	)		660,000			—
Borrowings under debt facilities		4,949,101			3,377,775			2,285,775
Payments under debt facilities		(4,486,779	)		(3,195,718	)		(2,409,200	)
Net cash provided by (used in) financing activities		(786,241	)		968,170			10,754
Effect of currency exchange rate changes on cash and cash equivalents		8,389			(27,185	)		19,559
Net increase (decrease) in cash and equivalents		(454,680	)		(153,472	)		226,787
Cash and cash equivalents at beginning of year		534,568			688,040			461,253
Cash and cash equivalents at end of year	$	79,888		$	534,568		$	688,040
Supplemental Cash Flow Information
Cash paid during the year for:
Interest	$	39,746		$	9,392		$	5,158
Income taxes	$	140,799		$	124,515		$	24,564

See notes to consolidated financial statements.

27

Notes to Consolidated Financial Statements

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Company Overview:  St. Jude Medical, Inc. (St. Jude Medical or the Company) develops, manufactures and distributes cardiovascular medical devices for the global cardiac rhythm management, cardiac surgery, cardiology and atrial fibrillation therapy areas and implantable neuromodulation devices for the management of chronic pain. The Company’s five operating segments are Cardiac Rhythm Management (CRM), Cardiac Surgery (CS), Neuromodulation (Neuro), Cardiology (CD) and Atrial Fibrillation (AF). Each operating segment focuses on developing and manufacturing products for its respective therapy area. The Company’s principal products in each of these operating segments are as follows: CRM – tachycardia implantable cardioverter defibrillator systems (ICDs) and bradycardia pacemaker systems (pacemakers); CS – mechanical and tissue heart valves and valve repair products; Neuro – neurostimulation devices; CD – vascular closure devices, guidewires, hemostasis introducers and other interventional cardiology products; and AF – electrophysiology (EP) introducers and catheters, advanced cardiac mapping and navigation systems and ablation systems.

The Company markets and sells its products primarily through a direct sales force. The principal geographic markets for the Company’s products are the United States, Europe and Japan.

Principles of Consolidation:  The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.

Fiscal Year:  The Company utilizes a 52/53-week fiscal year ending on the Saturday nearest December 31. Fiscal years 2006, 2005 and 2004 consisted of 52 weeks and ended on December 30, 2006, December 31, 2005 and January 1, 2005, respectively.

Use of Estimates:  Preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Cash Equivalents:  The Company considers highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents are stated at cost, which approximates market. The Company’s cash equivalents include bank certificates of deposit, money market funds and instruments, commercial paper investments and repurchase agreements collateralized by U.S. government agency securities. The Company performs periodic evaluations of the relative credit standing of the financial institutions and issuers of its cash equivalents and limits the amount of credit exposure with any one issuer.

Marketable securities:  Marketable securities consist of publicly-traded equity securities that are classified as available-for-sale securities and investments in mutual funds that are classified as trading securities. On the balance sheet, available-for-sale securities and trading securities are classified as other current assets and other assets, respectively.

Available-for-sale securities are recorded at fair market value based upon quoted market prices. Unrealized gains and losses, net of related incomes taxes, are recorded in accumulated other comprehensive income (loss) in shareholders’ equity. The following table summarizes the components of the balance of the Company’s available-for-sale securities (in thousands):

	December 30, 2006			December 31, 2005
Adjusted cost	$	15,792		$	15,820
Gross unrealized gains		38,036			35,673
Gross unrealized losses		(51	)		(413	)
Fair value	$	53,777		$	51,080

Realized gains (losses) from the sale of available-for-sale securities are recorded in other income (expense) and are computed using the specific identification method. During 2005, the Company sold an available-for-sale security for a realized gain of $1.4 million. When the fair value of a security falls below its original cost and the Company determines that the corresponding unrealized loss is other-than-temporary, the Company records an impairment loss to net earnings in the period the determination is made. During 2005 and 2004, the Company recognized impairment losses of $0.6 million

28

and $1.3 million, respectively, on certain available-for-sale securities. The related other comprehensive income (loss) reclassification adjustments for the realized gain and realized losses were not material.

The Company’s investments in mutual funds are recorded at fair market value based upon quoted market prices and are held in a rabbi trust which is not available for general corporate purposes and is subject to creditor claims in the event of insolvency. These investments are specifically designated as available to the Company solely for the purpose of paying benefits under the Company’s deferred compensation plan (see Note 11). The fair value of these investments totaled approximately $106 million at December 30, 2006 and approximately $76 million at December 31, 2005.

Accounts Receivable: The Company grants credit to customers in the normal course of business, but generally does not require collateral or any other security to support its receivables. The Company maintains an allowance for doubtful accounts for potential credit losses. The allowance for doubtful accounts was $24.9 million at December 30, 2006 and $33.3 million at December 31, 2005.

Inventories: Inventories are stated at the lower of cost or market with cost determined using the first-in, first-out method. Inventories consist of the following at (in thousands):

	December 30, 2006		December 31, 2005
Finished goods	$	315,306	$	262,640
Work in process		29,844		34,531
Raw materials		107,662		81,285
	$	452,812	$	378,456

Property, Plant and Equipment: Property, plant and equipment are recorded at cost and are depreciated using the straight-line method over their estimated useful lives, ranging from 15 to 39 years for buildings and improvements, three to seven years for machinery and equipment and three to eight years for diagnostic equipment. Diagnostic equipment primarily consists of programmers that are used by physicians and healthcare professionals to program and analyze data from pacemaker and ICD devices. The estimated useful lives of this equipment are based on management’s estimates of its usage by the physicians and healthcare professionals, factoring in new technology platforms and rollouts by the Company. To the extent that the Company experiences changes in the usage of this equipment or introductions of new technologies to the market, the estimated useful lives of this equipment may change in a future period. Diagnostic equipment had a net carrying value of $156.3 million and $88.6 million at December 30, 2006 and December 31, 2005, respectively. Property, plant and equipment are depreciated using accelerated methods for income tax purposes.

Goodwill and Other Intangible Assets: Goodwill represents the excess of cost over the fair value of identifiable net assets of businesses acquired. Other intangible assets consist of purchased technology and patents, customer lists and relationships, distribution agreements, trademarks and tradenames and licenses and are amortized on a straight-line basis using lives ranging from 3 to 20 years.

Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), requires that goodwill for each reporting unit be reviewed for impairment at least annually. The Company has five reporting units at December 31, 2006, consisting of its five operating segments (see Note 12). The Company tests goodwill for impairment using the two-step process prescribed in SFAS No. 142. In the first step, the Company compares the fair value of each reporting unit, as computed primarily by present value cash flow calculations, to its book carrying value, including goodwill. If the fair value exceeds the carrying value, no further work is required and no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is potentially impaired and the Company would then complete step 2 in order to measure the impairment loss. In step 2, the Company would calculate the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets (including unrecognized intangible assets) of the reporting unit from the fair value of the reporting unit (as determined in step 1). If the implied fair value of goodwill is less than the carrying value of goodwill, the Company would recognize an impairment loss equal to the difference.

Management also reviews other intangible assets for impairment at least annually to determine if any adverse conditions exist that would indicate impairment. If the carrying value of other intangible assets exceeds the undiscounted cash flows, the carrying value is written down to fair value in the period identified. In assessing fair value, management generally utilizes present value cash flow calculations using an appropriate risk-adjusted discount rate.

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During the fourth quarters of 2006 and 2005, management completed its annual goodwill and other intangible asset impairment reviews with no impairments to the carrying values identified.

Technology License Agreement: The Company has a technology license agreement that provides access to a significant number of patents covering a broad range of technology used in the Company’s pacemaker and ICD systems. The agreement provided for payments through September 2004, at which time the Company was granted a fully paid-up license to the underlying patents which expire at various dates through the year 2014. The costs deferred under this license are recorded on the balance sheet in other assets and are being recognized as an expense over the term of the underlying patents’ lives. The license had a net carrying value of $86.5 million and $109.2 million at December 30, 2006 and December 31, 2005, respectively.

Product Warranties: The Company offers a warranty on various products, the most significant of which relate to pacemaker and ICD systems. 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. Changes in the Company’s product warranty liability during fiscal years 2006 and 2005 were as follows (in thousands):

	2006			2005
Balance at beginning of year	$	19,897		$	13,235
Warranty expense recognized		(1,089	)		9,566
Warranty credits issued		(6,026	)		(2,904	)
Balance at end of year	$	12,782		$	19,897

Revenue Recognition: The Company sells its products to hospitals primarily through a direct sales force. In certain international markets, the Company sells its products through independent distributors. The Company recognizes revenue when persuasive evidence of a sales arrangement exists, delivery of goods occurs through the transfer of title and risks and rewards of ownership, the selling price is fixed or determinable and collectibility is reasonably assured. A portion of the Company’s inventory is held by field sales representatives or consigned at hospitals. Revenue is recognized at the time the Company is notified that the inventory has been implanted or used by the customer. For products that are not consigned, revenue recognition occurs upon shipment to the hospital or, in the case of distributors, when title transfers under the contract. The Company offers sales rebates and discounts to certain customers. The Company records such rebates and discounts as a reduction of net sales in the same period revenue is recognized. The Company estimates rebates based on sales terms and historical experience.

Research and Development: Research and development costs are expensed as incurred.

Purchased In-Process Research and Development (IPR&D): When the Company acquires another entity, the purchase price is allocated, as applicable, between IPR&D, other identifiable intangible assets, tangible assets and goodwill. Determining the portion of the purchase price allocated to IPR&D requires the Company to make significant estimates.

The Company’s policy defines IPR&D as the value assigned to those projects for which the related products have not yet reached technological feasibility and have no future alternative use. The primary basis for determining the technological feasibility of these projects is obtaining regulatory approval to market the underlying products in an applicable geographic region. In accordance with accounting principles generally accepted in the United States, the value attributed to those projects is expensed in conjunction with the acquisition. The Company recorded IPR&D of $179.2 million and $9.1 million in 2005 and 2004, respectively.

The Company uses the income approach to establish fair values of IPR&D as of the acquisition date. This approach establishes fair value by estimating the after-tax cash flows attributable to a project over its useful life and then discounting these after-tax cash flows back to a present value. The Company bases revenue assumptions on estimates of relevant market sizes, expected market growth rates, expected trends in technology and expected product introductions by competitors. In arriving at the value of the projects, the Company considers, among other factors, the stage of completion, the complexity of the work completed as of the acquisition date, the costs already incurred, the projected costs of completion, the contribution of core technologies and other acquired assets, the expected introduction date and the estimated useful life of the technology. The discount rate used is determined at the time of acquisition, and includes consideration of the assessed risk of the project not being developed to commercial feasibility. For the IPR&D acquired in connection with recent acquisitions, risk-adjusted discount rates ranging from 16% to 22% were used in 2005 and a risk-adjusted discount rate of 16% was used in 2004 to discount projected cash flows. The Company believes that the IPR&D

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amounts recorded represent the fair value at the date of acquisition and do not exceed the amount a third party would pay for the projects.

Litigation: The Company accrues a liability for costs related to claims, including future legal costs, settlements and judgments where it has assessed that a loss is probable and an amount can be reasonably estimated.

Stock-Based Compensation:  Effective January 1, 2006, the Company adopted the provisions of, and accounts for stock-based compensation in accordance with, SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123(R)). The Company elected the modified-prospective method of adopting SFAS No. 123(R), under which prior periods are not retroactively revised. 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 the vesting period. For the Company, the valuation provisions of SFAS No. 123(R) apply to awards granted after the January 1, 2006 effective date. Stock-based compensation expense for awards granted prior to the effective date but that remain unvested on 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.

Prior to adopting SFAS No. 123(R) on January 1, 2006, the Company used a graded attribution method, as described in FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, to recognize its pro forma stock-based compensation expense. Unrecognized stock-based compensation expense for awards granted prior to the adoption of SFAS No. 123(R) will continue to be recognized under the graded attribution method. Stock-based compensation expense for awards granted after the adoption of SFAS No. 123(R) will be recognized under a straight-line attribution method.

The amount of stock-based compensation expense recognized during a period is based on the portion of the awards that are ultimately expected to vest. The Company estimates pre-vesting option forfeitures at the time of grant by analyzing historical data and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the total expense recognized over the vesting period will only be for those awards that vest. The Company’s awards are not eligible to vest early in the event of retirement, however, the majority of the Company’s awards vest early in the event of death, disability or change in control.

The adoption of SFAS No. 123(R) had a material impact on the Company’s consolidated results of operations. The following table presents the statement of earnings impacts of stock-based compensation expense recognized during fiscal year 2006 (in thousands, except per share amounts):

	2006
Cost of sales	$	5,757
Selling, general and administrative expense		46,986
Research and development expense		17,659
Earnings before taxes		70,402
Net earnings	$	49,369
Basic net earnings per share	$	0.14
Diluted net earnings per share	$	0.13

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The following table illustrates the effect on net earnings and net earnings per share for fiscal years 2005 and 2004 if the Company had accounted for its stock-based compensation under the fair value recognition provisions of SFAS No. 123 (in thousands, except per share amounts):

		2005			2004
Net earnings, as reported	$	393,490		$	409,934
Add: Total stock-based compensation expense included in net earnings, net of related tax effects		902			—
Less: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(45,946	)		(50,888	)
Pro forma net earnings	$	348,446		$	359,046
Net earnings per share:
Basic-as reported	$	1.08		$	1.16
Basic-pro forma	$	0.96		$	1.02
Diluted-as reported	$	1.04		$	1.10
Diluted-pro forma	$	0.92		$	0.98

The adoption of SFAS No. 123(R) also had a material impact on the Company’s presentation of its consolidated statement of cash flows. Prior to the adoption of SFAS No. 123(R), stock option exercise tax benefits in excess of tax benefits from recognized stock-based compensation expense were reported as operating cash flows. Under SFAS No. 123(R), such excess tax benefits are reported as financing cash flows. Although total cash flows under SFAS No. 123(R) remain unchanged from what would have been reported under prior accounting standards, net operating cash flows are reduced and net financing cash flows are increased due to the adoption of SFAS No. 123(R). For fiscal year 2006, there were excess tax benefits of $28.6 million, which are required to be classified as an operating cash outflow and a financing cash inflow. For fiscal year 2005 and fiscal year 2004, there were excess tax benefits of $89.1 million and $114.0 million, respectively, which are classified as an operating cash inflow as part of the change in income taxes payable.

Net Earnings Per Share: Basic net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares during the period, exclusive of restricted shares. Diluted net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares and dilutive securities.

The table below sets forth the computation of basic and diluted net earnings per share for fiscal years 2006, 2005 and 2004 (in thousands, except per share amounts):

		2006		2005		2004
Numerator:
Net earnings	$	548,251	$	393,490	$	409,934
Denominator:
Basic-weighted average shares outstanding		359,252		363,612		353,454
Effect of dilutive securities:
Employee stock options		13,481		15,460		17,525
Restricted shares		97		34		13
Diluted-weighted average shares outstanding		372,830		379,106		370,992
Basic net earnings per share	$	1.53	$	1.08	$	1.16
Diluted net earnings per share	$	1.47	$	1.04	$	1.10

Diluted-weighted average shares outstanding have not been adjusted for certain dilutive securities where the effect of including those securities would not have been dilutive. For 2006, 2005 and 2004, 13.9 million, 4.9 million and 4.8 million potential shares of common stock, respectively, were excluded from the diluted net earnings per share computation because they were not dilutive.

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Foreign Currency Translation: Sales and expenses denominated in foreign currencies are translated at average exchange rates in effect throughout the year. Assets and liabilities of foreign operations are translated at period-end exchange rates. Gains and losses from translation of net assets of foreign operations, net of related income taxes, are recorded in accumulated other comprehensive income. Foreign currency transaction gains and losses are included in other income (expense).

New Accounting Pronouncements: In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN No. 48) which clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. FIN No. 48 is effective for fiscal years beginning after December 15, 2006 and was adopted by the Company effective January 1, 2007. The Company does not expect the financial statement impact of adoption to be material.

NOTE 2 – ACQUISITIONS AND MINORITY INVESTMENTS

Acquisitions

The results of operations of businesses acquired have been included in the Company’s consolidated results of operations since the dates of acquisition. Other than the acquisition of Advanced Neuromodulation Systems, Inc., pro forma results of operations have not been presented for these acquisitions since the effects of these business acquisitions were not material to the Company either individually or in aggregate.

Fiscal Year 2006

Advanced Neuromodulation Systems, Inc. (ANS): During 2006, the Company finalized the purchase price allocation relating to the acquisition of ANS. The impacts of finalizing the purchase price allocation, individually and in the aggregate, were not material. Overall, the Company recorded a $2.9 net million increase to ANS goodwill upon finalization of the purchase accounting.

During 2006, the Company also acquired businesses involved in the distribution of the Company’s products for aggregate cash consideration of $38.8 million which was recorded as other intangible assets.

Fiscal Year 2005

Advanced Neuromodulation Systems, Inc.: On November 29, 2005, the Company completed its acquisition of ANS for $1,353.9 million, which includes closing costs less $5.1 million of cash acquired. The ANS acquisition did not provide for the payment of any contingent consideration. ANS had been publicly traded on the NASDAQ market under the ticker symbol ANSI. ANS designed, developed, manufactured and marketed implantable neuromodulation devices used primarily to manage chronic severe pain. The ANS acquisition expanded the Company’s implantable microelectronics technology programs and provided the Company an immediate presence in the neuromodulation segment of the medical device industry. The Company recorded an IPR&D charge of $107.4 million associated with this transaction.

The goodwill recorded as a result of the ANS acquisition is not deductible for income tax purposes and was allocated entirely to the Company’s Neuro operating segment. The goodwill recognized represents future product opportunities that did not have regulatory approval at the date of acquisition. In connection with the acquisition of ANS, the Company recorded $249.3 million of developed and core technology intangible assets and $23.3 million of trademarks and tradenames. Collectively, these acquired intangible assets have estimated useful lives of 15 years.

As part of the consideration paid to acquire ANS, the Company granted replacement unvested stock options and restricted stock to ANS employees who had unvested stock options and restricted stock outstanding at the date of acquisition. As a result, the Company recorded $15.8 million of purchase consideration relating to the value of these replacement awards. These awards were valued using the Black-Scholes standard option pricing model. ANS employees are required to render future service in order to vest in the replacement stock options and restricted stock.

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The following unaudited pro forma information presents the consolidated results of operations of the Company and ANS as if the acquisition of ANS had occurred as of the beginning of each of the fiscal years presented (in thousands, except per share amounts):

	Unaudited
		2005		2004
Revenue	$	3,043,422	$	2,414,917
Net earnings		432,218		398,228
Net earnings per share:
Basic	$	1.19	$	1.13
Diluted	$	1.14	$	1.07

Pro forma adjustments relate to amortization of identified intangible assets, interest expense resulting from acquisition financing and certain other adjustments together with related income tax effects. Pro forma net earnings for 2005 include the $107.4 million IPR&D charge that was a direct result of the acquisition. Pro forma net earnings for 2005 also include an $85.2 million pre-tax gain on the sale of ANS’s investment in common stock of Cyberonics, Inc., which was recorded by ANS in their historical 2005 results of operations. The unaudited pro forma consolidated results of operations are for comparative purposes only and are not necessarily indicative of results that would have occurred had the acquisition occurred as of the beginning of the periods presented, nor are they necessarily indicative of future results.

Endocardial Solutions, Inc. (ESI): On January 13, 2005, the Company completed its acquisition of ESI for $279.4 million, which includes closing costs less $9.4 million of cash acquired. ESI had been publicly traded on the NASDAQ market under the ticker symbol ECSI. ESI developed, manufactured and marketed the EnSite® system used for the navigation and localization of diagnostic and therapeutic catheters used by physician specialists to diagnose and treat cardiac rhythm disorders. The Company acquired ESI to strengthen its portfolio of products used to treat heart rhythm disorders. The Company recorded an IPR&D charge of $12.4 million associated with this transaction.

The goodwill recorded as a result of the ESI acquisition is not deductible for income tax purposes and was allocated entirely to the Company’s AF operating segment. The goodwill recognized represents future product opportunities that did not have regulatory approval at the date of acquisition. In connection with the acquisition of ESI, the Company recorded $39.2 million of developed and core technology intangible assets that have estimated useful lives of 15 years and $7.5 million of customer relationships and distribution agreements intangible assets that have estimated useful lives of 5 years.

Velocimed, LLC (Velocimed): On April 6, 2005, the Company completed its acquisition of the businesses of Velocimed for $70.9 million, which includes closing costs less $6.7 million of cash acquired. Velocimed developed and manufactured specialty interventional cardiology devices. The Company acquired Velocimed to strengthen its portfolio of products in the interventional cardiology market. The Company recorded an IPR&D charge of $13.7 million associated with this transaction.

The goodwill recorded as a result of the Velocimed acquisition is not deductible for income tax purposes and was allocated entirely to the Company’s CD operating segment. The goodwill recognized represents future product opportunities that did not have regulatory approval at the date of acquisition. In connection with the acquisition of Velocimed, the Company recorded $61.9 million of developed and core technology intangible assets that have estimated useful lives of 15 years.

Certain funds held in escrow by the Company totaling $5.5 million were released in the fourth quarter of 2006 and recorded as goodwill. Additionally, contingent payments of up to $100 million are due if future revenue targets are met through 2008, and a milestone payment of up to $80 million is tied to U.S. Food and Drug Administration (FDA) approval of the Premere™ patent foramen ovale closure system, with no milestone payment being made if approval occurs after December 31, 2010. All future payments made by the Company will be recorded as additional goodwill.

Savacor, Inc. (Savacor): On December 30, 2005, the Company acquired Savacor for $49.7 million which includes closing costs less $0.4 million in cash acquired, plus additional contingent payments related to product development milestones for regulatory approvals and related to revenues in excess of minimum future targets. Savacor was a development-stage company focused on the development of a device that measures left atrial pressure and body temperature to help physicians detect and manage symptoms associated with progressive heart failure. The Company recorded an IPR&D charge of $45.7 million associated with this transaction.

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Because Savacor is a development-stage company, the excess of the purchase price over the fair value of the net assets acquired was allocated on a pro-rata basis to the net assets acquired. Accordingly, the majority of the excess purchase price was allocated to IPR&D, the principal asset acquired.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as a result of significant acquisitions made by the Company in fiscal year 2005:

(in thousands)	ANS		ESI		Velocimed		Savacor		Total Activity
Current assets	$	247,316	$	13,617	$	1,232	$	—	$	262,165
Goodwill		826,698		201,511		8,223		—		1,036,432
Other intangible assets		272,600		46,700		61,900		—		381,200
Purchased in-process research and development		107,400		12,400		13,700		45,674		179,174
Deferred income taxes		—		23,139		—		4,120		27,259
Other long-term assets		35,660		2,981		1,842		105		40,588
Total assets acquired	$	1,489,674	$	300,348	$	86,897	$	49,899	$	1,926,818
Current liabilities	$	28,746	$	20,948	$	3,832	$	245	$	53,771
Deferred income taxes		106,392		—		12,202		—		118,594
Other liabilities		603		—		—		—		603
Total liabilities assumed		135,741		20,948		16,034		245		172,968
Net assets acquired	$	1,353,933	$	279,400	$	70,863	$	49,654	$	1,753,850

During 2005, the Company entered into two additional business combinations for a total purchase price of $14.9 million, net of cash acquired. The Company also acquired businesses involved in the distribution of the Company’s products in 2005 for aggregate cash consideration of $17.8 million which was recorded as other intangible assets.

Fiscal Year 2004

Irvine Biomedical, Inc. (IBI): On October 7, 2004, the Company completed its acquisition of the remaining capital stock of IBI. IBI developed and sold EP catheter products used by physician specialists to diagnose and treat cardiac rhythm disorders. The Company acquired IBI to strengthen its product portfolio of products used to treat heart rhythm disorders. In April 2003, the Company had acquired a minority investment of 14% in IBI through the Company’s acquisition of Getz Bros. Co., Ltd. (Getz Japan). Net consideration paid to acquire the remaining 86% of IBI capital stock was $50.6 million, which includes closing costs less cash acquired. The original investment of $4.5 million was accounted for under the cost method of accounting until the date the remaining shares were purchased. As a result, the Company did not recognize any portion of IBI’s losses during this period. In the fourth quarter of 2004, in accordance with step-acquisition accounting treatment, the Company recorded a $0.8 million charge, net of tax, which represented the portion of IBI’s losses attributable to the Company’s ownership from the date of the purchase of Getz Japan in April 2003 until the final acquisition of IBI in October 2004. This amount was not reflected retroactively to prior periods as it was not material. Net consideration paid for the total acquisition was $54.8 million, which includes closing costs less $5.9 million of cash acquired. The Company recorded an IPR&D charge of $9.1 million in the fourth quarter of 2004 associated with this transaction.

The goodwill recorded as a result of the IBI acquisition is not deductible for income tax purposes and was allocated entirely to the Company’s AF operating segment. The goodwill recognized as part of the acquisition represents future product opportunities that did not have regulatory approval at the date of acquisition. In connection with the acquisition of IBI, the Company recorded $26.4 million of developed and core technology intangible assets that have useful lives of 12 and 14 years, respectively.

Epicor, Inc. (Epicor): On June 8, 2004, the Company completed its acquisition of the remaining capital stock of Epicor. Epicor developed products which use high intensity focused ultrasound (HIFU) to ablate cardiac tissue. The Company acquired Epicor to strengthen its product portfolio related to the treatment of atrial fibrillation. In May 2003, the Company had made an initial $15.0 million minority investment in Epicor and acquired an option to purchase the remaining ownership of Epicor prior to June 30, 2004 for $185.0 million. Pursuant to the option, the Company paid $185.0 million in cash to acquire the remaining outstanding capital stock of Epicor on June 8, 2004. The original investment was accounted for under the cost method of accounting until the date the remaining shares were purchased. As a result, the Company did not recognize any portion of Epicor’s losses during this period. At the date of the subsequent acquisition, in accordance with step-acquisition treatment, the Company’s historical financial statements were adjusted retroactively to reflect the

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portion of Epicor’s operating losses attributable to the Company’s ownership from the date of the original investment until the final purchase and the Company’s portion of IPR&D that would have been recognized as of the date of the original investment. These amounts totaled $3.6 million, net of tax, for the period described, and were recognized in other income (expense). Net consideration paid for the total acquisition was $198.0 million, which includes closing costs less $2.4 million of cash acquired.

The goodwill recorded as a result of the Epicor acquisition is not deductible for income tax purposes and was allocated entirely to the Company’s AF operating segment. The goodwill recognized represents future product opportunities that did not have regulatory approval at the date of acquisition. In connection with the acquisition of Epicor, the Company recorded a $21.7 million purchased technology intangible asset that has a useful life of 12 years.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as a result of significant acquisitions made by the Company in fiscal year 2004:

(in thousands)	Epicor		IBI		Total Activity
Current assets	$	2,867	$	6,695	$	9,562
Goodwill		159,121		21,745		180,866
Other intangible assets		21,700		26,400		48,100
Purchased in-process research and development		—		9,100		9,100
Deferred income taxes		15,086		—		15,086
Other long-term assets		743		1,452		2,195
Total assets acquired	$	199,517	$	65,392	$	264,909
Current liabilities	$	2,707	$	3,850	$	6,557
Deferred income taxes		—		7,588		7,588
Total liabilities assumed		2,707		11,438		14,145
Net assets acquired	$	196,810	$	53,954	$	250,764

During 2004, the Company also acquired businesses involved in the distribution of the Company’s products for aggregate cash consideration of $21.8 million which was recorded as other intangible assets.

Minority Investments

ProRhythm, Inc. (ProRhythm): On January 12, 2005, the Company made an initial equity investment of $12.5 million in ProRhythm, a privately-held company that is focused on the development of a HIFU catheter-based ablation system for the treatment of atrial fibrillation. The initial investment resulted in approximately a 9% ownership interest. In connection with making the initial equity investment, the Company also entered into a purchase and option agreement that provided the Company the ability to make an additional equity investment. In January 2006, the Company made an additional $12.5 million investment in ProRhythm, increasing our total ownership interest to 18%, that is being accounted for under the cost method of accounting.

The Company also has the exclusive right, but not the obligation, through the later of three months after the date ProRhythm delivers certain clinical trial data or March 31, 2007, to acquire the remaining capital stock of ProRhythm for $125.0 million in cash, with additional cash consideration payable to the non-St. Jude Medical shareholders after the consummation of the acquisition if ProRhythm achieves certain performance-related milestones.

Contingent Consideration Payments

Irvine Biomedical, Inc.: In December 2005, the Company paid $4.8 million of contingent purchase consideration to the applicable non-St. Jude Medical shareholders of IBI. This contingent payment, which was recorded as goodwill, was earned as a result of IBI receiving FDA approval of the IBI-1500T6 Cardiac Ablation Generator and Therapy™ Dual-8™ ablation catheters prior to a milestone date. These devices are part of an ablation system in which the catheters are connected to a generator which delivers radiofrequency or ultrasound energy through the catheter to create lesions through ablation of cardiac tissue. In addition, the purchase agreement provides for additional contingent purchase consideration of up to $3.8 million to the non-St. Jude Medical shareholders if IBI receives FDA approval by certain specified dates in 2007 of other certain EP catheter ablation systems currently in development. All future payments will be recorded as additional goodwill.

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NOTE 3 – GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for each of the Company’s reportable segments for the fiscal years ended December 30, 2006 and December 31, 2005 are as follows (in thousands):

	CRM/CS/Neuro			CD/AF			Total
Balance at January 1, 2005	$	358,020		$	235,779		$	593,799
Foreign currency translation		(14,347	)		(124	)		(14,471	)
ESI		—			201,511			201,511
Velocimed		—			8,223			8,223
ANS		826,698			—			826,698
IBI		—			4,833			4,833
Other		14,041			339			14,380
Balance at December 31, 2005	$	1,184,412		$	450,561		$	1,634,973
Foreign currency translation		5,984			200			6,184
Velocimed		—			5,457			5,457
ANS		2,870			—			2,870
Other		—			97			97
Balance at December 30, 2006	$	1,193,266		$	456,315		$	1,649,581

The following table provides the gross carrying amount of other intangible assets and related accumulated amortization (in thousands):

	December 30, 2006				December 31, 2005
	Gross carrying amount		Accumulated amortization		Gross carrying amount		Accumulated amortization
Amortized intangible assets:
Purchased technology and patents	$	472,874	$	70,422	$	474,994	$	41,402
Customer lists and relationships		140,061		34,963		98,282		23,009
Distribution agreements		41,986		15,683		42,164		11,486
Trademarks and tradenames		23,300		1,682		23,300		129
Licenses and other		7,348		2,543		7,184		1,765
	$	685,569	$	125,293	$	645,924	$	77,791
Indefinite intangible assets:
Trademarks	$	—			$	4,113

Amortization expense of other intangible assets was $50.1 million, $30.1 million and $17.5 million for the fiscal years 2006, 2005 and 2004, respectively. As discussed in Note 8, during the third quarter of 2006, the Company decided to discontinue the use of the Getz trademarks in Japan, and therefore wrote off the trademarks indefinite-lived intangible asset that the Company acquired in connection with the 2003 acquisition of Getz Japan.

The below table presents expected future amortization expense for other intangible assets. Actual amounts of amortization expense may differ due to additional intangible assets acquired and foreign currency translation impacts. Expected future amortization expense for other intangible assets is as follows (in thousands):

	2007		2008		2009		2010		2011		After 2011
Amortization expense	$	52,501	$	52,497	$	51,942	$	49,667	$	49,286	$	304,383

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NOTE 4 – DEBT

The Company’s long-term debt consisted of the following (in thousands):

	December 30, 2006		December 31, 2005
Commercial paper borrowings	$	678,350	$	216,000
1.02% Yen-denominated notes		175,523		176,937
2.80% Convertible Senior Debentures		5,498		660,000
Other		5		33
Total long-term debt	$	859,376	$	1,052,970
Less: current portion of long-term debt		—		876,000
Long-term debt	$	859,376	$	176,970

Commercial paper borrowings: The Company’s commercial paper program provides for the issuance of short-term, unsecured commercial paper with maturities up to 270 days. The Company had outstanding commercial paper borrowings of $678.4 million at December 30, 2006 and $216.0 million at December 31, 2005 bearing weighted average effective interest rates of 5.4% and 4.2%, respectively. Any future commercial paper borrowings would bear interest at the applicable current market rates.

The Company normally classifies all of its commercial paper borrowings as long-term debt as the Company has the ability to repay any short-term maturity with available cash from its existing long-term, committed credit facility. Because the Company repaid its December 31, 2005 commercial paper balance in January 2006, the Company classified the December 31, 2005 balance as current portion of long-term debt.

1.02% Yen-denominated notes: In May 2003, the Company issued 7-year, 1.02% unsecured notes totaling 20.9 billion Yen, or $175.5 at December 30, 2006 and $176.9 million at December 31, 2005, respectively. Interest payments are required on a semi-annual basis and the entire principal balance is due in May 2010.

2.80% Convertible Senior Debentures: In December 2005, the Company issued $660.0 million aggregate principal amount of 30-year 2.80% Convertible Senior Debentures (Convertible Debentures). The Company has the right to redeem some or all of the Convertible Debentures for cash at any time. Interest on the Convertible Debentures is payable on June 15 and December 15 of each year. Contingent interest of 0.25% is payable in certain circumstances. Holders of the Convertible Debentures can require the Company to repurchase for cash some or all of the Convertible Debentures on December 15 in the years 2006, 2008, 2010, 2015, 2020, 2025 and 2030. In December 2006, holders required the Company to repurchase $654.5 million of the Convertible Debentures for cash. $5.5 million aggregate principal amount of the Convertible Debentures remains outstanding as of December 30, 2006. The remaining holders may convert each of the $1,000 principal amount of the Convertible Debentures into 15.5009 shares of the Company’s common stock (an initial conversion price of approximately $64.51), subject to certain adjustments, under certain circumstances. Upon conversion, the Company is required to satisfy 100% of the principal amount of the Convertible Debentures solely in cash, with any amounts above the principal amount to be satisfied in shares of the Company’s common stock. The total number of contingently issuable shares that could be issued to satisfy conversion of the remaining $5.5 million aggregate principal amount of the Convertible Debentures is not material.

Credit facilities: In December 2006, the Company entered into a 5-year, $1.0 billion committed credit facility that it may draw on for general corporate purposes and to support its commercial paper program. Borrowings bear interest at the United States Dollar London InterBank Offered Rate (LIBOR) plus 0.27%, or in the event over half of the facility is drawn on, LIBOR plus 0.32%. The interest rate is subject to adjustment in the event of a change in the Company’s credit ratings. The Company has the option for borrowings to bear interest at a base rate, as further-described in the facility agreement. This credit facility replaced a $350.0 million credit facility that was scheduled to expire in September 2008 and a $400.0 million credit facility that was scheduled to expire in September 2009. There were no outstanding borrowings under any of these credit facilities during fiscal years 2006 or 2005.

In January 2007, the Company obtained an additional 3-month $700.0 million liquidity facility, of which $300.0 million was utilized as of February 16, 2007. Borrowings under this liquidity facility have been used to finance share repurchases made in 2007. Any borrowings under this liquidity facility bear interest at LIBOR plus 0.35%, or in the event over half the facility is drawn on, LIBOR plus 0.40%, in each case subject to adjustment upon the occurrence of an event of default.

NOTE 5 – COMMITMENTS AND CONTINGENCIES

Leases

The Company leases various facilities and equipment under noncancelable operating lease arrangements. Future minimum lease payments under these leases are as follows: $24.6 million in 2007; $18.4 million in 2008; $14.0 million in 2009; $13.1 million in 2010; $7.9 million in 2011; and $10.6 million in years thereafter. Rent expense under all operating leases was $24.6 million, $23.0 million and $17.3 million in 2006, 2005 and 2004, respectively.

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Litigation

Silzone® Litigation and Insurance Receivables: In July 1997, the Company began marketing mechanical heart valves which incorporated Silzone® coating. The Company later began marketing heart valve repair products incorporating Silzone® coating. Silzone® coating was intended to reduce the risk of endocarditis, a bacterial infection affecting heart tissue, which is associated with replacement heart valve surgery. In January 2000, the Company initiated a voluntary field action for products incorporating Silzone® coating after receiving information from a clinical study that patients with a Silzone®-coated heart valve had a small, but statistically significant, increased incidence of explant due to paravalvular leak compared to patients in that clinical study with heart valves that did not incorporate Silzone® coating.

Subsequent to the Company’s voluntary field action, the Company has been sued in various jurisdictions by some patients who received a product with Silzone® coating and, as of February 16, 2007, such cases are pending in the United States, Canada, United Kingdom and France. Some of these claimants allege bodily injuries as a result of an explant or other complications, which they attribute to Silzone®-coated products. Others, who have not had their Silzone®-coated heart valve explanted, seek compensation for past and future costs of special monitoring they allege they need over and above the medical monitoring all replacement heart valve patients receive. Some of the lawsuits seeking the cost of monitoring have been initiated by patients who are asymptomatic and who have no apparent clinical injury to date. The Company has vigorously defended against the claims that have been asserted and expects to continue to do so with respect to any remaining claims.

In 2001, the U.S. Judicial Panel on Multi-District Litigation (MDL) ruled that certain lawsuits filed in U.S. federal district court involving products with Silzone® coating should be part of MDL proceedings under the supervision of U.S. District Court Judge John Tunheim in Minnesota (the District Court). As a result, actions in federal court involving products with Silzone® coating have been and will likely continue to be transferred to Judge Tunheim for coordinated or consolidated pretrial proceedings.

The District Court ruled against the Company on the issue of preemption and found that the plaintiffs’ causes of action were not preempted by the U.S. Food and Drug Act. The Company sought to appeal this ruling, but the appellate court determined that it would not review the ruling at that point in the proceedings.

Certain plaintiffs requested the District Court to allow some cases to proceed as class actions. The first complaint seeking class-action status was served upon the Company on April 27, 2000 and all eight original class-action complaints were consolidated into one case by the District Court on October 22, 2001. One proposed class in the consolidated complaint seeks injunctive relief in the form of medical monitoring. A second class in the consolidated complaint seeks an unspecified amount of monetary damages. In response to the requests of the claimants in these cases, the District Court issued several rulings concerning class action certification. The Company requested the Eighth Circuit Court of Appeals (the Eighth Circuit) to review the District Court’s class certification orders.

On October 12, 2005, the Eighth Circuit issued a decision reversing the District Court’s class certification rulings. More specifically, the Eighth Circuit ruled that the District Court erred in certifying a consumer protection class seeking damages based on Minnesota’s consumer protection statutes, and required the District Court in further proceedings to conduct a thorough conflicts-of-law analysis as to each plaintiff class member before applying Minnesota law. In addition, in its October 12, 2005 opinion, the Eighth Circuit also ruled that the District Court’s certification of a medical monitoring class was an abuse of discretion and thus reversed the District Court’s certification of a medical monitoring class involving the products with Silzone® coating.

After briefing and oral argument by the parties, the District Court issued its further ruling on class certification issues on October 13, 2006. At that time, the District Court granted plaintiffs’ renewed motion to certify a nationwide consumer protection class under Minnesota’s consumer protection statutes and the Private Attorney General Act. The Company sought appellate review of the District Court’s October 13, 2006 decision, and on November 7, 2006, the Eighth Circuit agreed to conduct a review of the District Court’s decision. The parties are in the process of submitting briefs to the Eighth Circuit pursuant to a scheduling order it issued.

In addition to the purported class action before the District Court, as of February 16, 2007, there were 17individual Silzone® cases initiated in various federal courts which were pending before the District Court. Plaintiffs in those cases are requesting damages ranging from $10 thousand to $120.5 million and, in some cases, seeking an unspecified amount. The first individual complaint that was transferred to the MDL court was served upon the Company on November 28, 2000, and the most recent individual complaint that was transferred to the MDL court was served upon the Company on November 9, 2006. These cases, which are consolidated before the District Court, are proceeding in accordance with the scheduling orders the District Court has rendered.

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There are 19 individual state court suits concerning Silzone®-coated products pending as of February 16, 2007, involving 22 patients. These cases are venued in Florida, Minnesota, Missouri, Nevada, Pennsylvania and Texas. The first individual state court complaint was served upon the Company on March 1, 2000, and the most recent individual state court complaint was served upon the Company on November 9, 2006. The complaints in these state court cases request damages ranging from $10 thousand to $100 thousand and, in some cases, seek an unspecified amount. These state court cases are proceeding in accordance with the orders issued by the judges in those matters.

In addition, a lawsuit seeking a class action for all persons residing in the European Economic Union member jurisdictions who have had a heart valve replacement and/or repair procedure using a product with Silzone® coating was filed in Minnesota state court and served upon the Company on February 11, 2004, by two European citizens who now live in Canada. The complaint seeks damages in an unspecified amount for the class, and in excess of $50 thousand for each plaintiff. The complaint also seeks injunctive relief in the form of medical monitoring. The Company is opposing the plaintiffs’ pursuit of this case on jurisdictional, procedural and substantive grounds.

There are also four class-action cases and one individual case pending against the Company in Canada. In one such case in Ontario, the court certified that a class action may proceed involving Silzone® patients. The Company’s request for leave to appeal the rulings on certification was rejected, and the trial of the initial phase of this matter is now scheduled for September 2007. A second case seeking class action in Ontario has been stayed pending resolution of the other Ontario action, and a case seeking class action in British Columbia is also proceeding but is in its early stages. A court in the Province of Quebec has certified a class action, and that matter is proceeding in accordance with the orders in that court. Additionally, on December 22, 2005, the Company was served with a lawsuit by the Quebec Provincial health insurer. The lawsuit asserts a subrogation right to recover the cost of insured services furnished or to be furnished to class members in the class action pending in Quebec. The complaints in these cases each request damages ranging from 1.5 million to 2.0 billion Canadian Dollars (the equivalent to $1.3 million to $1.8 billion at December 30, 2006).

In the United Kingdom, one case involving one plaintiff is pending as of February 16, 2007. The Particulars of Claim in this case were served on July 13, 2004. The plaintiff in this case requests damages of 0.2 million British Pounds (the equivalent to $0.4 million at December 30, 2006).

In Ireland, one case involving one plaintiff was withdrawn in the third quarter of 2006. The complaint in this case had been originally served on December 30, 2004, and had sought an unspecified amount in damages.

In France, one case involving one plaintiff is pending as of February 16, 2007. It was initiated by way of an Injunctive Summons to Appear that was served on November 8, 2004, and requests damages in excess of 3 million Euros (the equivalent to $3.9 million at December 30, 2006).

The Company is not aware of any unasserted claims related to Silzone®-coated products. Company management believes that the final resolution of the Silzone® cases will take several years.

The Company has recorded an accrual for probable legal costs that it will incur to defend the various cases involving Silzone®-coated products, and the Company has recorded a receivable from its product liability insurance carriers for amounts expected to be recovered. The Company has not accrued for any amounts associated with settlements or judgments because management cannot reasonably estimate such amounts. Any Silzone® litigation settlement or judgment reserve established by the Company is not based on the amount of the claims because, based on the Company’s experience in these types of cases, the amount ultimately paid, if any, often does not bear any relationship to the amount claimed by the plaintiffs and is often significantly less than the amount claimed. Furthermore, management expects that no significant claims will ultimately be allowed to proceed as class actions in the United States and, therefore, that all settlements and judgments will be covered under the Company’s product liability insurance, subject to the insurance companies’ performance under the policies, which is discussed below. As such, management expects that any costs (the material components of which are settlements, judgments, legal fees and other related defense costs) not covered by the Company’s product liability insurance policies or existing reserves will not have a material adverse effect on the Company’s consolidated financial position, although such costs may be material to the Company’s consolidated earnings and cash flows of a future period.

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A summary of the activity relating to the Silzone® litigation reserve for the fiscal years ended December 30, 2006 and December 31, is as follows (in thousands):

		Legal and monitoring costs
Balance at January 1, 2005	$	26,435
Accrued costs		9,800
Cash payments		(1,328	)
Balance at December 31, 2005		34,907
Accrued costs		7,000
Cash payments		(2,413	)
Balance at December 30, 2006	$	39,494

The Company records insurance receivables for amounts related to probable future legal costs associated with the Silzone® litigation that are expected to be reimbursable by the Company’s insurance carriers. In 2006 and 2005, the Company determined that the Silzone® reserves should be increased by $7.0 million and $9.8 million, respectively, as a result of an increase in management’s estimate of the probable future legal costs that would be incurred. The Company also increased the receivable from the Company’s insurance carriers as the Company expects such costs to be reimbursable by the Company’s insurance carriers. At December 30, 2006 and December 31, 2005, the Company’s receivables from insurance carriers were $30.6 million and $24.1 million, respectively.

The Company’s remaining product liability insurance ($120.8 million at February 16, 2007) for Silzone® claims consists of a number of layers, each of which is covered by one or more insurance companies. Part of the Company’s final layer of insurance ($20 million of the final $50 million layer) is covered by Lumberman’s Mutual Casualty Insurance, a unit of the Kemper Insurance Companies (collectively referred to as Kemper). Prior to being no longer rated by A.M. Best, Kemper’s financial strength rating was downgraded to a “D” (poor). Kemper is currently in “run off,” which means that it is not issuing new policies and is, therefore, not generating any new revenue that could be used to cover claims made under previously-issued policies. In the event Kemper is unable to pay claims directed to it, the Company believes the other insurance carriers in the final layer of insurance will take the position that the Company will be directly liable for any claims and costs that Kemper is unable to pay. It is possible that Silzone® costs and expenses will reach the limit of the final Kemper layer of insurance coverage, and it is possible that Kemper will be unable to meet its full obligations to the Company. If this were to happen, the Company could incur expense of up to approximately $20 million. The Company has not accrued for any such losses as potential losses are possible, but not estimable, at this time.

Symmetry™ Bypass System Aortic Connector (Symmetry™ device) Litigation: The Company has been sued in various jurisdictions by claimants who allege that the Company’s Symmetry™ device caused bodily injury or might cause bodily injury. The Company’s Symmetry™ device was cleared through a 510(K) submission to the U.S. Food and Drug Administration (FDA), and therefore, the Company is unable to rely on a defense under the doctrine of federal preemption that such suits are prohibited. Given the Company’s self-insured retention levels under its product liability insurance policies, the Company expects that it will be solely responsible for these lawsuits, including any costs of defense, settlements and judgments.

Since August 2003, when the first lawsuit involving the Symmetry™ device was filed against the Company, through February 16, 2007, the Company has resolved the claims involving approximately 90% of the plaintiffs that have initiated lawsuits against the Company involving the Symmetry™ device. As of February 16, 2007, all but four of the lawsuits which allege that the Symmetry™ device caused bodily injury or might cause bodily injury have been resolved. All of the unresolved cases involving the Symmetry™ device are pending in state court in Minnesota. The first of the unresolved cases involving the Symmetry™ device was commenced against the Company on June 17, 2004, and the most recently initiated unresolved case was commenced against the Company on January 17, 2007. Each of the complaints in these unresolved cases request damages in excess of $50 thousand. In addition to this litigation, some persons have made claims against the Company involving the Symmetry™ device without filing a lawsuit, although, as with the lawsuits, the vast majority of the claims that the Company has been made aware of as of February 16, 2007 have been resolved.

Potential losses arising from future settlements or judgments of unresolved cases and claims are possible, but not estimable, at this time. Moreover, the Company currently expects that any costs (the material components of which are settlements, judgments, legal fees and other related defense costs) not covered by any remaining reserve will not have a material adverse effect on the Company’s consolidated financial position, although such costs may be material to the Company’s consolidated earnings and cash flows of a future period.

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Guidant 1996 Patent Litigation: In November 1996, Guidant Corporation (Guidant), which became a subsidiary of Boston Scientific Corporation in 2006, sued the Company in federal district court for the Southern District of Indiana alleging that the Company did not have a license to certain patents controlled by Guidant covering ICD products and alleging that the Company was infringing those patents. The Company’s contention was that it had obtained a license from Guidant to the patents at issue when it acquired certain assets of Telectronics in November 1996. In July 2000, an arbitrator rejected the Company’s position, and in May 2001, a federal district court judge also ruled that the Guidant patent license with Telectronics had not transferred to the Company.

Guidant’s suit originally alleged infringement of four patents by the Company. Guidant later dismissed its claim on one patent and a court ruled that a second patent was invalid. This determination of invalidity was appealed by Guidant, and the Court of Appeals upheld the lower court’s invalidity determination. In a jury trial involving the two remaining patents (the ‘288 and ‘472 patents), the jury found that these patents were valid and that the Company did not infringe the ‘288 patent. The jury also found that the Company did infringe the ‘472 patent, though such infringement was not willful. The jury awarded damages of $140.0 million to Guidant. In post-trial rulings, however, the judge overseeing the jury trial ruled that the ‘472 patent was invalid and also was not infringed by the Company, thereby eliminating the $140.0 million verdict against the Company. The trial court also made other rulings as part of the post-trial order, including a ruling that the ‘288 patent was invalid on several grounds.

In August 2002, Guidant commenced an appeal of certain of the trial judge’s post-trial decisions pertaining to the ‘288 patent. Guidant did not appeal the trial court’s finding of invalidity and non-infringement of the ‘472 patent. As part of its appeal, Guidant requested that the monetary damages awarded by the jury pertaining to the ‘472 patent ($140.0 million) be transferred to the ‘288 patent infringement claim.

On August 31, 2004, a three judge panel of the Court of Appeals for the Federal Circuit (CAFC) issued a ruling on Guidant’s appeal of the trial court decision concerning the ‘288 patent. The CAFC reversed the decision of the trial court judge that the ‘288 patent was invalid. The CAFC also ruled that the trial judge’s claim construction of the ‘288 patent was incorrect and, therefore, the jury’s verdict of non-infringement was set aside. Guidant’s request to transfer the $140.0 million to the ‘288 patent was rejected. The CAFC also ruled on other issues that were raised by the parties. The Company’s request for re-hearing of the matter by the panel and the entire CAFC court was rejected.

The case was returned to the district court in Indiana in November 2004, but since that time, further appellate activity has occurred. In this regard, the U.S. Supreme Court rejected the Company’s request that it review certain aspects of the CAFC decision. In addition, further appellate review has occurred after Guidant brought motion in the district court seeking to have a new judge assigned to handle the case in lieu of the judge that oversaw the prior trial. On a motion for reconsideration, the judge reversed his initial decision in response to Guidant’s motion and agreed to have the case reassigned to a new judge but also certified the issue to the CAFC. On July 20, 2005, the CAFC ruled that the original judge should continue with the case. A hearing on claims construction issues and various motions for summary judgment brought by both parties was held on December 20, 2005, and the district court issued rulings on claims construction and in response to some of the motions for summary judgment on March 1, 2006. In response to the district court ruling, on March 21, 2006, Guidant filed a special request with the CAFC to appeal certain of the March 1, 2006 rulings, or to clarify the August 31, 2005 CAFC decision. The Company filed responses to these filings and on June 2, 2006, the CAFC rejected Guidant’s special request for an appeal. Pursuant to a recent order of the district court, this matter is presently set for trial in April 2007, and it is otherwise proceeding in accordance with the deadlines established by the district court.

The ‘288 patent expired in December 2003. Accordingly, the final outcome of the lawsuit involving the ‘288 patent cannot result in an injunction precluding the Company from selling ICD products in the future. Sales of the Company’s ICD products which Guidant asserts infringed the ‘288 patent were approximately 18% and 16% of the Company’s consolidated net sales during the fiscal years 2003 and 2002, respectively.

On July 30, 2006, in exchange for the Company agreeing not to pursue the recovery of attorneys’ fees or assert certain claims and defenses, Guidant agreed that it would not seek to recover lost profits in the case, that the maximum royalty rate that it would seek for any patents found to be infringed by the Company would not exceed 3% of net sales, and that it would not seek prejudgment interest. These agreements have the effect of limiting the Company’s financial exposure. However, any potential losses arising from any legal settlements or judgments could be material to the Company’s consolidated earnings, financial position and cash flows. The Company has not accrued any amounts for legal settlements or judgments related to the Guidant 1996 patent litigation. Although the Company believes that the assertions and claims in the Guidant 1996 patent litigation are without merit, potential losses arising from any legal settlements or judgments are possible, but not estimable, at this time.

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Guidant 2004 Patent Litigation: In February 2004, Guidant sued the Company in federal district court in Delaware alleging that the Company’s Epic® HF ICD, Atlas®+ HF ICD and Frontier™ devices infringe U.S Patent No. RE 38,119E (the ‘119 patent). On January 6, 2006, the district court ruled against the Company in response to a motion for summary judgment it had filed with the district court in June 2005. The Company and Guidant have filed additional summary judgment motions and provided the district court with briefs on claims construction which have yet to be ruled upon by the district court. Pursuant to a recent order of the district court, this matter is presently set for trial in August 2007, and it is otherwise proceeding in accordance with deadlines established by the district court.

A competitor of the Company, Medtronic, Inc., which has a license to the ‘119 patent, contended in a separate lawsuit with Guidant in the same district court that the ‘119 patent was invalid. In July 2005, the district court ruled against Medtronic’s claim of invalidity, and in October 2006, the CAFC upheld the district court’s ruling against Medtronic’s claim of invalidity. By agreement with Guidant, in the initial case involving the ‘119 patent, Medtronic had presented limited arguments of invalidity in its case and did not address infringement. As it proceeds with this case against Guidant, the Company expects to assert invalidity arguments that were not made by Medtronic in its initial case involving the ‘119 patent and also defend against Guidant’s claims of patent infringement.

On July 30, 2006, in exchange for the Company agreeing not to pursue the recovery of attorneys’ fees or assert certain defenses, Guidant agreed that it would not seek to recover lost profits in the case, that the maximum royalty rate that it would seek for any patents found to be infringed by the Company would not exceed 3% of net sales, that it would not seek prejudgment interest, and that it would not pursue an injunction against the Company until all appeals have been exhausted and any judgment of infringement is final and no longer can be appealed. These agreements have the effect of limiting the Company’s financial and operational exposure. However, any potential losses arising from any legal settlements or judgments could be material to the Company’s consolidated earnings, financial position and cash flows. The Company has not accrued any amounts for legal settlements or judgments related to the outstanding Guidant 2004 patent litigation. Although the Company believes that the assertions and claims in the outstanding Guidant 2004 patent litigation are without merit, potential losses arising from any legal settlements or judgments are possible, but not estimable, at this time.

Guidant also sued the Company in February 2004 alleging that the Company’s QuickSite® 1056K pacing lead infringes U.S. Patent No. 5,755,766 (the ‘766 patent). This second suit was initiated in federal district court in Minnesota. Guidant later amended its complaint to allege that the QuickSite® 1056K and the QuickSite® 1056T pacing leads infringe U.S. Patent No. 6,901,288, as well as the ‘766 patent. The parties settled this suit on July 30, 2006 and agreed to a patent cross-license involving the parties’ cardiac rhythm management patent portfolios.

Advanced Bionics Patent Litigation: On July 30, 2006, the Company settled the litigation between its subsidiary, ANS, and Advanced Bionics, a subsidiary of Boston Scientific Corporation. That litigation involved patent infringement claims by both parties. In connection with the settlement, the parties agreed to a cross-license of certain patents related to neuromodulation.

Securities Class Action Litigation: In April and May 2006, five shareholders, each purporting to act on behalf of a class of purchasers during the period January 25 through April 4, 2006 (the Class Period), separately sued the Company and certain of its officers in federal district court in Minnesota alleging that the Company made materially false and misleading statements during the Class Period relating to financial performance, projected earnings guidance and projected sales of ICDs. The complaints, which all seek unspecified damages and other relief, as well as attorneys’ fees, have all been consolidated. In an August 24, 2006 ruling, lead plaintiffs were appointed by the district court. The plaintiffs filed their amended complaint on October 24, 2006, the Company filed a motion to dismiss on November 22, 2006 and the district court has not yet ruled on the motions. Arguments regarding the motion to dismiss are scheduled for February 26, 2007. The Company intends to vigorously defend against the claims asserted in these actions. The Company’s directors and officers liability insurance provide $75 million of insurance coverage for the Company, the officers and the directors, after a $15 million self-insured retention level has been reached.

On February 2, 2007, a derivative action was filed in state court in Minnesota which purports to bring claims belonging to the Company against the Company’s Board of Directors and various officers and former officers for alleged malfeasance in the management of the Company. The defendants’ response is due March 7, 2007.

Additionally, the Company’s subsidiary, ANS, had outstanding securities class action legal proceedings. In late May 2005, the U.S. District Court for the Eastern District of Texas, Sherman Division, granted an order consolidating three previously filed cases which sought class action status for claims asserted against ANS and certain of the individuals who were serving as ANS’s officers and directors at that time (the ANS Class Action Litigation), on behalf of purchasers of ANS securities between April 24, 2003 and February 16, 2005. On October 6, 2006, the parties entered into a settlement

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agreement to resolve the ANS Class Action Litigation and this settlement was approved by the federal magistrate on January 31, 2007. The final order is expected to be signed by the federal district judge in February 2007. ANS’s directors and officers liability insurance policy covers the amount of the settlement agreed to by the parties.

Other Litigation and Governmental Investigation Matters: The Company has been named in the report of the Independent Inquiry Committee into the United Nations (U.N.) Oil-For-Food Programme as having made payments to the Iraqi government in connection with certain product sales made by the Company to Iraq under the U.N. Oil-For-Food Programme in 2001, 2002 and 2003. The Company is investigating the allegations. In February 2006, the Company received a subpoena from the Securities and Exchange Commission (SEC) requesting the Company to produce documents concerning transactions under the U.N. Oil-for-Food Programme. The Company is cooperating with the SEC’s request.

In late January 2005, ANS received a subpoena from the U.S. Department of Health and Human Services, Office of the Inspector General (OIG) requesting documents related to certain of its sales and marketing, reimbursement, Medicare and Medicaid billing, and other business practices of ANS. The Company has produced the requested documents and has implemented a compliance program at ANS to ensure its sales and marketing practices comply with applicable law.

In October 2005, the U.S. Department of Justice, acting through the U.S. Attorney’s office in Boston, commenced an industry-wide investigation into whether the provision of payments and/or services by makers of implantable cardiac rhythm devices to doctors or other persons constitutes improper inducements under the federal health care program anti-kickback law. As part of this investigation, the Company received a civil subpoena from the U.S. Attorney’s office in Boston requesting documents on the Company’s practices related to pacemakers, ICDs, lead systems and related products marketed by our CRM segment during the period from January 2000 to date. The Company understands that its principal competitors in the CRM therapy areas received similar civil subpoenas. The Company received an additional subpoena from the U.S. Attorney’s office in Boston in September 2006, requesting documents related to certain employee expense reports and certain pacemaker and ICD purchasing arrangements for the period from January 2002 to date.

On January 16, 2007, the French Conseil de la Concurrence (one of the bodies responsible for the enforcement of antitrust/competition law in France) issued a Statement of Objections alleging that the Company had agreed with the four other main suppliers of ICDs in France to collectively refrain from responding to a 2001 tender for ICDs conducted by a group of 17 University Hospital Centers in France. This alleged collusion is said to be contrary to the French Commercial Code and Article 81 of the European Community Treaty. If the allegations contained in the Statement of Objections are upheld, the most likely outcome is that the Company’s French subsidiary will become liable to pay a civil fine. It is too early in the proceedings to estimate the likely amount of any fine that may be payable. The Company is in the process of evaluating this matter.

The Company is also involved in various other product liability lawsuits, claims and proceedings that arise in the ordinary course of business.

NOTE 6 – SHAREHOLDERS’ EQUITY

Capital Stock: The Company’s authorized capital consists of 25 million shares of $1.00 per share par value preferred stock and 500 million shares of $0.10 per share par value common stock. The Company has designated 1.1 million of the authorized preferred shares as a Series B Junior Preferred Stock for its shareholder rights plan (see Shareholders’ Rights Plan below for further discussion). There were no shares of preferred stock issued or outstanding during 2006, 2005 or 2004.

Shareholders’ Rights Plan: The Company has a shareholder rights plan that entitles shareholders to purchase one-tenth of a share of Series B Junior Preferred Stock at a stated price, or to purchase either the Company’s shares or shares of an acquiring entity at half their market value, upon the occurrence of certain events which result in a change in control, as defined by the Plan. The rights related to this plan expire in July 2007.

Share Repurchases: On April 18, 2006, the Company’s Board of Directors authorized a share repurchase program of up to $700.0 million of the Company’s outstanding common stock. The $700.0 million share repurchase program replaced an earlier share repurchase program, under which the Company was authorized to repurchase up to $300.0 million of its outstanding common stock. No stock had been repurchased under the earlier program. The Company began making share repurchases on April 21, 2006, and as of May 26, 2006, had repurchased the maximum amount authorized by the Board of Directors under the repurchase program. The Company repurchased 18.6 million shares for a total of $700.0 million, which was recorded as a $593.5 million aggregate reduction of common stock and additional paid-in capital and a $106.5 million reduction in retained earnings.

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On January 25, 2007, the Company’s Board of Directors authorized a new share repurchase program of up to $1.0 billion of the Company’s outstanding common stock. The Company began making share repurchases on January 29, 2007, and as of February 16, 2007, 12.9 million shares had been repurchased for approximately $546 million.

NOTE 7 – STOCK-BASED COMPENSATION

Stock Compensation Plans

The Company’s stock compensation plans provide for the issuance of stock-based awards, such as restricted stock or stock options, to directors, officers, employees and consultants. Stock option awards under these plans generally have an eight to ten year life, an exercise price equal to the fair market value on the date of grant and a four-year vesting term. Restricted stock awards under these plans generally vest over a four-year period. During the vesting period, ownership of the shares cannot be transferred. Restricted stock is considered issued and outstanding at the grant date and has the same dividend and voting rights as other common stock. Directors can elect to receive half or all of their annual retainer in the form of a restricted stock grant with a six-month vesting term. At December 30, 2006, the Company had 2.8 million shares of common stock available for grant under these plans of which, 0.1 million are available for restricted stock award grants.

The Company also has an Employee Stock Purchase Savings Plan (ESPP) that allows participating employees to purchase newly issued shares of the Company’s common stock at a discount through payroll deductions. The ESPP consists of a 12-month offering period whereby employees can purchase shares at 85% of the market value at either the beginning of the offering period or the end of the offering period, whichever price is lower. The maximum number of shares that employees can purchase is established at the beginning of the offering period. Employees purchased 0.5 million, 0.6 million and 0.6 million shares in 2006, 2005 and 2004, respectively. At December 30, 2006, 0.8 million shares of common stock were available for purchase under the ESPP.

Valuation Assumptions

The Company uses the Black-Scholes standard option pricing model (Black-Scholes model) to determine the fair value of stock options and ESPP purchase rights. The determination of the fair value of the awards on the date of grant using the Black-Scholes model is affected by the Company’s stock price as well as assumptions of other variables, including projected employee stock option exercise behaviors, risk-free interest rate, expected volatility of the Company’s stock price in future periods and expected dividend yield. The weighted average fair values of ESPP purchase rights granted to employees during fiscal years 2006, 2005 and 2004 were $10.12, $12.38 and $8.70, respectively. The fair value of restricted stock is based on the Company’s closing stock price on the date of grant. The weighted average fair values of restricted stock granted during fiscal years 2006, 2005 and 2004 were $34.04, $47.85 and $37.62, respectively.

The following table provides the weighted average fair value of stock options granted to employees during fiscal years 2006, 2005 and 2004 and the related weighted average assumptions used in the Black-Scholes model:

	2006			2005			2004
Fair value of options granted	$	11.23		$	14.71		$	12.79
Assumptions used:
Expected life (years)		4.1			4.4			4.8
Risk-free interest rate		4.5	%		4.4	%		3.5	%
Volatility		27.8	%		26.1	%		29.0	%
Dividend yield		0	%		0	%		0	%

Expected life: The Company analyzes historical employee exercise and termination data to estimate the expected life assumption. For determining the fair value of stock options under SFAS No. 123(R), the Company uses different expected lives for the general employee population and officers and directors. In preparing to adopt SFAS No. 123(R), the Company examined its historical pattern of stock option exercises to determine if there was a discernable pattern as to how different classes of employees exercised their stock options. The Company’s analysis showed that officers and directors held their stock options for a longer period of time before exercising compared to the rest of the employee population. Prior to adopting SFAS No. 123(R), the Company used the entire employee population for estimating the expected life assumptions.

Risk-free interest rate: The rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected life of the options.

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Volatility: The Company estimates the expected volatility of its common stock by using the implied volatility in market traded options in accordance with SEC Staff Accounting Bulletin (SAB) No. 107, Share-Based Payment, which expressed the views of the SEC staff regarding the application of SFAS No. 123(R). The Company’s decision to use implied volatility was based on the availability of actively traded options for the Company’s common stock and the Company’s assessment that implied volatility is more representative of future stock price trends than the historical volatility of the Company’s common stock. Prior to adopting SFAS No. 123(R), the Company used historical volatility to determine the expected volatility.

Dividend yield: The Company does not anticipate paying any cash dividends in the foreseeable future and therefore a dividend yield of zero is assumed.

Stock Option and Restricted Stock Activity

The following table summarizes stock option activity under all stock compensation plans, including options assumed in connection with acquisitions, during the fiscal year ended December 30, 2006:

	Options (in thousands)			Weighted Average Exercise Price		Weighted Average Contractual Term (years)		Aggregate Instrinsic Value (in thousands)
Outstanding at December 31, 2005		45,887		$	23.34
Granted		5,243			37.94
Canceled		(1,118	)		37.81
Exercised		(4,110	)		14.98
Outsanding at December 30, 2006		45,902		$	25.40		4.3	$	603,140
Vested or expected to vest at December 30, 2006		43,813		$	24.64		4.2	$	602,131
Exercisable at December 30, 2006		33,274		$	19.71		3.4	$	588,041

The aggregate intrinsic value of options outstanding and options exercisable is based on the Company’s closing stock price on the last trading day of the fiscal year for in-the-money options. The total intrinsic value of options exercised during fiscal years 2006, 2005 and 2004 was $105.6 million, $252.4 million and $313.3 million, respectively.

The following table summarizes restricted stock activity under all stock compensation plans, including restricted stock assumed in connection with acquisitions, during the year ended December 30, 2006:

	Restricted Stock (in thousands)		Weighted Average Grant Price
Unvested balance at December 31, 2005	222		$	47.79
Granted	14			34.04
Vested	(16	)		35.90
Canceled	(10	)		46.56
Unvested balance at December 30, 2006	210		$	47.88

In connection with the acquisition of ANS in November 2005, the Company granted replacement unvested stock options and replacement unvested restricted stock to ANS employees who had unvested stock options and unvested restricted stock outstanding at the date of acquisition. ANS employees are required to render future service in order to vest in the replacement stock options and restricted stock. The Company issued 790,737 replacement St. Jude Medical stock options having a weighted average exercise price of $24.00, which vest over one- to four-year periods. The fair values of the replacement stock options were determined on the replacement grant date using the Black-Scholes model. The weighted average fair value of the replacement stock options was $27.79. Additionally, the Company issued 209,364 shares of replacement St. Jude Medical restricted stock at a weighted average grant price of $48.17, which vest over a four year period. Included in the $70.4 million of total pre-tax stock-based compensation expense recognized for 2006, is $9.4 million of expense relating to these ANS replacement awards, respectively.

At December 30, 2006, there was $93.7 million of total unrecognized stock-based compensation expense, adjusted for estimated forfeitures, which is expected to be recognized over a weighted average period of 1.7 years and will be adjusted for any future changes in estimated forfeitures. Included in total unrecognized stock-based compensation expense is $6.9

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million related to replacement awards that the Company issued in connection with the acquisition of ANS, which is expected to be recognized over a weighted average period of 1.2 years.

NOTE 8 – PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT (IPR&D) AND SPECIAL CHARGES (CREDITS)

IPR&D Charges

The Company is responsible for the valuation of purchased in-process research and development. The fair value assigned to IPR&D was estimated by discounting each project to its present value using the after-tax cash flows expected to result from the project once it has reached technological feasibility. The Company discounts the after-tax cash flows using an appropriate risk-adjusted rate of return (ANS – 17%, Velocimed – 22%, ESI – 16%, IBI – 16%) that takes into account the uncertainty surrounding the successful development of the projects through obtaining regulatory approval to market the underlying products in an applicable geographic region. In estimating future cash flows, the Company also considered other tangible and intangible assets required for successful development of the resulting technology from the IPR&D projects and adjusted future cash flows for a charge reflecting the contribution of these other tangible and intangible assets to the value of the IPR&D projects.

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 projects 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, failure of clinical trials, delay or failure to obtain required market clearances, and patent litigation. If commercial viability were not achieved, the Company would not realize the original estimated financial benefits expected for these projects. The Company funds all costs to complete IPR&D projects with internally generated cash flows.

Fiscal Year 2005

Savacor, Inc.: In December 2005, the Company acquired privately-held Savacor to complement the Company’s development efforts in heart failure diagnostic and therapy guidance products. At the date of acquisition, $45.7 million of the purchase price was expensed as IPR&D related to projects that had not yet reached technological feasibility and had no future alternative use. The IPR&D acquired relates to in-process projects for a device in clinical trials both in the United States and internationally that measures left atrial pressure and body temperature. Through December 30, 2006, the Company has incurred costs of approximately $6 million related to these projects. The Company expects to incur approximately $15 million to bring the device to commercial viability on a worldwide basis within four years. Because Savacor is a development-stage company, the excess of the purchase price over the fair value of the net assets acquired is allocated on a pro-rata basis to the net assets acquired. Accordingly, the majority of the excess purchase price was allocated to IPR&D, the principal asset acquired.

Advanced Neuromodulation Systems, Inc.: In November 2005, the Company acquired ANS to expand the Company’s implantable microelectronics technology programs and provide the Company immediate access to the neuromodulation segment of the medical device industry. At the date of acquisition, $107.4 million of the purchase price was expensed as IPR&D related to projects that had not yet reached technological feasibility and had no future alternative use. The majority of the IPR&D acquired relates to in-process projects for next-generation Eon™ and Genesis® rechargeable implantable pulse generator (IPG) devices as well as next-generation leads that deliver electrical impulses to targeted nerves that are causing pain.

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A summary of the fair values assigned to each in-process project acquired and the estimated total cost to complete each project as of the acquisition date is presented below (in millions):

Development Projects	Assigned Fair Value		Estimated Total Cost to Complete
Eon™	$	67.2	$	6.9
Genesis™		15.3		2.7
Leads		23.7		0.2
Other		1.2		0.9
	$	107.4	$	10.7

Through December 30, 2006, the Company has incurred costs of $7.2 million related to these projects. The Company expects to incur an additional $10.7 million through 2009 to bring these technologies to commercial viability.

Velocimed, LLC: In April 2005, the Company acquired the business of Velocimed to further enhance the Company’s portfolio of products in the interventional cardiology market. At the date of acquisition, $13.7 million of the purchase price was expensed as IPR&D related to projects for the Proxis™ embolic protection device that had not yet reached technological feasibility in the U.S. and other geographies and had no future alternative use. The device is used to help minimize the risk of heart attack or stroke if plaque or other debris is dislodged into the blood stream during interventional cardiology procedures. Through December 30, 2006, the Company has incurred $6.8 million in costs related to these projects. The Company expects to incur an additional $0.6 million in 2007 to bring this technology to commercial viability.

Endocardial Solutions, Inc.: In January 2005, the Company acquired ESI to further enhance the Company’s portfolio of products used to treat heart rhythm disorders. At the date of acquisition, $12.4 million of the purchase price was expensed as IPR&D related to system upgrades that had not yet reached technological feasibility and had no future alternative use. These major system upgrades are part of the EnSite® system which is used for the navigation and localization of diagnostic and therapeutic catheters used in atrial fibrillation ablation and other EP catheterization procedures. During 2005, the Company incurred $0.7 million in costs related to these projects and in the third quarter of 2005, the Company achieved commercial viability and launched EnSite® system version 5.1 and the EnSite® Verismo™ segmentation tool.

Fiscal Year 2004

Irvine Biomedical, Inc.: In October 2004, the Company acquired IBI to further enhance the Company’s portfolio of products used to treat heart rhythm disorders. At the date of acquisition, $9.1 million of the purchase price was expensed for IPR&D related to projects for an ablation system and therapeutic catheters that had not yet reached technological feasibility and had no future alternative use. The majority of the IPR&D relates to devices that are part of an ablation system in which catheters are connected to a generator which delivers radiofrequency or ultrasound energy through the catheter to create lesions through ablation of cardiac tissue. In 2005 and 2004, the Company incurred $0.5 million and $0.2 million, respectively, in costs related to these projects and in the fourth quarter of 2005, the Company achieved commercial viability and received FDA approval to market the Cardiac Ablation Generator and Therapy™ EP catheters, expanding the Company’s therapeutic EP portfolio. The remaining IPR&D relates to a cool path ablation catheter that allows for the infusion of saline to cool the catheter tip electrode. Through December 30, 2006, the Company had incurred approximately $3 million in costs related to this device and expects to receive FDA approval in 2007 to market this product.

Special Charges (Credits)

Fiscal Year 2006

Restructuring Activities: During the third quarter of 2006, Company management performed a review of the organizational structure of the Company’s Cardiac Surgery and Cardiology divisions and its international selling organization. In August 2006, Company management approved restructuring plans to streamline its operations within its Cardiac Surgery and Cardiology divisions and combine them into one new Cardiovascular division, effective January 1, 2007, and also to implement changes in its international selling organization to enhance the efficiency and effectiveness of sales and customer service operations in certain international geographies. This strategic reorganization and operational restructuring will allow the Company to enhance operating efficiencies and increase investment in product development.

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As a result of these restructuring plans, the Company recorded pre-tax special charges totaling $34.8 million in the third quarter of 2006 consisting of employee termination costs ($14.7 million), inventory write-downs ($8.7 million), asset write-downs ($7.3 million) and other exit costs ($4.1 million). Of the total $34.8 million special charge, $15.1 million was recorded in cost of sales and $19.7 million was recorded in operating expenses. In order to enhance segment comparability and reflect management’s focus on the ongoing operations of the Company, the restructuring special charges have not been recorded in the individual reportable segments.

Employee termination costs relate to severance and benefits costs for approximately 140 individuals. The charges for employee termination costs were recorded after management determined that such severance and benefits were probable and estimable, in accordance with SFAS No. 112, Employers’ Accounting for Postemployment Benefits. Inventory write-downs represent the net carrying value of inventory relating to product lines discontinued in connection with the reorganization. Asset write-downs represent the net book value of assets that will no longer be utilized as a result of the reorganization and restructuring, including $4.2 million of trademarks acquired in connection with the Company’s 2003 acquisition of Getz Japan as well as other assets relating to product lines discontinued in connection with the reorganization. Other exit costs primarily represent contract termination costs.

A summary of the activity relating to the restructuring accrual for fiscal year 2006 is as follows (in thousands):

	Employee termination costs			Inventory write-downs			Asset write-downs			Other			Total
Balance at December 31, 2005	$	—		$	—		$	—		$	—		$	—
Restructuring charges		14,710			8,694			7,361			4,062			34,827
Non-cash charges used		—			(8,694	)		(7,361	)		—			(16,055	)
Cash payments		(3,642	)		—			—			(586	)		(4,228	)
Balance at December 30, 2006	$	11,068		$	—		$	—		$	3,476		$	14,544

Fiscal Year 2005

Symmetry™ Bypass System Aortic Connector Litigation: During the third quarter of 2005, over 90% of the cases and claims asserted involving the Symmetry™ device were resolved. As a result, the Company reversed $14.8 million of the pre-tax $21.0 million special charge that was recorded in the third quarter of 2004 to accrue for legal fees in connection with claims involving the Symmetry™ device. Additionally, the Company recorded a pre-tax charge of $3.3 million in the third quarter of 2005 to accrue for settlement costs negotiated in these related cases. These adjustments resulted in a net pre-tax benefit of $11.5 million that the Company recorded in the third quarter of 2005 related to Symmetry™ device product liability litigation. See Note 5 for further details on the outstanding litigation against the Company relating to the Symmetry™ device.

Fiscal Year 2004

Symmetry™ Bypass System Aortic Connector Product Line Discontinuance: On September 23, 2004, management committed the Company to a plan to discontinue developing, manufacturing, marketing and selling its Symmetry™ device. The decision was based on operating losses incurred related to the product over the previous three years and the prospect of ongoing operating losses, resulting from a decrease in the number of coronary artery bypass graft surgery cases and an apparent slow down in the adoption of off-pump procedures for which the Symmetry™ device was developed.

In conjunction with the plan, the Company recorded a pre-tax charge in the third quarter of 2004 of $14.4 million. The charge was comprised of $4.4 million of inventory write-offs, $4.1 million of fixed asset write-offs, $3.6 million of sales returns, $1.3 million of contract termination and other costs, primarily related to a leased facility and $1.0 million in workforce reduction costs. These activities and all payments required in connection with the charge have been completed.

Symmetry™ Bypass System Aortic Connector Litigation: The Company has been sued in various jurisdictions by claimants who allege that the Company’s Symmetry™ device caused bodily injury or might cause bodily injury. During the third quarter of 2004, the number of lawsuits involving the Symmetry™ device increased and the number of persons asserting claims outside of litigation increased as well. The Company determined that it was probable future legal fees to defend the cases would be incurred and that the amount of such fees was reasonably estimable. As a result, the Company

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recorded a pre-tax charge of $21.0 million in the third quarter of 2004 to accrue for legal fees in connection with claims involving the Symmetry™ device.

Edwards LifeSciences Corporation:  In December 2004, the Company settled a patent infringement lawsuit with Edwards LifeSciences Corporation and recorded a pre-tax charge of $5.5 million.

NOTE 9 – OTHER INCOME (EXPENSE)

(in thousands)	2006			2005			2004
Interest income	$	9,266		$	19,523		$	10,093
Interest expense		(33,883	)		(10,028	)		(4,810	)
Equity method losses		—			—			(2,091	)
Other		2,175			(821	)		(1,958	)
Other income (expense)	$	(22,442	)	$	8,674		$	1,234

NOTE 10 – INCOME TAXES

The Company’s earnings before income taxes were generated from its U.S. and international operations as follows (in thousands):

	2006		2005		2004
U.S.	$	554,581	$	347,281	$	327,617
International		166,060		274,123		209,575
Earnings before income taxes	$	720,641	$	621,404	$	537,192

Income tax expense consists of the following (in thousands):

	2006			2005		2004
Current:
U.S. federal	$	144,115		$	158,075	$	96,156
U.S. state and other		12,121			22,881		9,814
International		27,081			42,125		30,628
Total current		183,317			223,081		136,598
Deferred		(10,927	)		4,833		(9,340	)
Income tax expense	$	172,390		$	227,914	$	127,258

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The tax effects of the cumulative temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial statement purposes are as follows (in thousands):

	2006			2005
Deferred income tax assets:
Net operating loss carryforwards	$	24,060		$	58,399
Tax credit carryforwards		36,160			33,800
Inventories		101,530			83,539
Stock-based compensation		20,686			—
Accrued liabilities and other		41,847			30,237
Deferred income tax assets		224,283			205,975
Deferred income tax liabilities:
Unrealized gain on available-for-sale securities		(14,733	)		(13,804	)
Property, plant and equipment		(51,174	)		(39,030	)
Intangible assets		(204,382	)		(210,312	)
Deferred income tax liabilities		(270,289	)		(263,146	)
Net deferred income tax liability	$	(46,006	)	$	(57,171	)

The Company has not recorded any valuation allowance for its deferred tax assets as of December 30, 2006 or December 31, 2005 as the Company believes that its deferred tax assets, including the net operating loss and tax credit carryforwards, will be fully realized based upon its estimates of future taxable income.

A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows (in thousands):

	2006			2005			2004
Income tax expense at the U.S. federal statutory rate of 35%	$	252,225		$	217,491		$	188,017
U.S. state income taxes, net of federal tax benefit		14,105			16,225			12,917
International taxes at lower rates		(46,448	)		(47,606	)		(40,409	)
Tax benefits from extraterritorial income exclusion		(9,625	)		(9,143	)		(7,945	)
Tax benefits from domestic manufacturer’s deduction		(5,230	)		(3,955	)		—
Research and development credits		(25,435	)		(23,509	)		(14,031	)
Non-deductible IPR&D charges		—			68,086			3,185
Section 965 repatriation		—			26,000			—
Finalization of tax examinations		—			(13,700	)		(13,982	)
Other		(7,202	)		(1,975	)		(494	)
Income tax expense	$	172,390		$	227,914		$	127,258
Effective income tax rate		23.9	%		36.7	%		23.7	%

The 2005 and 2004 effective income tax rates include the reversal of $13.7 million and $14.0 million, respectively, of previously recorded income tax expense due to the finalization of certain tax examinations. The Company’s effective income tax rate is favorably affected by Puerto Rican tax exemption grants which result in Puerto Rico earnings being partially tax exempt through the year 2012.

At December 30, 2006, the Company has $62.2 million of U.S. federal net operating loss carryforwards and $1.9 million of U.S. tax credit carryforwards that will expire from 2018 through 2024 if not utilized. The Company also has state net operating loss carryforwards of $26.1 million that will expire from 2010 through 2013 and tax credit carryforwards of $51.8 million that have an unlimited carryforward period. These amounts are subject to annual usage limitations. The Company’s net operating loss carryforwards arose primarily from acquisitions.

The Company has not recorded U.S. deferred income taxes on $576.7 million of its non-U.S. subsidiaries’ undistributed earnings, because such amounts are intended to be reinvested outside the United States indefinitely.

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NOTE 11 – RETIREMENT PLANS

Defined Contribution Plans:  The Company has a 401(k) profit sharing plan that provides retirement benefits to substantially all full-time U.S. employees. Eligible employees may contribute a percentage of their annual compensation, subject to Internal Revenue Service limitations, with the Company matching a portion of the employees’ contributions. The Company also contributes a portion of its earnings to the plan based upon Company performance. The Company’s matching and profit sharing contributions are at the discretion of the Company’s Board of Directors. In addition, the Company has defined contribution programs for employees in certain countries outside the United States. Company contributions under all defined contribution plans totaled $47.1 million, $38.0 million and $27.7 million in 2006, 2005 and 2004, respectively.

The Company has a non-qualified deferred compensation plan that provides certain officers and employees the ability to defer a portion of their compensation until a later date. The deferred amounts and earnings thereon are payable to participants, or designated beneficiaries, at specified future dates upon retirement, death or termination from the Company. The deferred compensation liability, which is classified as other liabilities, was approximately $106 million at December 30, 2006 and approximately $76 million at December 31, 2005.

Defined Benefit Plans:  The Company has funded and unfunded defined benefit plans for employees in certain countries outside the United States. The Company had an accrued liability totaling $23.8 million and $17.6 million at December 30, 2006 and December 31, 2005, respectively, which approximated the actuarially calculated unfunded liability. The related pension expense was not material.

NOTE 12 – SEGMENT AND GEOGRAPHIC INFORMATION

Segment Information: The Company’s five operating segments are Cardiac Rhythm Management (CRM), Cardiac Surgery (CS), Neuromodulation (Neuro), Cardiology (CD) and Atrial Fibrillation (AF). The Company formed the Neuro operating segment in November 2005 in connection with the acquisition of ANS. Each operating segment focuses on developing and manufacturing products for its respective therapy area. The primary products produced by each operating segment are: CRM – ICDs and pacemakers; CS – mechanical and tissue heart valves and valve repair products; Neuro – neurostimulation devices; CD – vascular closure devices, guidewires, hemostasis introducers and other interventional cardiology products; and AF – EP introducers and catheters, advanced cardiac mapping and navigation systems and ablation systems.

The Company has aggregated the five operating segments into two reportable segments based upon their similar operational and economic characteristics: CRM/CS/Neuro and CD/AF. Net sales of the Company’s 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 of the reportable segments. 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. Because of this, reportable segment operating profit is not representative of the operating profit of the products in these reportable segments. Additionally, certain assets are managed by the Company’s selling and corporate functions, principally including end-customer receivables, inventory, corporate cash and cash equivalents and deferred income taxes. For management reporting purposes, the Company does not compile capital expenditures by reportable segment and, therefore, this information has not been presented as it is impracticable to do so.

Effective January 1, 2007, the Company combined the Cardiac Surgery and Cardiology divisions into a new Cardiovascular division which will incorporate all activities previously managed by the Cardiac Surgery division and by the Cardiology division. Segment information will be reclassified in 2007 to reflect the new Cardiovascular division. In order to enhance segment comparability and reflect management’s focus on our ongoing operations, the related restructuring special charges have not been recorded in the individual reportable segments.

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The following table presents certain financial information by reportable segment (in thousands):

	CRM/CS/Neuro			CD/AF			Other			Total
Fiscal Year 2006
Net sales	$	2,524,445		$	778,002		$	—		$	3,302,447
Operating profit		1,523,339			316,384			(1,096,640	)		743,083
Depreciation and amortization expense		91,839			25,413			49,560			166,812
Total assets		1,991,832			702,275			2,095,687			4,789,794
Fiscal Year 2005
Net sales	$	2,223,701		$	691,579		$	—		$	2,915,280
Operating profit		1,231,144	(a)		263,211	(b)		(881,625	)		612,730
Depreciation and amortization expense		67,761			21,795			40,653			130,209
Total assets		1,936,915			679,973			2,227,952			4,844,840
Fiscal Year 2004
Net sales	$	1,748,749		$	545,424		$	—		$	2,294,173
Operating profit		1,015,621	(c)		254,270	(d)		(733,933)			535,958
Depreciation and amortization expense		38,533			11,105			36,117			85,755
Total assets		695,330			339,090			2,196,327			3,230,747

(a)	Included in CRM/CS/Neuro 2005 operating profit are IPR&D charges of $107.4 million and $45.7 million relating to the acquisitions of ANS and Savacor, respectively. Also included is an $11.5 million special credit relating to a reversal of a portion of the Symmetry™ device product liability litigation special charge recorded in 2004, net of settlement costs.
(b)	Included in CD/AF 2005 operating profit are IPR&D charges of $13.7 million and $12.4 million relating to the acquisitions of Velocimed and ESI, respectively.
(c)	Included in CRM/CS/Neuro 2004 operating profit are special charges of $35.4 million related to Symmetry™ device product line discontinuance and product liability litigation.
(d)	Included in CD/AF 2004 operating profit is an IPR&D charge of $9.1 million relating to the IBI acquisition.

Net sales by class of similar products for the respective fiscal years were as follows (in thousands):

Net Sales	2006		2005		2004
Cardiac rhythm management	$	2,055,765	$	1,924,846	$	1,473,770
Cardiac surgery		289,317		273,873		274,979
Neuromodulation		179,363		24,982		—
Cardiology		452,295		437,769		388,584
Atrial fibrillation		325,707		253,810		156,840
	$	3,302,447	$	2,915,280	$	2,294,173

Geographic Information: The Company markets and sells its products primarily through a direct sales force. The principal geographic markets for the Company’s products are the United States, Europe and Japan. The Company attributes net sales to geographic markets based on the location of the customer. Other than the United States, Europe and Japan, no one geographic market is greater than 5% of consolidated net sales.

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Net sales by significant geographic market for the respective fiscal years were as follows (in thousands):

Net Sales	2006		2005		2004
United States	$	1,920,623	$	1,709,911	$	1,264,756
International
Europe		806,544		683,014		577,058
Japan		289,716		286,660		267,723
Other		285,564		235,695		184,636
		1,381,824		1,205,369		1,029,417
	$	3,302,447	$	2,915,280	$	2,294,173

Long-lived assets by significant geographic market were as follows (in thousands):

Long-Lived Assets	December 30, 2006		December 31, 2005		January 1, 2005
United States	$	2,765,936	$	2,596,513	$	1,042,690
International
Europe		124,071		100,068		102,172
Japan		120,503		125,962		148,312
Other		89,119		81,156		74,356
		333,693		307,186		324,840
	$	3,099,629	$	2,903,699	$	1,367,530

54

NOTE 13 – QUARTERLY FINANCIAL DATA (UNAUDITED)

Quarterly financial data for 2006 and 2005 is as follows (in thousands, except per share amounts):

	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Fiscal Year 2006:
Net sales	$	784,416		$	832,922		$	821,278		$	863,831
Gross profit		575,969			605,958			580,991			626,016
Net earnings		137,069			141,032			115,540	(a)		154,610	(b)
Basic net earnings per share	$	0.37		$	0.39		$	0.33		$	0.43
Diluted net earnings per share	$	0.36		$	0.38		$	0.32		$	0.42
Fiscal Year 2005:
Net sales	$	663,909		$	723,655		$	737,780		$	789,936
Gross profit		476,026			522,637			537,045			582,811
Net earnings		119,351	(c)		101,481	(d)		167,787	(e)		4,871	(f)
Basic net earnings per share	$	0.33		$	0.28		$	0.46		$	0.01
Diluted net earnings per share	$	0.32		$	0.27		$	0.44		$	0.01

(a)	Includes special charges of $22.0 million, net of taxes, related to restructuring activities in the Company’s Cardiac Surgery and Cardiology divisions and international selling organization.
(b)	Includes a $12.8 million reduction in income tax expense related to the retroactive portion of the research and development tax credit for the first nine months of 2006.
(c)	Includes an IPR&D charge of $12.4 million relating to the acquisition of ESI.
(d)	Includes an IPR&D charge of $13.7 million relating to the acquisition of Velocimed, as well as income tax expense of $27.0 million on the repatriation of $500 million under the provisions of the American Jobs Creation Act of 2004.
(e)	Includes a special credit of $7.2 million, net of taxes, for the reversal of a portion of the Symmetry™ device product liability litigation special charge recorded in 2004, net of settlement costs. Also includes a $13.7 million reversal of previously recorded income tax expense due to the finalization of certain tax examinations as well as a contribution of $6.2 million, net of taxes, to the Foundation.
(f)	Includes IPR&D charges of $153.1 million relating to the acquisitions of ANS and Savacor, as well as a reduction in income tax expense of $1.0 million on the repatriation of $500 million under the provisions of the American Jobs Creation Act of 2004.

55

Five-Year Summary Financial Data
(In thousands, except per share amounts)

	2006 (a)			2005 (b)			2004 (c)			2003			2002
SUMMARY OF OPERATIONS FOR THE FISCAL YEAR:
Net sales	$	3,302,447		$	2,915,280		$	2,294,173		$	1,932,514		$	1,589,929
Gross profit	$	2,388,934		$	2,118,519		$	1,615,123		$	1,329,423		$	1,083,983
Percent of net sales		72.3	%		72.7	%		70.4	%		68.8	%		68.2	%
Operating profit	$	743,083		$	612,730		$	535,958		$	455,945		$	369,955
Percent of net sales		22.5	%		21.0	%		23.4	%		23.6	%		23.3	%
Net earnings	$	548,251		$	393,490		$	409,934		$	336,779		$	276,285
Percent of net sales		16.6	%		13.5	%		17.9	%		17.4	%		17.4	%
Diluted net earnings per share	$	1.47		$	1.04		$	1.10		$	0.91		$	0.75
FINANCIAL POSITION AT YEAR END:
Cash and cash equivalents	$	79,888		$	534,568		$	688,040		$	461,253		$	401,860
Working capital (d)		1,013,958			406,759			1,327,419			1,031,190			770,304
Total assets		4,789,794			4,844,840			3,230,747			2,553,482			1,951,379
Long-term debt, including current portion		859,376			1,052,970			234,865			351,813			—
Shareholders’ equity	$	2,968,987		$	2,883,045		$	2,333,928		$	1,601,635		$	1,576,727
OTHER DATA:
Diluted weighted average shares outstanding		372,830			379,106			370,992			370,753			366,004

Fiscal year 2003 consisted of 53 weeks. All other fiscal years noted above consisted of 52 weeks. The Company did not declare or pay any cash dividends during 2002 through 2006.

(a)	Results for 2006 include after-tax special charges of $22.0 million related to restructuring activities in the Company’s Cardiac Surgery and Cardiology divisions and international selling organization. The Company also recorded after-tax stock-based compensation expense of $49.4 million resulting from the adoption of SFAS No. 123(R), on January 1, 2006. The impact of these items on 2006 net earnings was $71.4 million, or $0.19 per diluted share.
(b)	Results for 2005 include $179.2 million of IPR&D charges relating to the acquisitions of ANS, Savacor, Velocimed and ESI. Additionally, the Company recorded an after-tax special credit of $7.2 million for the reversal of a portion of the Symmetry™ device product liability litigation special charge recorded in 2004, net of settlement costs. The Company also recorded after-tax expense of $6.2 million as a result of a contribution to the St. Jude Medical Foundation. The Company also recorded the reversal of $13.7 million of previously recorded income tax expense due to the finalization of certain tax examinations, as well as $26.0 million of income tax expense on the repatriation of $500 million under the provisions of the American Jobs Creation Act of 2004. The impact of all of these items on 2005 net earnings was $190.5 million, or $0.50 per diluted share.
(c)	Results for 2004 include after-tax special charges of $21.9 million relating to the discontinuance of the Symmetry™ device product line and product liability litigation, as well as an after-tax special charge of $3.4 million resulting from the settlement of certain patent infringement litigation. Additionally, the Company recorded $9.1 million of IPR&D in conjunction with the acquisition of IBI. Also, the Company recorded the reversal of $14.0 million of previously recorded income tax expense due to the finalization of certain tax examinations. The impact of all of these items on 2004 net earnings was $20.4 million, or $0.06 per diluted share.
(d)	Total current assets less total current liabilities.

56

Certifications

The Company has filed as exhibits to its Annual Report on Form 10-K for the year ended December 30, 2006, the Chief Executive Officer and Chief Financial Officer certifications required by section 302 of the Sarbanes-Oxley Act. The Company has also submitted the required annual Chief Executive Officer certifications to the New York Stock Exchange.

Transfer Agent

Requests concerning the transfer or exchange of shares, lost stock certificates, duplicate mailings, or change of address should be directed to the Company’s Transfer Agent at:

Computershare Trust Company, N.A.
P.O. Box 43023
Providence, Rhode Island 02940-3023
1.877.498.8861
www.equiserve.com (Account Access Availability)
Hearing impaired #TDD: 1.800.952.9245

Annual Meeting of Shareholders

The annual meeting of shareholders will be held at
9:30 a.m. on Wednesday, May 16, 2007, at the Minnesota Historical Center, 345 Kellogg Boulevard West,
St. Paul, Minnesota, 55102.

Investor Contact

To obtain information about the Company call 1.800.552.7664, visit our website at www.sjm.com or write to:

Investor Relations
St. Jude Medical, Inc.
One Lillehei Plaza
St. Paul, Minnesota 55117-9983

The Investor Relations (IR) section on St. Jude Medical’s website includes all SEC filings, a list of analyst coverage, webcasts and presentations, financial information and a calendar of upcoming earnings announcements and IR events. St. Jude Medical’s Newsroom features press releases, company background information, fact sheets, executive bios, a product photo portfolio, and other media resources. Patient profiles can be found on our website, including the patients featured in this year’s annual report.

Corporate Governance

(See Company Information on website - www.sjm.com)

• Principles of Corporate Governance

• Code of Business Conduct

• SEC Filings

Company Stock Splits

2:1 on 4/27/79, 1/25/80, 9/30/86, 3/15/89, 4/30/90, 6/10/02 and 11/1/04. 3:2 on 11/16/95

Stock Exchange Listings

New York Stock Exchange
Symbol: STJ

The range of high and low prices per share for the Company’s common stock for fiscal years 2006 and 2005 is set forth below. As of February 14, 2007, the Company had 3,067 shareholders of record.

	Fiscal Year
	2006				2005
Quarter	High		Low		High		Low
First	$	54.75	$	40.30	$	41.85	$	35.80
Second	$	42.00	$	31.20	$	44.50	$	34.48
Third	$	40.00	$	31.50	$	48.36	$	42.89
Fourth	$	39.07	$	32.40	$	52.80	$	44.00

Trademarks

All product names appearing in this document are trademarks owned by, or licensed to, St. Jude Medical Inc.

©2007 St. Jude Medical, Inc.

EX-21

Exhibit 21

ST. JUDE MEDICAL, INC.
SUBSIDIARIES OF THE REGISTRANT
as of December 30, 2006

St. Jude Medical, Inc. Wholly Owned Subsidiaries:
•	Pacesetter, Inc. - Sylmar, California, Scottsdale, Arizona, and Maven, South Carolina
	(Delaware corporation) (doing business as St. Jude Medical Cardiac Rhythm Management Division)
•	St. Jude Medical S.C., Inc. – Austin, Texas (Minnesota corporation)
		-	Bio-Med Sales, Inc. (Pennsylvania corporation)
		-	Pacesetter Associates II, Inc. (Ohio corporation)
		-	Pacesetter Associates, Inc. (Ohio corporation)
•	St. Jude Medical Europe, Inc. - St. Paul, Minnesota (Delaware corporation)
		-	Brussels, Belgium branch
•	St. Jude Medical Canada, Inc. - Mississauga, Ontario and St. Hyacinthe, Quebec (Ontario, Canada corporation)
•	St. Jude Medical (Shanghai) Co., Ltd. – Shanghai, China (Chinese corporation)
		-	Beijing, Shanghai and Guangzhou representative offices
•	St. Jude Medical (Hong Kong) Limited - Central, Hong Kong (Hong Kong corporation)
		-	Beijing, China representative office
		-	Korean and Taiwan branch offices
		-	Mumbai, New Delhi, Calcutta, Chennai and Bangalore, India branch offices
		-	Singapore representative office
•	St. Jude Medical, Inc., Cardiac Assist Division - St. Paul, Minnesota (Delaware corporation)
	(Assets of St. Jude Medical, Inc., Cardiac Assist Division sold to Bard 1/19/96)
•	St. Jude Medical Australia Pty., Ltd. – Sydney, Australia (Australian corporation)
•	St. Jude Medical Brasil, Ltda. - Sao Paulo and Belo Horizonte, Brazil (Brazilian corporation)
•	St. Jude Medical, Daig Division, Inc.- Minnetonka, Minnesota (Minnesota corporation)
•	St. Jude Medical Colombia, Ltda. - Bogota, Colombia (Colombian corporation)
•	St. Jude Medical ATG, Inc. - Maple Grove, Minnesota (Minnesota corporation)
•	St. Jude Medical (Thailand) Co., Ltd. – Bangkok, Thailand (Thailand corporation)
•	Epicor Medical, Inc. – Sunnyvale, California (Delaware corporation)
•	Irvine Biomedical, Inc. – Irvine, California (California corporation)
•	Frank Merger Corporation – (Delaware corporation)
•	Velocimed, Inc. - Maple Grove, Minnesota (Delaware corporation)
•	Velocimed DMC, Inc. - Maple Grove, Minnesota (Delaware corporation)
•	Velocimed PFO, Inc. - Maple Grove, Minnesota (Delaware corporation)
•	Endocardial Solutions, Inc. - St. Paul, Minnesota (Delaware corporation)
		-	Endocardial Solutions NV/SA (Belgian Corporation)
•	Sky Merger Corp. – (Delaware Corporation)
•	Light Merger Corporation – (Delaware Corporation)
•	St. Jude Medical Argentina S.r.l. – Buenos Aires, Argentina (Argentinean corporation)
•	Advanced Neuromodulation Systems, Inc. – Plano, Texas (Texas Corporation)
		-	Quest Acquisition Corp. – Plano, Texas (Delaware Corporation)
		-	Hi-Tronics Designs, Inc. – Budd Lake, New Jersey (New Jersey Corporation)
		-	Neuro-Regeneration, Inc. – Plano, Texas (Delaware Corporation)
		-	Micronet Medical, Inc. – Plano, Texas (Minnesota Corporation)
		-	Hug Centers of America I, Inc. – Plano, Texas (Delaware Corporation)
		-	SPAC Acquisition Corp. Wilmington, Delaware (Delaware Corporation)
		-	ANS Germany GmbH (German corporation)
		-	Advanced Neuromodulation Systems, UK Limited (United Kingdom corporation)
		-	Advanced Neuromodulation Systems Australia Pty Limited (Australian corporation)
		-	Advanced Neuromodulation Systems France S.A.S. (French corporation)
•	SJM International, Inc. - St. Paul, Minnesota (Delaware corporation)
		-	Tokyo, Japan branch
		-	St. Jude Medical Delaware Holding LLC (Delaware limited liability company)

SJM International, Inc. Wholly Owned Legal Entities (Directly and Indirectly):
•	St. Jude Medical Holland Finance C.V. (Netherlands limited partnership) (ownership of St. Jude Medical Holland Finance C.V. is shared by SJM International, Inc. and St. Jude Medical Delaware Holding LLC)
		-	St. Jude Medical Luxembourg S.à r.l. (Luxembourg corporation) (wholly owned subsidiary of St. Jude Medical Holland Finance C.V.)
			-	St. Jude Medical Investments B.V. (Netherlands corporation headquartered in Luxembourg) (wholly owned subsidiary of St. Jude Medical Luxembourg S.à r.l.)
				-	St. Jude Medical Nederland B.V. (Netherlands corporation) (wholly owned subsidiary of St. Jude Medical Investments B.V.)
				-	St. Jude Medical Enterprise AB (Swedish corporation headquartered in Luxembourg) (wholly owned subsidiary of St. Jude Medical Investments B.V.)
					-	St. Jude Medical Puerto Rico B.V. (Netherlands corporation) (wholly owned subsidiary of St. Jude Medical Enterprise AB)
						-	Puerto Rico branch of St. Jude Medical Puerto Rico B.V.
					-	St. Jude Medical Coordination Center (Belgium branch of St. Jude Medical Enterprise AB)
					-	St. Jude Medical AB (Swedish corporation) (wholly owned subsidiary of St. Jude Medical Enterprise AB)
				-	St. Jude Medical Holdings B.V. (Netherlands corporation) (wholly owned subsidiary of St. Jude Medical Investments B.V.)
					-	Getz Bros. Co. Ltd. (Japanese corporation) (wholly owned subsidiary of St. Jude Medical Holdings B.V.)
					-	St. Jude Medical India Private Limited (Indian corporation) (wholly owned subsidiary of St. Jude Medical Holdings B.V.)
					-	St. Jude Medical (Singapore) Pte. Ltd. (Singaporean corporation) (wholly owned subsidiary of St. Jude Medical Holdings B.V.)
					-	St. Jude Medical (Malaysia) Sdn Bhd (Malaysian corporation) (wholly owned subsidiary of St. Jude Medical Holdings B.V.)
					-	St. Jude Medical Taiwan Co. (Taiwan corporation) (wholly owned subsidiary of St. Jude Medical Holdings B.V.)
					-	St. Jude Medical Korea YH (Korean corporation) (wholly owned subsidiary of St. Jude Medical Holdings B.V.)
•	St. Jude Medical Sweden AB (Swedish corporation)
•	St. Jude Medical Danmark A/S (Danish corporation)
•	St. Jude Medical (Portugal) - Distribuição de Produtos Médicos, Lda. (Portuguese corporation)
•	St. Jude Medical Export Ges.m.b.H. (Austrian corporation)
•	St. Jude Medical Medizintechnik Ges.m.b.H. (Austrian corporation)
•	St. Jude Medical Italia S.p.A. (Italian corporation)
•	St. Jude Medical Belgium (Belgian corporation)
•	St. Jude Medical España S.A. (Spanish corporation)
•	St. Jude Medical France S.A.S. (French corporation)
•	St. Jude Medical Finland O/y (Finnish corporation)
•	St. Jude Medical Sp.zo.o. (Polish corporation)
•	St. Jude Medical GmbH (German corporation)
•	St. Jude Medical Kft (Hungarian corporation)
•	St. Jude Medical UK Limited (United Kingdom corporation)
•	St. Jude Medical AG (Swiss corporation)
•	UAB “St. Jude Medical Baltic” (Lithuanian corporation)
•	St. Jude Medical Medizintechnik AG (Swiss corporation)
•	H-Solutions SA (French corporation)
•	Nexus Medical Sarl (French corporation)

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in this Annual Report (Form 10-K) of St. Jude Medical, Inc. of our reports dated February 16, 2007, with respect to the consolidated financial statements of St. Jude Medical, Inc., St. Jude Medical, Inc. management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of St. Jude Medical, Inc., included in the 2006 Annual Report to Shareholders of St. Jude Medical, Inc.

Our audits also included the financial statement schedule of St. Jude Medical, Inc. listed in Item 15(a)(2). This schedule is the responsibility of St. Jude Medical, Inc.’s management. Our responsibility is to express an opinion based on our audits. In our opinion, as to which the date is February 16, 2007, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also consent to the incorporation by reference in the Registration Statement No. 33-9262, Registration Statement No. 33-41459, Registration Statement No. 33-48502, Registration Statement No. 33-54435, Registration Statement No. 333-42945, Registration Statement No. 333-42658, Registration Statement No. 333-42668, Registration Statement No. 333-96697, Registration Statement No. 333-127381, Registration Statement No. 333-130180 and Registration Statement No. 333-136398 on Form S-8 of St. Jude Medical, Inc. of our reports dated February 16, 2007, with respect to the consolidated financial statements of St. Jude Medical, Inc., St. Jude Medical, Inc. management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of St. Jude Medical, Inc., incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule of St. Jude Medical, Inc. included in this Annual Report (Form 10-K) of St. Jude Medical, Inc.

/s/ Ernst & Young LLP

Minneapolis, MN
February 28, 2007

EX-24

Exhibit 24

POWER OF ATTORNEY

KNOW ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Daniel J. Starks, John C. Heinmiller and Pamela S. Krop, each with full power to act without the other, his or her true and lawful attorney-in-fact and agent with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of St. Jude Medical, Inc. for the fiscal year ended December 30, 2006, and any or all amendments to said Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and to file the same with such other authorities as necessary, granting unto each such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each such attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, this Power of Attorney has been signed on this 28^th day of February, 2007, by the following persons.

	/s/ MICHAEL A. ROCCA
Daniel J. Starks Chairman, President and Chief Executive Officer (Principal Executive Officer)	Michael A. Rocca Director
	/s/ DAVID A. THOMPSON
John C. Heinmiller Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	David A. Thompson Director
/s/ JOHN W. BROWN	/s/ STEFAN K. WIDENSOHLER
John W. Brown Director	Stefan K. Widensohler Director
/s/ RICHARD R. DEVENUTI	/s/ WENDY L. YARNO
Richard R. Devenuti Director	Wendy L. Yarno Director
/s/ STUART M. ESSIG
Stuart M. Essig Director
/s/ THOMAS H. GARRETT III
Thomas H. Garrett III Director

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Daniel J. Starks, certify that:
	1.	I have reviewed this annual report on Form 10-K of St. Jude Medical, 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 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 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.

Date:  February 28, 2007

/s/  DANIEL J. STARKS

Daniel J. Starks

Chairman, President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, John C. Heinmiller, certify that:
	1.	I have reviewed this annual report on Form 10-K of St. Jude Medical, 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 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 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.

Date:   February 28, 2007

/s/   JOHN C. HEINMILLER

John C. Heinmiller

Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of St. Jude Medical, Inc. (the “Company”) on Form 10-K for the period ended December 30, 2006 as filed with the Securities and Exchange Commission (the “Report”), I, Daniel J. Starks, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §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; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/	DANIEL J. STARKS
Daniel J. Starks
Chairman, President and Chief
Executive Officer
February 28, 2007

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of St. Jude Medical, Inc. (the “Company”) on Form 10-K for the period ended December 30, 2006 as filed with the Securities and Exchange Commission (the “Report”), I, John C. Heinmiller, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §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; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/  JOHN C. HEINMILLER

John C. Heinmiller

Executive Vice President and

Chief Financial Officer

February 28, 2007