November 18, 2008

Equity Research
www.zacks.com

Christopher Titus, CFA

111 North Canal Street, Chicago, IL 60606

Medtronic

(MDT-NYSE)

MDT: Q2 results below estimates; Numerous execution and regulatory issues raised; Management lowered guidance; Estimates and Target Price lowered.

OUTLOOK
MDT s story is improving - product approvals and launches, and a renewed focus on operating margins should drive healthy near-term EPS growth. An increase in quarterly dividends and reiteration of guidance reaffirms our position on this stock. We revise our estimates to bring them inline with management s downward revision to guidance. We revise our valuation closer inline with peers.

Current Recommendation Prior Recommendation Date of Last Change Current Price (11/17/08) Six- Month Target Price

Hold Buy 05/11/2005 $36.42 $40.80

SUMMARY DATA
52-Week High 52-Week Low One-Year Return (%) Beta Average Daily Volume (sh) Shares Outstanding (mil) Market Capitalization ($mil) Short Interest Ratio (days) Institutional Ownership (%) Insider Ownership (%) Annual Cash Dividend Dividend Yield (%) 5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%) P/E using TTM EPS P/E using 2009 Estimate P/E using 2010 Estimate Zacks Rank $56.55 $36.24 -17.45 0.55 8,742,808 1,128 $41,093 1.78 76 0 $0.75 2.06 Risk Level Type of Stock Industry Zacks Rank in Industry Below Avg. Large-Blend Med Products 38 of 67

ZACKS ESTIMATES
Revenue
(in millions of $)

Q1 (Jul) 2007 2008 2009 2010 2,897 A 3,127 A 3,706 A 4,101 E

Q2 (Oct) 3,075 A 3,124 A 3,570 A

Q3 (Jan) 3,048 A 3,405 A 3,643 E

Q4 (Apr) 3,280 A 3,860 A 3,948 E

Year (Apr) 12,299 A 13,515 A 14,867 E 15,806 E

10.8 12.9 12.2 13.4 12.0 10.8 3

Earnings per Share

(EPS is operating earnings before non recurring items)

2007 2008 2009 2010

Q1 (Jul) $0.55 A $0.62 A $0.72 A

Q2 (Oct) $0.59 A $0.58 A $0.67 A

Q3 (Jan) $0.61 A $0.63 A $0.74 E

Q4 (Apr) $0.66 A $0.78 A $0.85 E

Year (Apr) $2.41 A $2.60 A $2.98 E $3.39 E 14

Zacks Projected EPS Growth Rate - Next 5 Years %

Copyright 2008, Zacks Investment Research. All Rights Reserved.

KEY POINTS
Medtronic (MDT) is a market leader in cardiology and spine devices that benefits from scale, resources, and incremental sales synergies within the medical devices industry. Strengthening its position in neurology and stents, two high growth markets. A deep product pipeline and strong R&D program leaves MDT well positioned for long-term organic growth, not relying purely upon acquisitions.

OVERVIEW
Medtronic, Inc. is one of the world s leading medical technology companies, specializing in implantable and interventional therapy devices and products. Founded in 1949, the company is based in Minneapolis, MN and has approximately 38,000 employees. The company generated $12.3 billion in consolidated net fiscal (year ending April on the last Friday of the month) 2007 sales. More information can be found at the company s website www.medtronic.com.

Fiscal Year 2008 Revenues

(dollars in billions)
Surgical Tech $0.780 Diabetes $1.019 Neuromodul $1.311

Physio-Control $0.329 Cardiac Rhythm $4.963

CV $2.131 Spinal $2.982

Consolidated Net Sales $13.515

Source: company reports

Business Segments: Medtronic derives its revenue from eight divisions: Cardiac Rhythm Disease Management, Spinal, CardioVascular (combined Cardiac Surgery and Vascular segments), Neuromodulation, Diabetes, Spinal/ENT, Physio-Control, and Corporate Technologies and New Ventures (division created in fiscal Q109 that also includes the Navigation segment formerly included in Spinal). Cardiac Rhythm Disease Management (CRDM): Medtronic s CRDM division is its largest segment with sales of $4.96 billion for fiscal year 2008, or 37% of total fiscal 2008 sales. MDT has leading CRDM market share and offers the broadest product line in the industry for the diagnosis and treatment of heart

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rhythm disorders and heart failure. Since there are many different heart rhythm problems, the company has produced implantable devices that specifically address complex combinations of arrhythmias. Bradycardia (too-slow heart rate) is a common condition, with millions of people worldwide suffering from its effects. Bradycardia systems include pacemakers (Adapta, EnRhythm, EnPulse), leads and accessories. Approximately 7 million people worldwide have tachyarrhythmia (too-rapid heart rate). Tachyarrhythmia is a potentially fatal condition that can lead to sudden cardiac arrest, or the sudden and complete cessation of heart activity. Tachyarrhythmia can occur in the upper heart chambers (atria) or the lower chambers (ventricles). Tachyarrhythmia systems include ICDs (or implantable cardioverter defibrillators) such as Virtuoso, EnTrust, and Intrinsic. Heart failure afflicts nearly 5 million Americans and 22 million people worldwide. Up to 550,000 new cases are diagnosed each year. The company offers the InSync product line for patients with heart failure. The company also offers products like the Concerto line for patients with heart failure who are also considered at high risk of sudden cardiac arrest. In addition to implantable devices, the division also provides leads, ablation products, electrophysiology catheters, and information systems for the management of patients. Pacing revenue growth has been consistently in the mid-single digits, with sales growth outside of the United States increasing at doubledigit rates. And, ICD sales account for more than half of CRDM sales. The company offers patient management tools that enable physicians and clinics to monitor patient progress as measured by their implanted devices. CareLink, an Internet-based system, allows physicians to remotely monitor patients. Data uploaded from the patient s pacemaker, CRT-D, or ICD using a standard telephone line is immediately available to the doctor. More than 2,400 cardiology clinics and hospitals are signed onto the CareLink system. These clinics represent more than 250,000 monitored patients. The system s success has led to co-marketing arrangements with other device manufacturers. Product Launches: MDT expects to launch 25 new products over the next twelve months, both in the U.S. and internationally, including the Vision 3-D platform of high- and low-power devices, two new left ventricular leads, and an entirely new platform for CareLink. Fidelis Recall: In October 2007, MDT voluntarily recalled the Sprint Fidelis defibrillator lead due to potential for lead fracture. The Fidelis recall impact has diminished considerably. Formerly a 75%/25% production mix for Fidelis/Quattro, the company has now focused on switching all manufacturing lines from Fidelis to Quattro leads. In December 2007, MDT received Japanese regulatory approval for the Sprint Quattro dual-coil lead. Post-Fidelis recall, management expects flat to low-single digit growth in the U.S. ICD market. Ex-U.S. revenue growth is projected to be in the range of mid-to-upper single digits. Spinal: The company s second largest division, Spinal, had sales of $2.982 billion in fiscal year 2008, or 22% of total fiscal 2008 sales. This division includes products used in the surgical procedures of the spine. Recent results have been primarily driven by sales of biologics, strong international markets, and the contribution from Kyphon. During Q208, the company received FDA approval for its PRESTIGE Cervical Disc System (over 1800 physicians trained to date), the first artificial disc commercially available in the U.S. for use in the neck. However, initial roll-out of PRESTIGE has been slow due to longer-thanexpected physician training and lack of reimbursement. The company also received positive panel recommendation for final FDA approval for its BRYAN Cervical Disc System based on data comparing the artificial disc to traditional fusion. In November 2007, the company expanded its spine portfolio by completing the acquisition of Kyphon Inc. (KYPH) at a total consideration of approximately $4.2 billion. The acquisition adds expertise in vertebral compression fractures and spinal stenosis suffered primarily by older patients. Medtronic s legacy spinal surgery business focuses on younger patients with scoliosis and degenerative disc disease in the cervical and lumbar spine. The transaction is expected have a neutral impact in FY09 and is expected to be accretive beyond. In December 2007, MDT agreed to form a joint venture with Shandong Weigao Group to expand its spine and orthopedic markets in China. The transaction is expected to close in calendar year 2008. CardioVascular: The company s third largest division, CardioVascular, has $2.1 billion in sales, or 16% of total fiscal 2008 sales. The CardioVascular division is composed of the two former segments, Cardiac

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Surgery and Vascular. Cardiac Surgery products include perfusion systems which oxygenate and circulate a patient s blood during arrested heart revascularization surgery, positioning and stabilization systems for beating heart revascularization surgery, products for the repair and replacement of heart valves, surgical accessories, and surgical ablation products. The company, given its broad array of valve tissue products, is benefiting from the continuing shift in the valve market from mechanical to tissue valves. Tissue product offerings include the Mosaic bioprosthetic heart valve, Freestyle stentless and Hancock II stented valves. The Cardioblate Ablation System is designed to allow surgeons to efficiently restore a normal heart rhythm in atrial arrhythmias patients undergoing surgery by creating lines of ablation that guide electrical conduction within the atria. In March 2007, the company initiated the study of the Concomitant Utilization of RadioFrequency Energy for Atrial Fibrillation (CURE-AF), a U.S. pivotal trial to evaluate the safety and efficacy of its Cardioblate surgical ablation systems (CSAS) to treat permanent AF requiring simultaneous open heart surgery. Enrollment of 75 patients at 10 U.S. medical centers has begun for this non-randomized clinical trial. Vascular: The Vascular segment offers a whole line of minimally invasive products and therapies to treat coronary artery disease, abdominal aortic and thoracic aortic aneurysms, and peripheral vascular disease. Segment growth reflects worldwide acceptance of the Endeavor product line. Medtronic teamed with Abbott Labs (ABT) to manufacture the Endeavor DES with MDT s Driver cobalt alloy structure and ABT s drug-eluting compound. In July 2005, MDT received CE Mark approval for the commercialization of the Endeavor coronary DES. In May 2007, the company received European CE Mark approval and launched the Endeavor Sprint in Europe. In October 2007, the company launched the Endeavor Resolute, its next-generation DES, internationally. In November 2006, its U.S. PMA Endeavor application was submitted for FDA approval based on the data from four significant clinical trials conducted on approximately 4,100 patients: ENDEAVOR I, ENDEAVOR II (vs. MDT s bare-metal Driver stent), ENDEAVOR III (vs. JNJ s Cypher stent) and ENDEAVOR IV (vs. Boston Scientific s TAXUS stent). The company received an FDA Advisory Panel recommendation in October 2007 and in February 2008, MDT received final FDA approval for Endeavor, providing the company with its first U.S. DES product. In June 2008, the company announced FDA approval of its Talent Thoracic Stent Graft, a life-saving medical device that will allow more patients to benefit from a minimally invasive treatment for certain types of aneurysms of the descending thoracic aorta. Heparin-related Recall: On April 8, 2008, the U.S. Food and Drug Administration recommended that device manufacturers check heparin supplies with newly-developed tests, and that corrective action be taken for products affected by tainted supplies. As a result, the company initiated a voluntary and precautionary recall of selected products featuring the Carmeda BioActive surface. The affected devices are disposable products used during cardiopulmonary bypass (CPB) for heart surgeries. Affected products include blood oxygenators, reservoirs, pumps, cannulae, and tubing packs. Neuromodulation: Medtronic s Neuromodulation division had sales of $1.311 billion in fiscal year 2008, or 10% of total fiscal 2008 sales. This division consists of therapeutic and diagnostic devices, including implantable neurostimulation systems, implantable drug administration devices, urology and gastroenterology products (InterStim Therapy, Prostiva RF Therapy, Enterra Therapy, Bravo pH Monitoring System). In July 2006, MDT received U.S. and EU approval for its InterStim II system. In October 2006, the company launched RestoreADVANCED and PrimeADVANCED neurostimulation systems in the U.S., for the treatment of chronic pain. Management believes that it can maintain momentum with the launch of the RESTORE ULTRA after receiving the FDA approval in February 2008. The RESTORE Ultra is the thinnest stimulation device in the U.S. market. Diabetes: The Diabetes division had sales of $1.019 billion in fiscal year 2008, or 8% of total fiscal 2008 sales. Recent growth has been primarily due to an increase in insulin pump and continuous glucose monitor sales. In March 2007, the company launched its FDA-approved Paradigm and Guardian REALTime continuous glucose monitoring (CGM) systems with CareLink. The CareLink service was first launched in the United States in 2002 to provide an efficient way, via the internet, for physicians to remotely monitor the condition of their patients with implantable devices. MDT expects to benefit from the co-marketing meter agreements signed with Johnson & Johnson and Bayer earlier in fiscal 2008. MDT is beginning to see referral momentum from the joint sales calls and marketing events, geared toward

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patients needing multiple daily injections. In February, MDT launched its Bayer co-developed blood glucose meter in the German market and expects to launch the JNJ LifeScan meter in the U.S. in late fiscal 2008 or early fiscal 2009. ENT: Medtronic s ENT (Ear, Nose, Throat) division had sales $323 million in fiscal year 2008, or 2% of total fiscal 2008 sales. This division includes products used for ears, nose and throat diseases and disorders, such as chronic sinusitis, chronic otitis media, hearing loss, thyroid diseases, and tumors of the head and neck and other neurological diseases. Primary products include tissue-removal systems and surgical instruments, implantable devices, nerve monitoring systems, disposable fluid-control products, image-guided surgery systems, shunts for pediatric and normal pressure hydrocephalus, drainage systems for the treatment of traumatic brain injury, neuro-endoscopes, and a full line of cranial fixation devices. Physio-Control: Medtronic s Physio-Control division had sales of $329 million in fiscal year 2008, or 2% of total fiscal 2008 sales. This division develops, manufactures, and markets external defibrillators (LIFEPAK), including automated external defibrillators (AEDs) and manual defibrillators used by hospitals and emergency response personnel. In January 2007, the company voluntarily suspended U.S. shipments of Physio-Control products manufactured at MDT s Redmond, Washington facility in order to address quality system issues. On April 25, 2008, the company reached an agreement on a consent decree with the FDA regarding appropriate corrective actions. However, worldwide shipments will continue to meet critical customer requirements and certain specified public health needs. As stated in December 2006, the company remains committed to the spinning Physio-Control off at the appropriate time, following the resolution of the voluntary suspension. Corporate Ventures and New Ventures: Consisting primarily of the former Navigation business, this division was created in fiscal Q109. MDT is a leader in the field of computer-assisted surgery (CAS), and plans to leverage this and other technologies across various business segments. In February 2007, MDT launched the Synergy Experience StealthStation System, a combination of Navigational Procedure Solutions and MAST techniques, allowing less invasive procedures, smaller incisions and less radiation exposure. In June 2007, Medtronic acquired the O-arm Imaging System assets of Breakaway Imaging, LLC, a privately held developer of medical imaging systems for surgery. With this acquisition, Medtronic will now own, rather than license, exclusive worldwide distribution and marketing rights of the O-arm Imaging System that offers two- and three-dimensional imaging. In the fiscal year 2008, this division had sales of $159 million. Business Performance: Diversification through R&D and acquisition has altered the revenue mix over the past four years. The contribution from CRMD has declined from 46% in FY05 to 37% in FY08. Product recalls and the addition of lower margin products have negatively impacted gross margins. Higher R&D expenses related to MDT s increased pipeline focus has also added to margin declines. R&D spending steadily increased from 9.4% of sales in FY04 to a high of 10.1% in FY07, and since declined to 9.4% again in FY08. SG&A expenses also increased due to continued investment in infrastructure and expanded sales force, as well as acquisitions. SG&A as a percent of sales increased from 30.8% in FY04 to 34.8% in FY08. EPS growth exceeded sales growth due to changes in tax rates, shares outstanding, and other income and expenses.

Sales Growth
Gross Margin SG&A + R&D Operating Margin Effective Tax Rate Net Margin

4Y CAGR 10.4%

FY08 9.9%
74.5% 44.3% 30.2% 22.7% 16.5%

FY07 8.9%
74.2% 43.8% 30.4% 20.3% 22.8%

FY06 12.3%
75.1% 42.3% 32.8% 19.4% 22.6%

FY05 10.6%
75.7% 41.4% 34.2% 29.1% 17.9%

EPS Growth

12.4%

7.9%

9.0%

18.8%

14.1%

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KEY DEVELOPMENTS
At the June 2008 investor meeting, management outlined the ONE Medtronic approach, an initiative with the following goals: (1) drive sustainable long term growth of 9%-11% through innovation, (2) focus on operating margins increase by 300 to 400 basis points, (3) EPS growth of 11%-14% and return a minimum of 40%-50% of free cash flow to shareholders annually, and (4) align the organization for consistent execution. Management estimates that drug-eluting stent penetration has increased to 67% in the U.S. Received FDA approval for the Attain StarFix left ventricular lead with deployable lobes, the first ever active fixation left heart lead - has demonstrated a zero percent chronic dislodgement rate. In fiscal Q1, MDT created a new operating segment consisting primarily of the former Navigation business and plans to leverage this and other technologies in the field of computer-assisted surgery Recalls & Suspensions: Voluntary suspension U.S. shipments of Physio-Control products manufactured at MDT s Redmond, Washington facility in order to address quality system issues (January 2007). MDT voluntarily recalled the Sprint Fidelis defibrillator lead due to potential for lead fracture (October 2007). Tainted supplies of heparin led to testing and corrective action be taken for affected products (April 2008).

INDUSTRY POSITION
The company faces competition from both the therapeutic and diagnostic medical markets in more than 120 countries throughout the world. In the product lines, the company competes with a mixture of competitors ranging from large manufacturers with multiple business lines to small manufacturers that offer a limited selection of products. The company s primary competitors in the CRDM and Cardiac Surgery business are Edwards LifeSciences Corporation, Johnson & Johnson, Boston Scientific Corporation and St. Jude Medical, Inc. In Spine, MDT faces competition with Zimmer, Inc., Johnson & Johnson, Stryker Corporation and Synthes-Stratec, Inc. The primary competitors in the Navigation business are BrainLAB, Inc. and Stryker Corporation. In the Vascular segment, the coronary and peripheral vascular business of MDT competes with Boston Scientific Corporation, Johnson & Johnson, and Abbott Laboratories, Inc., while primary competitors in the endovascular business are Cook, Inc. and W. L. Gore & Associates, Inc. The company s Neurological products directly compete with Boston Scientific Corporation, St. Jude Medical, Inc., Urologix, Inc., and American Medical Systems. Competitors in the Diabetes products include Johnson & Johnson, Abbott Laboratories, Roche Ltd., Smiths Group PLC, and DexCom, Inc. Significant competitors of MDT s ENT business are Gyrus Group PLC, Stryker Corporation, Integra LifeSciences Holdings Corporation, and Anspach Effort, Inc. In the Physio-Control business, Cardiac Science, Inc., Zoll Medical Corporation, and Royal Philips Electronics, Defibtech, HeartSine, and Welch Allyn generate competition for the company. Medtronic s advantage is that MDT is a strong competitor in virtually every medical field in cardiovascular, cardiac rhythm management, cardiac surgery, neurological, spinal, diabetes and ENT. In order to continue to compete effectively, in the current environment of managed care, economically motivated buyers, consolidation among healthcare providers, increased competition, and declining reimbursement rates, Medtronic requires competing on the basis of price. Additionally, the company must continue to create or acquire advanced technology, incorporate this technology into proprietary products, obtain regulatory approvals in a timely manner, and manufacture and successfully market these products.

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RECENT NEWS
On November 18, 2008, Medtronic, Inc. reported financial results for the second quarter of fiscal year 2009. For the second quarter, adjusted diluted EPS from continuing operations were $0.67 vs. $0.58 in the year-ago period.
Revenues Segments: (% of sales)
- CRDM - Spinal - CardioVascular - Neuromodulation - Diabetes - Surgical Technologies - Physio-Control 35% 23% 17% 10% 8% 6% 2% 37% 21% 16% 10% 8% 6% 2% 8% 26% 22% 7% 11% 15% 1%

Q109 3,570

Q108 3,124

Change 14%

100% Margins Gross Margin R&D SG&A Operating Income Other expense, net Interest expense One-time charges Earnings before income taxes Provision for income taxes Net Margin Diluted Shares Outstanding EPS - GAAP EPS adjusted

100% bps 215 -41 -6 262 170 223 796 -927 -966 -532 -2% -12% 16%

75.3% 9.1% 35.4% 30.8% 4.0% 0.3% 8.0% 18.5% 13.6% 16.0% 1,129 0.51 0.67

73.1% 9.5% 35.4% 28.1% 2.3% -2.0% 0.0% 27.8% 23.3% 21.3% 1,148 0.58 0.58

Revenues were negatively impacted by numerous competitive and regulatory issues. Changes in foreign exchange added $65 million, or two points of growth. Domestic revenues represented 61.5% of the total revenue and grew 12%. CRDM revenue growth of 8% was hampered by lower ASP s in the pacing business and a competitive launch in the defibrillator business.. Growth in the Spinal segment was hurt by lower than expected sales of Kyphon s balloon Kyphoplasty product and the FDA warning letter issued during Q1 regarding the recombinant human bone morphogenetic protein in cervical spine fusion. Strong Endeavor sales in the U.S. brought MDT s market share to 12% in stents. The company s injunction on the use of rapid exchange technology was lifted on October 29, 2008. The company expects to launch five new angioplasty products in the near future. Neuromodulation sales were adversely affected by process related issues in manufacturing of drug pumps used in pain management. These were addressed late in the quarter. Growth in the remaining segments was driven by image guided surgery systems, glucose monitors, defibrillators, and their accessories. Margins Gross margin was positively impacted by favorable foreign currency, efficiencies in manufacturing driven by increased volume, and ongoing initiatives to reduce product costs. SG&A as a percentage of sales benefited from the ONE Medtronic cost reduction initiative. The global implementation of SAP has integrated many departments and branches, reducing infrastructure expenses. Numerous one-time charges during the second quarter included litigation charges and inprocess R&D. Total adjustments accounted for $0.16 per share.

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For full fiscal year 2009, the company reduced its revenue guidance by $400 to $500 million, now expecting revenues between $14.6 billion and $15.0 billion. As a result, expected diluted EPS declined four cents to $2.90 - $2.98. Earnings per share estimates exclude the effect of any special or extraordinary charges that may impact the company s continuing operations and the guidance provided only reflects information available to the company at this time. Gross margin is expected to be approximately at 76%. Excluding unusual charges, the company expects its effective tax rate in between 21.5% and 22.5%. On November 13, 2008, Medtronic, Inc. announced that it has completed its $325 million buyout of heart treatment-maker CryoCath. Medtronic agreed to buy CryoCath in late September for $8.75 Canadian per share, or $400 million Canadian. More than 41.1 million shares, or 96.3 percent of shares in Montreal-based CryoCath, were deposited before Medtronic's offer expired on Nov. 12. Medtronic will make its payment by Nov. 14, 2008. CryoCath makes the Arctic Front system, which treats abnormal heart rhythms by using extreme cold to destroy some tissue. The method is known as cryoablation technology. On November 12, 2008, Medtronic, Inc. announced the U.S. market launch of the Endeavor Sprint drugeluting stent (DES) on a rapid exchange (RX) delivery system. Using the popular Sprinter balloon catheter technology, the Endeavor Sprint system puts the highly deliverable Endeavor DES on an enhanced delivery platform, making Medtronic s flagship DES even easier for physicians to deliver to the site of coronary blockages. The Endeavor Sprint system incorporates a new tip design for a low profile, a new balloon material and an enhanced shaft design which together greatly improve the device s deliverability. On November 12, 2008, Medtronic, Inc. announced that enrollment in the 2,300-patient RESOLUTE AllComers (R-AC) clinical study was completed in just six months, two months ahead of schedule. The randomized trial compares the safety and efficacy of Medtronic s Endeavor Resolute drug-eluting stent (DES) with Abbott Laboratories Xience DES. On November 10, 2008, Medtronic, Inc. announced the first U.S. clinical trial data on the Melody transcatheter pulmonary valve. These findings also represent the first U.S. data on transcatheter valves in a population with congenital heart disease and the first reported U.S. data on the use of a transcatheter valve in the pulmonary position. The Melody valve is currently investigational in the U.S. Data were presented on 66 patients enrolled at centers in Boston, Seattle, New York, Columbus, and Miami. Encouraging from a safety perspective was a high acute procedural success rate of 98 percent. At six-months follow up, maintenance of excellent valve competence was demonstrated as was a corresponding, clinically-significant, reduction of more than 18 percent in right ventricular volume. Valve competence was assessed by median pulmonary regurgitation fraction, which was down to 0 percent from a baseline of 30 percent. On November 10, 2008, Medtronic, Inc. announced new data at Scientific Sessions 2008 which shows that survival among patients with implantable cardioverter-defibrillators (ICDs) treated only with antitachycardia pacing (ATP) was superior to patients who experienced at least one shock-treated episode, further demonstrating the clinical benefit of ATP. Additionally, the analysis evaluating more than 2,000 patients, found no link between inappropriate therapy and mortality, nor a causal relationship between ICD therapy (ATP or shock) and mortality.

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ATP allows most patients with ICDs to receive painless pacing pulses to safely and effectively terminate dangerous ventricular tachyarrhythmias, those rapid, abnormal rhythms in the lower chambers of the heart that can result in sudden cardiac arrest. In the analysis, there were 3,630 treated tachyarrhythmia episodes, of which 97% were classified as either ventricular tachycardia (VT) or fast VT (FVT), irregular heart rhythms ranging from 100-300 beats per minute, which are treatable by an ICD. The findings are as follows: Of these episodes for which therapy was delivered, 80.2% were successfully treated with ATP. In fact, 91.9% of 2,176 treated VT episodes were successfully terminated by ATP, without the need for a shock. And 68.2% of 1,339 treated FVT episodes were terminated by ATP, without the need for a shock. On October 22, 2008, Medtronic, Inc. announced the U.S. market launch of the Talent Thoracic Stent Graft on the Xcelerant Delivery System, which makes minimally-invasive treatment of thoracic aortic aneurysms easier to perform. A thoracic aortic aneurysm is a dangerous bulge or weakness in the main artery extending from the heart that affects nearly 10 of every 100,000 elderly people in the United States. Thoracic endovascular aortic repair (TEVAR) is a minimally invasive procedure in which a stent graft is threaded through the femoral artery and expanded at the site of the aneurysm. Once in place, the stent graft creates a new path for blood flow, reducing pressure on the aneurysm and the risk of rupture. Left untreated, aortic aneurysms can burst, an emergency situation that commonly results in death due to extensive internal bleeding. The alternative to TEVAR is open surgical repair. On October 22, 2008, Medtronic, Inc. announced that it has submitted its Pre-Market Approval (PMA) application with the U.S. Food and Drug Administration (FDA) for InterStim Therapy for the treatment of fecal incontinence. InterStim Therapy is a reversible treatment for patients with fecal incontinence after conservative treatments have failed. Once approved by the FDA, InterStim Therapy for fecal incontinence will be the only therapy that allows patients and physicians to trial the therapy with a minimally invasive test stimulation to confirm its effect prior to the device implant. On October 21, 2008, Medtronic, Inc. announced that a federal court in the Northern District of California has ordered that the injunction preventing Medtronic s access to the Rapid Exchange delivery system will end on October 29, 2008. In its order, the court noted that Abbott would not suffer any irreparable injury, and that an equitable assessment of this case clearly supports an end to the injunction. On October 21, 2008, Medtronic, Inc. announced that it expects sales growth of 9% to 11% and profit growth of 11% to 14% in fiscal 2009. On October 20, 2008, Medtronic, Inc. announced that its board declared a regular quarterly dividend of 18.75 cents per share. The dividend is payable on Jan. 23, 2009 to shareholders of record Jan. 2, 2009. On October 20, 2008, Medtronic, Inc. announced on the occasion of World Osteoporosis Day, that more than 500,000 vertebral compression fractures (VCFs) have been treated with KYPHON Balloon Kyphoplasty since the minimally invasive procedure was commercialized in 2000. VCFs are mainly caused by osteoporosis, a disease that weakens bones and makes them susceptible to fractures. On October 14, 2008, Medtronic, Inc. announced the latest update to an independently conducted pooled data analysis which shows once again how the Endeavor drug-eluting stent (DES) from Medtronic is distinguished by persistently strong safety benefits for patients with coronary artery disease. Called ENDEAVOR-Safety, the analysis now includes more than 1,100 patients followed to four years.

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Compared to a bare-metal stent (n=596), the Endeavor DES (n=2,132) has been shown at four years to be associated with numerically lower rates of death, cardiac death, major adverse cardiac events (MACE), myocardial infarction (MI) and stent thrombosis, with the differences in rates of cardiac death and MI between the two devices reaching statistical significance in this retrospective analysis. The results released at the Transcatheter Cardiovascular Therapeutics (TCT) meeting and summarized below, also include a comparison of stent thrombosis in Endeavor patients receiving six and 12 months of dual antiplatelet therapy.

Endpoint Death Cardiac Death MI Cardiac Death/MI Stent Thrombosis protocol ARC def/prob

Endeavor DES n=2,132 5.1 1.9 2.9 4.6 0.5 0.7

Driver BMS n=596 5.2 2.6 4.4 7.0 1.2 1.5

On October 14, 2008, Medtronic, Inc. announced the U.S. launch of the X-STOP PEEK IPD System, the first interspinous process decompression (IPD) device approved by the U.S. Food and Drug Administration (FDA) that offers a PEEK-Bone interface for treating the symptoms of lumbar spinal stenosis (LSS). LSS is the most common reason for back surgery in people over the age of 65 in the United States. On October 12, 2008, Medtronic, Inc. announced that of those treated with the Endeavor Resolute drugeluting stent (DES) from the company, in the RESOLUTE IDE trial, only two patients required repeat procedures a remarkably low 1.5 percent rate of target lesion revascularization (TLR) at two years following implant, according to data released at the Transcatheter Cardiovascular Therapeutics (TCT) meeting. What s more, there were no instances of stent thrombosis among the 130 study subjects received an Endeavor Resolute DES through 24 months of follow-up. all of whom

On October 7, 2008, Medtronic, Inc. announced that the company and the Scoliosis Research Society launched Spine Check a new program designed to help promote scoliosis screenings for middle school and junior high school students. On October 2, 2008, Medtronic, Inc. announced that it has warned physicians about issues with some of its implantable drug pump systems that have been linked to one patient death and dozens of other problems. The Food and Drug Administration posted a notice about problems with the tubing connecting the company's catheters to its drug pumps. The pumps are implanted in the abdomen to deliver drugs to treat chronic pain. Medtronic warned physicians of the problem in late June. Medtronic said the misconnections could block the flow of drugs, cause overdoses and other potentially fatal complications. The company said in a statement last week it has received 83 reports of problems with the systems, including one death.

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On September 26, 2008, Medtronic, Inc. announced that the U.S. Food and Drug Administration (FDA) has classified its safety alert about the proper connection of sutureless catheters used with implantable drug infusion systems as a Class I recall. The notification relates to the improper connection of its sutureless connector intrathecal catheters (referred to as SC catheters). The affected products include the following models; INDURA 1P Intrathecal Catheter, model 8709SC, Intrathecal Catheter, model 8731SC, Sutureless Pump Connector Revision Kit, model 8578, and Intrathecal Catheter Pump Segment Revision Kit, model 8596SC. On September 17, 2008, Medtronic, Inc. announced the U.S. launch of the Discyphor Direct Catheter System, the second-generation catheter system used by physicians to obtain additional information to diagnose discogenic low back pain. The Discyphor Direct Catheter System provides additional information to help identify which disc is causing a patient s pain. More than 100,000 patients annually undergo spinal surgery for discogenic low back pain in the United States, but patient satisfaction from such surgeries is mixed. On September 11, 2008, Physio-Control, Inc., a wholly-owned subsidiary of Medtronic, Inc. announced that the FDA has classified as a Class I action the company s recently initiated and completed voluntary urgent medical device recall of 249 fully automatic LIFEPAK CR Plus automated external defibrillators (AEDs). Certain fully automated devices manufactured from May 2004 through April 2007 are misconfigured with the software intended for semi-automatic AEDs. With this configuration set up, if the responder is instructed to press the shock button to deliver therapy, they will not be able to locate the shock button because it is covered in the fully automated device. In this situation, it is possible that therapy could be delayed or not delivered at all; possibly resulting in death. There has been one patient related complaint associated with this issue. On August 29, 2008, Medtronic, Inc. announced that the U.S. District Court of Marshall, Texas found two patents of Medtronic unenforceable for inequitable conduct during the prosecution of the patents before the United States Patent and Trademark Office. A jury had previously found that certain Boston Scientific balloon catheters and stent delivery systems infringed three Medtronic patents and that the patents were valid. The jury awarded damages of $250 million. As a result of this decision, the damages are reduced to approximately $19 million. Following a prior decision by the Court, Medtronic and Boston Scientific had already agreed to reduce the jury verdict to approximately $186 million. On October 25, 2008, Medtronic, Inc. announced that its board declared a regular quarterly dividend of 18.75 cents per share. The dividend is payable on Oct. 24 to shareholders of record Oct. 3, 2008. On August 19, 2008, Medtronic, Inc. reported financial results for the first quarter of fiscal year 2009. For the first quarter, adjusted diluted EPS from continuing operations was $0.72 vs. $0.62 in the year-ago period.
Revenues Segments: (% of sales)
- CRDM - Spinal - CardioVascular - Neuromodulation - Diabetes - Surgical Technologies - Physio-Control 35% 23% 17% 9% 7% 5% 3% 100% 39% 21% 16% 9% 8% 6% 2% 100% 6% 33% 30% 20% 12% 17% 57%

Q109 3,706

Q108 3,127

Change 19%

Margins

(bps)

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Gross Margin R&D SG&A Operating Income Other expense, net Interest expense Earnings before income taxes Provision for income taxes Net Margin Diluted Shares Outstanding EPS

76.9% 8.7% 35.6% 32.6% 4.1% 0.2% 28.3% 22.5% 21.9% 1,129 $0.72

74.7% 9.6% 35.0% 30.0% 1.8% -1.4% 29.6% 21.0% 22.7% 1,153 $0.62

226 -85 51 259 225 165 -131 -383 -80 -2% 16%

Revenues were positively impacted by changes in foreign exchange, adding $157 million, or five points of growth, reflecting the importance of International growth to the quarter (+23.6%). Domestic revenues represented 60.7% of the total revenue and grew 15.5%. CRDM revenue growth was stronger than expected, driven by pacing products (+7%) and increasing stability in ICD sales. Growth in the Spinal segment included the recently acquired sales of Kyphon. Excluding sales from Kyphon ($161 million), spinal revenue increased 8.4%, driven by Biologics (+16%). Strong Endeavor sales in the U.S. and two product launches in the Endovascular business drove CardioVascular revenues. Neuromodulation benefited gained market share with the launch of RestoreULTRA (pain management) and continued sales of InterStim (bladder control / incontinence) devices. Growth in the remaining segments was driven by image guided surgery systems and navigation equipment, glucose monitors, defibrillators, and their accessories. Margins Gross margin was positively impacted by favorable foreign currency, efficiencies in manufacturing driven by increased volume, ongoing initiatives to reduce product costs and a 50 basis point benefit from the impact of Kyphon. The Kyphon acquisition also adversely impacted SG&A and net interest income, which swung to a net interest expense. Adjustments - Adjusted results in the reported quarter excluded restructuring charges of $66 million (after-tax) or $0.06 per diluted share related to a global realignment initiative to streamline operations. Adjusted results for the comparable quarter excluded restructuring charges of $11 million or $0.01 per diluted share, and IPR&D charges of $25 million or $0.02 per diluted share. For full fiscal year 2009, the company expects revenue of between $15.0 billion and $15.5 billion, and diluted EPS of $2.94 to $3.02. Earnings per share estimates exclude the effect of any special or extraordinary charges that may impact the company s continuing operations and the guidance provided only reflects information available to the company at this time. Gross margin is expected to be approximately at 76%. Excluding unusual charges, the company expects its effective tax rate in between 22% and 23%.

RISKS
There is no guarantee Medtronic will be successful in the markets with which it wishes to do business. Medtronic faces intense competition in the ICD and CRT-D device market and may experience market share erosion. For instance, the recent recall of the Fidelis leads could be a significant competitive disadvantage and reduce top-line growth. The inability to obtain or maintain favorable third party payer reimbursement authorizations for products can depress sales growth. The company is exposed to patent litigation, regulatory concerns and product liability that may result in seizure or recall of products, all of which can negatively affect financial results.

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VALUATION
The company fell short of our estimates on numerous execution and regulatory issues. We expect the strong pipeline of cardiovascular devices to rejuvenate growth in the CRDM segment moving forward. Recent and near-term launches of Endeavor DES, neuromodulation, diabetes, and surgical products, as well as, acquisitions will continue driving near-term growth. We believe MDT s ONE Medtronic restructuring initiative to improve operating leverage, an area where financial performance has suffered, will help bottom-line results. We are adjusting our estimates to reflect management s reduction in guidance for FY09. At present, the stock is trading at 10.6x our fiscal 2009 EPS estimate of $2.98, a 35% discount to the average of comparables 2009 P/Es, our valuation moves to 13.7x FY09 (a 15% discount to peers), yielding a target price of $40.80. Our rating is HOLD.

Industry Comparables
P/E Curr FY Medtronic Industry Mean Industry Median S&P 500 St Jude Medical Edwards Lifesci Boston Scientif 12.2 23.9 10.0 11.8 13.8 20.4 13.8 P/E Next FY 10.9 13.9 9.1 10.4 12.2 17.5 10.9 5 Yr EPS Growth Est 13.7 15.2 12.5 10.0 14.6 14.1 17.0 PEG Curr FY 0.9 1.2 0.8 1.2 0.9 1.5 0.8 P/S Curr FY 2.7 2.4 0.8 1.7 2.5 2.3 1.3 P/S Next FY 2.5 2.2 0.7 1.5 2.3 2.1 1.3 Price/ Book 3.3 3.4 1.0 3.1 3.1 3.3 0.7

PROJECTED INCOME STATEMENT

Medtronic Inc.
Income Statement (Dollars in millions, except EPS data) 12/09E 14,867 3,568 5,025 1,487 500 3,439 3,301 3.10 2.98 12/08 13,515 3,442 4,707 1,275 812 2,362 2,235 2.07 1.96 1.96 1,142.1 12/07 12,299 3,168 4,153 1,239 224 2,676 2,802 2.30 2.41 2.41 1,161.8 12/06 11,292 2,815 3,659 1,113 180 2,335 2,547 1.92 2.09 2.09 1,217.3

Sales Cost of Goods Sold SG&A R&D Total Non-Operating Expense (Income) Adjusted Net Income exclu FAS 123R Adj Net Income inclu FAS 123R Diluted EPS exclu FAS 123R Diluted EPS inclu FAS 123R Reported EPS Diluted Shares in millions

1,107.8

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HISTORICAL ZACKS RECOMMENDATIONS

DISCLOSURES
The analysts contributing to this report do not hold any shares of MDT. Zacks EPS and revenue forecasts are not consensus forecasts. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Buy- Zacks expects that the subject company will outperform the broader U.S. equity market over the next one to two quarters. Hold- Zacks expects that the company will perform in line with the broader U.S. equity market over the next one to two quarters. SellZacks expects the company will under perform the broader U.S. Equity market over the next one to two quarters. The current distribution of Zacks Ratings is as follows on the 1060 companies covered: Buy- 24.4%, Hold- 67.2%, Sell 8.1%. Data is as of midnight on the business day immediately prior to this publication.

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