DEF 14A 1 c22263ddef14a.htm DEFINITIVE NOTICE AND PROXY def14a
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.                )

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  Definitive Proxy Statement
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  Definitive Additional Materials
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  Soliciting Material Pursuant to §240.14a-12
 
Medtronic, Inc.

 
(Name of Registrant as Specified In Its Charter)
 
 

 
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(MEDTRONIC)
 
710 Medtronic Parkway
Minneapolis, Minnesota 55432
Telephone: 763-514-4000
 
July 18, 2008
 
Dear Shareholder:
 
Please join us for our Annual Meeting of Shareholders on Thursday, August 21, 2008, at 10:30 a.m. (Central Daylight Time) at Medtronic’s World Headquarters, 710 Medtronic Parkway, Minneapolis (Fridley), Minnesota.
 
The enclosed Notice of Annual Meeting of Shareholders and Proxy Statement describe the business to be conducted at the meeting. We also will report on matters of current interest to our shareholders.
 
We invite you to join us beginning at 9:30 a.m. to view Medtronic’s interactive product displays. Product specialists will be available to answer your questions before and after the Annual Meeting.
 
Your vote is important. Whether you own a few shares or many, it is important that your shares are represented. If you cannot attend the Annual Meeting in person, you may vote your shares by internet or by telephone, or by completing and signing the accompanying proxy card and promptly returning it in the envelope provided.
 
We look forward to seeing you at the Annual Meeting.
 
Sincerely,
 
(WILLIAM A. HAWKINS)
 
William A. Hawkins
President and Chief Executive Officer
 
Alleviating Pain, Restoring Health, Extending Life


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MEDTRONIC, INC.
NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS
 
 
TIME 10:30 a.m. (Central Daylight Time) on Thursday, August 21, 2008.
 
PLACE Medtronic World Headquarters
710 Medtronic Parkway
Minneapolis (Fridley), Minnesota 55432
 
ITEMS OF BUSINESS
1.  To elect six directors for a one year term.
 
2.  To ratify the appointment of PricewaterhouseCoopers LLP as Medtronic’s independent registered public accounting firm.
 
3.  To approve the Medtronic, Inc. 2008 Stock Award and Incentive Plan.
 
4.  To consider such other business as may properly come before the Annual Meeting and any adjournment thereof.
 
RECORD DATE You may vote at the Annual Meeting if you were a shareholder of record at the close of business on June 23, 2008.
 
VOTING BY PROXY It is important that your shares be represented and voted at the Annual Meeting. Please vote in one of these three ways:
 
1.  VOTE BY INTERNET, by going to the web address http://www.proxyvote.com and following the instructions for Internet voting shown on the enclosed proxy card,
 
2.  VOTE BY TELEPHONE, by dialing 1-800-690-6903 and following the instructions for telephone voting shown on the enclosed proxy card, or
 
3.  VOTE BY PROXY CARD, by completing, signing, dating and mailing the enclosed proxy card in the envelope provided. If you vote by Internet or telephone, please do not mail your proxy card.
 
ANNUAL REPORT Medtronic’s 2008 Annual Report accompanies this Notice of Annual Meeting of Shareholders.
 
By Order of the Board of Directors,
 
(TERRANCE L. CARLSON)
 
Terrance L. Carlson
Corporate Secretary
 
Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to Be Held on August 21, 2008. The Proxy Statement and Annual Report to Shareholders are available at http://www.medtronic.com/annualmeeting/.
 
This Notice of Annual Meeting, Proxy Statement and accompanying proxy card
are being distributed on or about July 18, 2008.


 

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(medtronic)
710 Medtronic Parkway
Minneapolis, Minnesota 55432
Telephone: 763-514-4000
 
 
 
 
PROXY STATEMENT
Annual Meeting of Shareholders
August 21, 2008
 
 
 
 
We are providing these proxy materials in connection with the solicitation by the Board of Directors of Medtronic, Inc. (“Medtronic”) of proxies to be voted at Medtronic’s Annual Meeting of Shareholders to be held on August 21, 2008, and at any adjournment of the meeting.
 
GENERAL INFORMATION ABOUT THE MEETING AND VOTING
 
What am I voting on?
 
There are three proposals scheduled to be voted on at the meeting:
 
  •  Election of six directors;
 
  •  Ratification of the appointment of PricewaterhouseCoopers LLP as Medtronic’s independent registered public accounting firm for fiscal year 2009; and
 
  •  Approval of the Medtronic, Inc. 2008 Stock Award and Incentive Plan.
 
Who is entitled to vote?
 
Shareholders as of the close of business on June 23, 2008 (the “Record Date”), may vote at the Annual Meeting. You have one vote for each share of common stock you held on the Record Date, including shares:
 
  •  Held directly in your name as “shareholder of record” (also referred to as registered shareholder);
 
  •  Held for you in an account with a broker, bank or other nominee (shares held in “street name”). Street name holders generally cannot vote their shares directly and must instead instruct the brokerage firm, bank or nominee how to vote their shares; and
 
  •  Credited to your account in the Medtronic, Inc. Savings and Investment Plan.
 
What constitutes a quorum?
 
A majority of the outstanding shares entitled to vote, present or represented by proxy, constitutes a quorum for the Annual Meeting. Abstentions are counted as present and entitled to vote for purposes of determining a quorum. Shares represented by “broker non-votes” (see below) are also counted as present and entitled to vote for purposes of determining a quorum. On the Record Date, 1,125,730,817 shares of Medtronic common stock were outstanding and entitled to vote.


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How many votes are required to approve each proposal?
 
The following explains how many votes are required to approve each proposal, provided that a majority of our shares entitled to vote is present at the Annual Meeting (in person or by proxy). The six candidates for election who receive a plurality vote of the shares present and entitled to vote in the affirmative will be elected. Ratifying PricewaterhouseCoopers LLP as Medtronic’s independent registered public accounting firm for fiscal year 2009 requires the affirmative vote of a majority of the shares present and entitled to vote. Finally, approval of the Medtronic, Inc. 2008 Stock Award and Incentive Plan requires the affirmative vote of a majority of the shares present and entitled to vote.
 
How are votes counted?
 
You may either vote “FOR” or “WITHHOLD” authority to vote for each nominee for the Board of Directors. You may vote “FOR,” “AGAINST” or “ABSTAIN” on the other proposals. If you abstain from voting on any of the other proposals, it has the same effect as a vote against the proposal. If you just sign and submit your proxy card without voting instructions, your shares will be voted “FOR” each director nominee and the other proposals.
 
What is a broker non-vote?
 
If you hold your shares in street name and do not provide voting instructions to your broker, your shares will not be voted on any proposal on which your broker does not have discretionary authority to vote (a broker non-vote). Shares held by brokers who do not have discretionary authority to vote on a particular matter and who have not received voting instructions from their customers are counted as present for the purpose of determining whether there is a quorum at the Annual Meeting, but are not counted or deemed to be present for the purpose of determining whether shareholders have approved that matter.
 
How does the Board recommend that I vote?
 
Medtronic’s Board recommends that you vote your shares:
 
  •  “FOR” each of the nominees to the Board;
 
  •  “FOR” the ratification of the appointment of PricewaterhouseCoopers LLP as Medtronic’s independent registered public accounting firm for fiscal year 2009; and
 
  •  “FOR” the approval of the Medtronic, Inc. 2008 Stock Award and Incentive Plan.
 
How do I vote my shares without attending the meeting?
 
If you are a shareholder of record or hold shares through a Medtronic stock plan, you may vote by granting a proxy. For shares held in street name, you may vote by submitting voting instructions to your broker or nominee. In any circumstance, you may vote:
 
  •  By Internet or Telephone — If you have internet or telephone access, you may submit your proxy by following the voting instructions on the proxy card no later than 11:59 p.m., Eastern Daylight Time, on August 20, 2008 (or, for shares held through the Medtronic, Inc. Savings and Investment Plan and the Medtronic Puerto Rico Employees’ Savings and Investment Plan, no later than 11:59 p.m., Eastern Daylight Time, on August 18, 2008). If you vote by internet or telephone, you need not return your proxy card.
 
  •  By Mail — You may vote by mail by signing and dating your proxy card and mailing it in the envelope provided. You should sign your name exactly as it appears on the proxy card. If you are signing in a representative capacity (for example, as guardian, executor, trustee, custodian, attorney or officer of a corporation), you should indicate your name and title or capacity.


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How do I vote my shares in person at the meeting?
 
If you are a shareholder of record and prefer to vote your shares at the meeting, bring the enclosed proxy card or proof of identification. You may vote shares held in street name only if you obtain a signed proxy from the record holder (broker or other nominee) giving you the right to vote the shares.
 
Even if you plan to attend the meeting, we encourage you to vote in advance by internet, telephone or mail so that your vote will be counted even if you are unable to attend the meeting.
 
What does it mean if I receive more than one proxy card?
 
It generally means you hold shares registered in more than one account. To ensure that all your shares are voted, sign and return each proxy card or, if you vote by internet or telephone, vote once for each proxy card you receive.
 
May I change my vote?
 
Yes. Whether you have voted by mail, internet or telephone, you may change your vote and revoke your proxy by:
 
  •  Sending a written statement to that effect to the Corporate Secretary of Medtronic;
 
  •  Voting by internet or telephone at a later time;
 
  •  Submitting a properly signed proxy card with a later date; or
 
  •  Voting in person at the Annual Meeting and by filing a written notice of termination of the prior appointment of a proxy with Medtronic or by filing a new written appointment of a proxy with Medtronic.
 
Can I receive future proxy materials electronically?
 
Yes. If you are a shareholder of record or hold shares through a Medtronic stock plan, you may elect to receive future proxy statements and annual reports online as described in the next paragraph. If you elect this feature, you will receive an email message notifying you when the materials are available, along with a web address for viewing the materials. If you received this proxy statement electronically, you do not need to do anything to continue receiving proxy materials electronically in the future.
 
Whether you hold shares registered directly in your name, through a Medtronic stock plan, or through a broker or bank, you can enroll for future delivery of proxy statements and annual reports by following these easy steps:
 
  •  Go to our website at www.medtronic.com;
 
  •  Under About Medtronic, click on Investor Relations;
 
  •  In the Shareholder Services section, click on Electronic Delivery of Proxy Materials; and
 
  •  Follow the prompts to submit your electronic consent.
 
Generally, brokers and banks offering this choice require that shareholders vote through the internet in order to enroll. Street name shareholders whose broker or bank is not included in this website are encouraged to contact their broker or bank and ask about the availability of electronic delivery. As with all internet usage, the user must pay all access fees and telephone charges. You may view this year’s proxy materials at www.medtronic.com/annualmeeting.
 
What are the costs and benefits of electronic delivery of Annual Meeting materials?
 
There is no cost to you for electronic delivery. You may incur the usual expenses associated with internet access as charged by your internet service provider. Electronic delivery ensures quicker delivery, allows you to print the materials at your computer and makes it convenient to vote your shares online. Electronic delivery also conserves natural resources and saves Medtronic significant printing, postage and processing costs.


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PROPOSAL 1 — ELECTION OF DIRECTORS
 
Directors and Nominees
 
Commencing this year, directors whose term of office is expiring shall be elected annually for terms of one year. Victor J. Dzau, M.D., William A. Hawkins, Shirley Ann Jackson, Ph.D., Denise M. O’Leary, Jean-Pierre Rosso and Jack W. Schuler are directors who have been nominated for re-election to the Board to serve until the 2009 Annual Meeting and until their successors are elected and qualified. All of the nominees are currently directors, and all of the nominees except for Dr. Dzau were previously elected to the Board of Directors by the shareholders. Dr. Dzau was elected to the Board in February 2008 by the Board following recommendation by the Nominating Subcommittee of the Corporate Governance Committee.
 
All of the nominees have consented to being named as a nominee in this Proxy Statement and have indicated a willingness to serve if elected. However, if any nominee becomes unable to serve before the election, the shares represented by proxies may be voted for a substitute designated by the Board, unless a contrary instruction is indicated on the proxy.
 
A plurality of votes cast is required for the election of directors. However, under the Medtronic Principles of Corporate Governance, any nominee for director in an uncontested election (i.e., an election where the only nominees are those recommended by the Board of Directors) who receives a greater number of votes “withheld” from his or her election than votes “for” such election (a “Majority Withheld Vote”) will, within five business days of the certification of the shareholder vote by the inspector of elections, tender a written offer to resign from the Board of Directors. The Corporate Governance Committee will promptly consider the resignation offer and recommend to the Board of Directors whether to accept it. The Corporate Governance Committee will consider all factors its members deem relevant in considering whether to recommend acceptance or rejection of the resignation offer, including, without limitation:
 
  •  the perceived reasons why shareholders withheld votes “for” election from the director;
 
  •  the length of service and qualifications of the director;
 
  •  the director’s contributions to Medtronic;
 
  •  Medtronic’s compliance with securities exchange listing standards;
 
  •  possible contractual ramifications in the event the director in question is a management director;
 
  •  the purpose and provisions of the Medtronic Principles of Corporate Governance; and
 
  •  the best interests of Medtronic and its shareholders.
 
If a director’s resignation is accepted, the Corporate Governance Committee will recommend to the Board of Directors whether to fill the vacancy on the Board created by the resignation or reduce the size of the Board. Any director who tenders his or her offer to resign pursuant to this policy shall not participate in the Corporate Governance Committee or Board deliberations regarding whether to accept the offer of resignation. The Board will act on the Corporate Governance Committee’s recommendation within 90 days following the certification of the shareholder vote, which may include, without limitation:
 
  •  acceptance of the offer of resignation;
 
  •  adoption of measures intended to address the perceived issues underlying the Majority Withheld Vote; or
 
  •  rejection of the resignation offer.
 
Thereafter, the Board of Directors will disclose its decision to accept the resignation offer or the reasons for rejecting the offer, if applicable, on a Current Report on Form 8-K to be filed with the Securities and Exchange Commission (the “SEC”) within four business days of the date of the Board’s final determination.


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NOMINEES FOR DIRECTORS FOR ONE-YEAR TERMS ENDING IN 2009:
 
     
     
(VICTOR J. DZAU)  
VICTOR J. DZAU, M.D                                             Director since 2008
Chancellor of Health Affairs Duke University                       age 62

Dr. Dzau has served as Chancellor for Health Affairs at Duke University and President and Chief Executive Officer of the Duke University Health System since July 2004. From July 1996 until September 2004, he was the Hersey Professor of Theory and Practice of Medicine at the Harvard Medical School and Chair of the Department of Medicine, Physician in Chief and Director of Research at Brigham and Women’s Hospital. He is the previous Chairman of the National Institutes of Health (NIH) Cardiovascular Disease Advisory Committee and served on the Advisory Committee to the Director of the NIH. Dr. Dzau is a member of the Institute of Medicine. He currently serves as a director of Alnylam Pharmaceuticals, Inc., Duke University Health System, PepsiCo, Inc. and Genzyme Corporation.
     
(WILLIAM A. HAWKINS)  
WILLIAM A. HAWKINS                                             Director since 2007
President and Chief Executive Officer Medtronic                       age 54

Mr. Hawkins has been a director of Medtronic since March 2007 and President and Chief Executive Officer since August 2007. He served as President and Chief Operating Officer of Medtronic since May 2004. He served as Senior Vice President and President, Medtronic Vascular, from January 2002 to May 2004. He served as President and Chief Executive Officer of Novoste Corporation from 1998 to 2002. Mr. Hawkins serves on the board of visitors for the Duke University School of Engineering and the board of directors for the Guthrie Theater.
     
(SHIRLEY ANN JACKSON)  
SHIRLEY ANN JACKSON, Ph.D.                                           Director since 2002
President of Rensselaer Polytechnic Institute                       age 61

Dr. Jackson has been President of Rensselaer Polytechnic Institute since July 1999. She was Chair of the U.S. Nuclear Regulatory Commission from July 1995 to July 1999; and Professor of Physics at Rutgers University and consultant to AT&T Bell Laboratories from 1991 to 1995. She is a member of the National Academy of Engineering and the American Philosophical Society and is a Fellow of the American Academy of Arts and Sciences, the American Association for the Advancement of Science, and the American Physical Society. She is a trustee of the Brookings Institution, a Life Trustee of M.I.T. and a member of the Council on Foreign Relations. She is also a director of NYSE Euronext, Federal Express Corporation, Marathon Oil Corporation, Public Service Enterprise Group and I nternational Business Machines Corporation.
     
(DENISE M. OLEARY)  
DENISE M. O’LEARY                                             Director since 2000
Private Venture Capital Investor                                age 51

Ms. O’Leary has been a private venture capital investor in a variety of early stage companies since 1996. Ms. O’Leary is also a director of US Airways Group, Inc. and Calpine Corporation. She is a director of Stanford Hospitals and Clinics, where she was chair of the board from 2000 through 2005, and Lucile Packard Children’s Hospital. She was a member of the Stanford University Board of Trustees from 1996 through 2006, where she chaired the Committee of the Medical Center for that period.


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(JEAN-PIERRE ROSSO)  
JEAN-PIERRE ROSSO                                             Director since 1998
Chairman, World Economic Forum USA                       age 68

Mr. Rosso has been Chairman of World Economic Forum USA since April 2006. Mr. Rosso served as Chairman of CNH Global N.V. from November 1999 until his retirement in May 2004; was Chief Executive Officer of CNH Global N.V. from November 1999 to November 2000; and Chief Executive Officer of Case Corporation from April 1994 to November 1999 and Chairman from March 1996 to November 1996. He is also a director of Bombardier Inc. and Eurazeo.
     
(JACK W. SCHULER)  
JACK W. SCHULER                                             Director since 1990
Chairman of the Board of Stericycle, Inc.                       age 67

Mr. Schuler has been Chairman of the Board of Stericycle, Inc. since March 1990; President and Chief Operating Officer of Abbott Laboratories from January 1987 to August 1989; and a director of that company from April 1985 to August 1989. Mr. Schuler is a director of Quidel Corporation.
 
THE BOARD RECOMMENDS A VOTE FOR THE DIRECTOR NOMINEES.
 
CLASS II DIRECTORS: DIRECTORS CONTINUING IN OFFICE UNTIL 2009
 
     
     
(RICHARD H. ANDERSON)  
RICHARD H. ANDERSON                                             Director since 2002
Chief Executive Officer Delta Airlines, Inc.                       age 53

Mr. Anderson has been Chief Executive Officer of Delta Airlines, Inc. since September 2007. Prior to that he was Executive Vice President of UnitedHealth Group and President, Commercial Services Group, of UnitedHealth Group Incorporated from December 2006 to September 2007, Executive Vice President of UnitedHealth Group since November 2004 and was Chief Executive Officer of its Ingenix subsidiary from December 2004. Mr. Anderson was Chief Executive Officer of Northwest Airlines Corporation and its principal subsidiary, Northwest Airlines, from February 2001 to November 2004. Mr. Anderson serves on the board of directors of Cargill, Inc. and Delta Airlines, Inc. Northwest Airlines Corporation filed for bankruptcy in September 2005, which is within two years of Mr. Anderson serving as an executive officer of Northwest Airlines Corporation.
     
(ROBERT C. POZEN)  
ROBERT C. POZEN                                             Director since 2004
Chairman, MFS Investment Management                       age 61

Mr. Pozen has been Chairman of MFS Investment Management and a director of MFS Mutual Funds since February 2004 and previously was Secretary of Economic Affairs for the Commonwealth of Massachusetts from January 2003 to December 2003. Mr. Pozen was also John Olin Visiting Professor, Harvard Law School, from 2002 to 2003; Vice Chairman of Fidelity Investments from June 2000 to December 2001 and President of Fidelity Management & Research from April 1997 to December 2001. He is also a director of BCE Inc., the parent company of Bell Canada, the chairman of the SEC Advisory Committee on Improvements to Financial Reporting and since January 2008 is a senior lecturer at Harvard.


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CLASS III DIRECTORS: CONTINUING IN OFFICE UNTIL 2010*
 
     
     
(DAVID L. CALHOUN)  
DAVID L. CALHOUN                                             Director since 2007
Chairman and Chief Executive Officer                       age 51
The Nielsen Company

Mr. Calhoun was appointed Chairman of the Executive Board and Chief Executive Officer of The Nielsen Company on August 23, 2006. Prior to joining The Nielson Company, Mr. Calhoun served as Vice Chairman of General Electric Company and President & Chief Executive Officer, GE Infrastructure. Before that, Mr. Calhoun served as President and Chief Executive Officer of GE Aircraft Engines; President and Chief Executive Officer of Employers Reinsurance Corporation; President and Chief Executive Officer of GE Lighting; President and Chief Executive Officer of GE Transportation Systems; and Chief Executive Officer of GE Transportation.
     
(ARTHUR D. COLLINS, Jr.)  
ARTHUR D. COLLINS, Jr.                                             Director since 1994
Chairman of the Board                                                        age 60
Medtronic

Mr. Collins has been Chairman of the Board of Medtronic since April 2002; and was Chief Executive Officer from April 2002 to August 2007; President and Chief Executive Officer from May 2001 to April 2002; President and Chief Operating Officer from August 1996 to April 2001; Chief Operating Officer from January 1994 to August 1996; and Executive Vice President of Medtronic and President of Medtronic International from June 1992 to January 1994. He was Corporate Vice President of Abbott Laboratories from October 1989 to May 1992 and Divisional Vice President of that company from May 1984 to October 1989. He is also a director of The Boeing Company, U.S. Bancorp and Cargill, Inc. and a member of the Board of Overseers of The Wharton School at the University of Pennsylvania.
     
(JAMES T. LENEHAN)  
JAMES T. LENEHAN                                                       Director since 2007
Financial Consultant and Retired Vice Chairman and                       age 59
President of Johnson & Johnson

Mr. Lenehan served as President of Johnson & Johnson from 2002 until June 2004 and retired after 28 years of service; Vice Chairman of Johnson & Johnson from August 2000 until June 2004; Worldwide Chairman of Johnson & Johnson’s Medical Devices and Diagnostics Group from 1999 until he became Vice Chairman of the Board; and was previously Worldwide Chairman, Consumer Pharmaceuticals & Professional Group. Mr. Lenehan has been a financial consultant since October 2004.
     
(KENDALL J. POWELL)  
KENDALL J. POWELL                                             Director since 2007
Chairman and Chief Executive Officer                       age 54
General Mills

Mr. Powell has been Chairman of General Mills since May 2008 and Chief Executive Officer of General Mills since September 2007. Prior to that he was President and Chief Operating Officer and a director of General Mills from June 2006 to September 2007; Executive Vice President and Chief Operating Officer, U.S. Retail from May 2005 to June 2006; Executive Vice President of General Mills from August 2004 to May 2005. From September 1999 to August 2004, Mr. Powell was Chief Executive Officer of Cereal Partners Worldwide. Mr. Powell joined General Mills in 1979. Mr. Powell also serves on the boards of Cereal Partners Worldwide, the Twin Cities United Way and the Minnesota Historical Society.
 
 
*  Mr. Collins is expected to retire at the 2008 Annual Meeting.


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Director Independence
 
Under the New York Stock Exchange Corporate Governance Rules, to be considered independent, a director must be determined to have no material relationship with Medtronic other than as a director. The Board of Directors has determined that the following directors, comprising all of our non-management directors, are independent under the New York Stock Exchange Corporate Governance Rules: Messrs. Anderson, Calhoun, Lenehan, Powell, Pozen, Rosso and Schuler, Drs. Dzau and Jackson and Ms. O’Leary. In making this determination, the Board considered its Director Independence Standards, which correspond to the New York Stock Exchange standards on independence. These standards identify types of relationships that are categorically immaterial and do not, by themselves, preclude the directors from being independent. The types of relationships and the directors who had such relationships include:
 
  •  having an immediate family member who is, or has recently been, employed by Medtronic other than as an executive officer (Mr. Schuler);
 
  •  being a current employee of an entity that has made payments to, or received payments from, Medtronic for property or services (Messrs. Anderson and Schuler and Drs. Dzau and Jackson); and
 
  •  being an employee of a non-profit organization to which Medtronic or The Medtronic Foundation has made contributions (Dr. Dzau).
 
All of the relationships of the types listed above were entered into, and payments were made or received, by Medtronic in the ordinary course of business and on competitive terms. Aggregate payments to, transactions with or discretionary charitable contributions to each of the relevant organizations did not exceed the greater of $200,000 or 2% of that organization’s consolidated gross revenues for that organization’s fiscal years 2006, 2007 or 2008.
 
In addition, the Board considered relationships consistent with its Director Independence Standards in which the director had a further removed relationship with the relevant third party. This included the director being a director (rather than an employee or executive officer) of a Medtronic vendor or purchaser of Medtronic’s products in which aggregate payments to, transactions with or discretionary charitable contributions to the relevant third party did not exceed the greater of $200,000 or 2% of that organization’s consolidated gross revenues for that organization’s fiscal years 2006, 2007 or 2008. This also included a director’s spouse who was not an employee of The Medtronic Foundation, but was a consultant in which payments to the spouse did not exceed $100,000. The Board of Directors determined that none of the relationships were material. All of the relationships were entered into, and payments were made or received, by Medtronic in the ordinary course of business and on competitive terms.
 
Dr. Dzau is a director of Alnylam Pharmaceuticals, Inc. (“Alnylam”). Medtronic is party to an agreement with Alnylam to collaboratively research opportunities in the area of neurodegenerative disorders. The parties have a research program targeting Huntington’s disease, and may expand their collaboration in the future with other research programs for diseases such as Alzheimer’s and Parkinson’s. In addition, Dr. Dzau is a director of Genzyme Corporation (“Genzyme”). Medtronic and Genzyme each own a portion of a limited liability company for the research, development and commercialization of therapies involving the local delivery of myoblast biologics in order to produce a myogenic and angiogenic result in the human heart. Currently, the company is still in the research and development phase of any potential therapies. The Board determined that these relationships were not material. Our business relationships with Alnylam and Genzyme are maintained on an arm’s length basis. Neither Dr. Dzau nor the institutions with which he is affiliated are given special treatment in these relationships, and Dr. Dzau does not participate in negotiations or approvals regarding the relationships. In addition, under the New York Stock Exchange Corporate Governance Rules for evaluating director independence, the Board determined that none of the amounts paid in connection with the relationships are at a level that would compromise Dr. Dzau’s independence.


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Mr. Pozen is Chairman of MFS Investment Management, which manages money for MFS mutual funds and other accounts, and which may from time to time buy or sell Medtronic stock. The Board determined that this relationship is not material. Mr. Pozen has no involvement with these transactions and there is an informational barrier between him and the rest of MFS with regard to Medtronic stock.
 
Certain Relationships and Related Transactions
 
In January 2007, the Board of Directors of Medtronic adopted written related party transaction policies and procedures. The policies require that all “interested transactions” (as defined below) between Medtronic and “related parties” (as defined below) are subject to approval or ratification by the Corporate Governance Committee. In determining whether to approve or ratify such transactions, the Corporate Governance Committee will take into account, among other factors it deems appropriate, whether the interested transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances and the extent of the related person’s interest in the transaction. In addition, the Corporate Governance Committee has reviewed a list of interested transactions and deemed them to be pre-approved or ratified. Also, the Board of Directors has delegated to the chair of the Corporate Governance Committee the authority to pre-approve or ratify any interested transaction in which the aggregate amount is expected to be less than $1 million. Finally, the policies provide that no director shall participate in any discussion or approval of an interested transaction for which he or she is a related party, except that the director shall provide all material information concerning the interested transaction to the Corporate Governance Committee.
 
Under the policies, an “interested transaction” is defined as any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including any indebtedness or any guarantee of indebtedness) in which:
 
  •  the aggregate amount involved will or may be expected to exceed $100,000 in any fiscal year;
 
  •  Medtronic is a participant; and
 
  •  any related party has or will have a direct or indirect interest (other than solely as a result of being a director or a less than ten percent beneficial owner of another entity).
 
A “related party” is defined as any:
 
  •  person who is or was (since the beginning of the last fiscal year for which Medtronic has filed a Form 10-K and proxy statement, even if they do not presently serve in that role) an executive officer, director or nominee for election as a director;
 
  •  greater than five percent beneficial owner of Medtronic’s common stock; or
 
  •  immediate family member of any of the foregoing.
 
During fiscal year 2008, Tino Schuler, a son of director Jack W. Schuler, was employed by Medtronic as one of a number of marketing directors focused on Medtronic’s core ear, nose and throat product lines reporting to a Vice President, Marketing and Sales of our Surgical Technologies operating segment. Mr. Tino Schuler worked for Xomed beginning in August 1993, and Xomed, the predecessor to our core ear, nose and throat business, was acquired by Medtronic in 1999. In fiscal year 2008, Medtronic’s core ear, nose and throat product lines represented less than 2.5% of Medtronic world-wide revenue. Mr. Tino Schuler was paid an aggregate salary and bonus of $211,889 and the standard benefits provided to other non-executive Medtronic employees for his services during fiscal year 2008. Mr. Tino Schuler is not an executive officer of, and does not have a key strategic role within, Medtronic, and this relationship is deemed under the Board of Directors written related party transaction policies as being pre-approved.
 
Physio-Control, Inc., a subsidiary of Medtronic, and other defendants, including Mr. Hawkins as President and Chief Executive Officer of Medtronic, entered into a consent decree with the U.S. Food and Drug Administration regarding Physio-Control’s quality system improvements for its external defibrillator products. The decree addresses issues raised by the FDA during inspections of Physio-Control’s quality


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system processes and outlines the actions Physio-Control must take in order to resume unrestricted distribution of its external defibrillators.
 
Medtronic has one outstanding loan to an executive officer, Catherine Szyman, who is neither a named executive officer nor a member of the Board of Directors. The loan was extended for relocation purposes in 2001 prior to the enactment of, and is permissible under, the Sarbanes-Oxley Act of 2002. The principal amount of the loan is $250,000, has a 10 year term, and accrues interest equal to 35.22% of appreciation in the underlying house or the maximum allowable interest under usury law, whichever is less. Medtronic currently anticipates the loan will be paid in full in August upon Ms. Szyman’s relocation to Minnesota.
 
GOVERNANCE OF MEDTRONIC
 
Our Corporate Governance Principles
 
The Board of Directors first adopted Principles of Corporate Governance (the “Governance Principles”) in fiscal 1996 and has revised these Governance Principals from time to time, including to comply with New York Stock Exchange Corporate Governance Rules. The Governance Principles describe Medtronic’s corporate governance practices and policies, and provide a framework for the governance of Medtronic. Among other things, the Governance Principles include the provisions below.
 
  •  A majority of the members of the Board must be independent directors and no more than three directors may be Medtronic employees. Currently two directors, Medtronic’s Chairman and its President and Chief Executive Officer, are not independent.
 
  •  Medtronic maintains Audit, Compensation, Corporate Governance and Quality and Technology Committees, which consist entirely of independent directors.
 
  •  The Corporate Governance Committee, which consists of all the independent directors on the Board, oversees an annual evaluation of the Board and its committees. The Nominating Subcommittee of the Corporate Governance Committee evaluates the performance of each director whose term is expiring based on criteria set forth in the Governance Principles.
 
Our Governance Principles, the charters of our Audit, Compensation, Corporate Governance and Quality and Technology Committees and our codes of conduct are published on our website at www.medtronic.com under the Corporate Governance caption. These materials are available in print to any shareholder upon request. From time to time the Board reviews and updates these documents as it deems necessary and appropriate.
 
Lead Director; Executive Sessions
 
The Chair of our Corporate Governance Committee, Mr. Rosso, is our designated “Lead Director” and presides as the chair at meetings of the independent directors. Six regular meetings of our Board are held each year and at each Board meeting our independent directors meet in executive session with no company management present.


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Committees of the Board and Meetings
 
Our four standing Board committees — Audit, Compensation, Corporate Governance and Quality and Technology — consist solely of independent directors, as defined in the New York Stock Exchange Corporate Governance Rules. Each director attended 75% or more of the total meetings of the Board and Board committees on which the director served in fiscal year 2008. The Audit Committee was established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The following table summarizes the current membership of the Board and each of its standing committees and the number of times each standing committee met during fiscal year 2008.
 
                               
                        Corporate
    Quality and
      Board     Audit     Compensation     Governance     Technology
Mr. Anderson
    X           Chair     X*      
                               
Mr. Calhoun
    X     X           X     X
                               
Mr. Collins
    Chair                        
                               
Dr. Dzau
    X           X     X     X
                               
Mr. Hawkins
    X                        
                               
Dr. Jackson
    X     X           X     Chair
                               
Mr. Lenehan
    X           X     X     X
                               
Ms. O’Leary
    X     Chair           X*      
                               
Mr. Powell
    X           X     X     X
                               
Mr. Pozen
    X     X           X     X
                               
Mr. Rosso
    X     X           Chair*      
                               
Mr. Schuler
    X           X     X*      
                               
Number of fiscal year 2008 meetings
    8     12     7     4     4
                               
 
 
* Denotes member of Nominating Subcommittee, which met four times in fiscal year 2008.
 
Effective August 21, 2008, Mr. Powell will serve as the chair of the Corporate Governance Committee and as Lead Director, and Mr. Hawkins will serve as Chairman of the Board. Mr. Collins is expected to retire at the 2008 Annual Meeting.
 
The Board has four standing committees — the Audit Committee, the Compensation Committee, the Corporate Governance Committee, and the Quality and Technology Committee — with each of their principal functions described below.
 
Audit Committee
 
  •  Oversees the integrity of Medtronic’s financial reporting
 
  •  Oversees the independence, qualifications and performance of Medtronic’s independent registered public accounting firm and the performance of Medtronic’s internal auditors
 
  •  Oversees Medtronic’s compliance with legal and regulatory requirements
 
  •  Reviews annual financial statements with management and Medtronic’s independent registered public accounting firm and recommends to the Board whether the financial statements should be included in our Annual Report on Form 10-K
 
  •  Reviews and discusses with management and Medtronic’s independent registered public accounting firm quarterly financial statements and discusses with management Medtronic’s earnings press releases
 
  •  Reviews major changes to Medtronic’s accounting and auditing principles and practices


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  •  Hires the firm to be appointed as Medtronic’s independent registered public accounting firm that reports directly to the Audit Committee
 
  •  Pre-approves all audit and permitted non-audit services to be provided by the independent registered public accounting firm
 
  •  Reviews the scope of the annual audit and internal audit programs and the results of the annual audit examination
 
  •  Reviews, at least annually, a report by the independent registered public accounting firm describing its internal quality-control procedures and any issues raised by the most recent internal quality-control review
 
  •  Meets periodically with management to review Medtronic’s major financial and business risk exposures and steps taken to monitor and control these exposures
 
  •  Considers, at least annually, the independence of the independent registered public accounting firm
 
  •  Reviews the adequacy and effectiveness of Medtronic’s internal controls and disclosure controls and procedures
 
  •  Establishes procedures concerning the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters
 
  •  Meets privately in separate executive sessions periodically with management, internal audit and the independent registered public accounting firm
 
Audit Committee Independence and Financial Experts
 
In accordance with New York Stock Exchange requirements and SEC Rule 10A-3, all members of the Audit Committee meet the additional independence standards applicable to its members. In addition, all of our current Audit Committee members are audit committee financial experts, as that term is defined in SEC rules.
 
Audit Committee Pre-Approval Policies
 
Rules adopted by the SEC in order to implement requirements of the Sarbanes-Oxley Act of 2002 require public company audit committees to pre-approve audit and non-audit services provided by a company’s independent registered public accounting firm. Our Audit Committee has adopted detailed pre-approval policies and procedures pursuant to which audit, and audit-related, tax and other permissible non-audit services, are pre-approved by category of service. The fees are budgeted, and actual fees versus the budget are monitored throughout the year. During the year, circumstances may arise when it may become necessary to engage the independent registered public accounting firm for additional services not contemplated in the original pre-approval. In those instances, we obtain the pre-approval of the Audit Committee before engaging the independent registered public accounting firm. The policies require the Audit Committee to be informed of each service, and the policies do not include any delegation of the Audit Committee’s responsibilities to management. The Audit Committee may delegate pre-approval authority to one or more of its members. The member to whom such authority is delegated will report any pre-approval decisions to the Audit Committee at its next scheduled meeting.
 
Compensation Committee
 
  •  Reviews compensation philosophy and major compensation programs
 
  •  Annually reviews executive compensation programs, annually reviews and approves corporate goals and objectives relevant to the compensation of the Chief Executive Officer and, based on its own evaluation of performance in light of those goals and objectives as well as input from the Corporate Governance Committee, establishes and approves compensation of the Chief Executive Officer and annually approves the total compensation of all other executive officers


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  •  Administers and makes recommendations to the Board with respect to incentive compensation plans and equity-based compensation plans and approves stock option and other stock incentive awards for senior executive officers
 
  •  Reviews new compensation arrangements and reviews and recommends to the Board employment agreements and severance arrangements for senior executive officers
 
  •  Reviews and discusses with management the Compensation Discussion and Analysis required by the rules of the SEC and recommends to the Board a Compensation Discussion and Analysis for inclusion in the Company’s annual proxy statement
 
  •  Establishes compensation for directors and recommends changes to the full Board
 
You should refer to the Compensation Discussion and Analysis on page 22 for additional discussion of the Compensation Committee’s processes and procedures relating to compensation.
 
Compensation Committee Interlocks and Insider Participation
 
None of the members of the Compensation Committee during fiscal year 2008 was an officer or employee of Medtronic, and no executive officer of Medtronic during fiscal year 2008 served on the compensation committee or board of any company that employed any member of Medtronic’s Compensation Committee or Board.
 
Corporate Governance Committee
 
  •  Recommends to the Board corporate governance guidelines
 
  •  Leads the Board in its annual review of the Board’s performance
 
  •  Adopts, monitors and recommends to the Board changes to the Governance Principles
 
  •  Recommends to the Board the selection and replacement, if necessary, of the Chief Executive Officer, oversees the evaluation of senior management and periodically provides input to the Compensation Committee regarding the performance of the Chief Executive Officer in light of goals and objectives set by the Compensation Committee
 
  •  Reviews and determines the philosophy underlying directors’ compensation and remains apprised of the Compensation Committee’s actions in approving executive compensation and the underlying philosophy for it
 
  •  Maintains a Nominating Subcommittee which recommends to the full Corporate Governance Committee criteria for selecting new directors, nominees for Board membership and the positions of Chairman, Chief Executive Officer and Chair of the Corporate Governance Committee and whether a director should be nominated to stand for re-election
 
The Corporate Governance Committee considers candidates for Board membership, including those suggested by shareholders, applying the same criteria to all candidates. Any shareholder who wishes to recommend a prospective nominee for the Board for consideration by the Corporate Governance Committee must notify the Corporate Secretary in writing at Medtronic’s offices at 710 Medtronic Parkway, Minneapolis, MN 55432 no later than March 20, 2009. Any such recommendations should provide whatever supporting material the shareholder considers appropriate, but should at a minimum include such background and biographical material as will enable the Corporate Governance Committee to make an initial determination as to whether the nominee satisfies the criteria for directors set out in the Governance Principles.
 
If the Corporate Governance Committee identifies a need to replace a current member of the Board, to fill a vacancy in the Board or to expand the size of the Board, the Nominating Subcommittee considers candidates from a variety of sources. The process followed to identify and evaluate candidates includes meetings to evaluate biographical information and background material relating to candidates and


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interviews of selected candidates by members of the Board. Recommendations of candidates for inclusion in the Board slate of director nominees are based upon the criteria set forth in the Governance Principles. These criteria include business experience and skills, independence, distinction in their activities, judgment, integrity, the ability to commit sufficient time and attention to Board activities and the absence of potential conflicts with Medtronic’s interests. The Corporate Governance Committee also considers any other relevant factors that it may from time to time deem appropriate, including the current composition of the Board, the balance of management and independent directors, the need for Audit Committee and other expertise and the evaluation of all prospective nominees.
 
After completing interviews and the evaluation process, the Corporate Governance Committee makes a recommendation to the full Board as to persons who should be nominated by the Board. The Board determines the nominees after considering the recommendations and report of the Corporate Governance Committee and making such other evaluations as it deems appropriate.
 
Alternatively, shareholders intending to appear at the Annual Meeting to nominate a candidate for election by the shareholders at the meeting (in cases where the Board does not intend to nominate the candidate or where the Corporate Governance Committee was not requested to consider his or her candidacy) must comply with the procedures in Medtronic’s restated articles of incorporation, which are described under “Other Information — Shareholder Proposals and Director Nominations” on page 63 of this Proxy Statement.
 
Quality and Technology Committee
 
  •  Provides assistance to the Board in its oversight of product quality and safety, scientific and technical direction and human and animal studies
 
  •  Oversees risk management in the area of product quality and safety, including review of Medtronic’s overall quality strategy and processes in place to monitor and control product quality and safety; periodic review of results of product quality and quality system assessments by Medtronic and external regulators; and review of selected product quality issues and field actions
 
  •  Oversees the scientific and technical direction of Medtronic, including monitoring of overall effectiveness of research and development and periodic review of Medtronic’s intellectual property portfolio
 
  •  Oversees risk management in the area of human and animal studies, including the periodic review of policies and procedures related to the conduct of human and animal studies
 
Special Committee
 
In November 2005, the Board convened a Special Committee, comprised of Jack W. Schuler (Chair), Robert C. Pozen and Jean-Pierre Rosso, to oversee Medtronic’s response to a subpoena received from the Office of the United States Attorney for the District of Massachusetts relating to alleged fraud and abuse and alleged violation of federal Anti-Kickback statutes. For more information about this matter, please see Note 15 to Medtronic’s consolidated financial statements included in Medtronic’s Annual Report for fiscal year 2008.
 
Annual Meeting of the Shareholders
 
It is has been the longstanding practice of Medtronic for all directors to attend the Annual Meeting of Shareholders. All directors attended the last Annual Meeting.


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Director Compensation
 
The Director Compensation table reflects all compensation awarded to, earned by or paid to the Company’s non-employee directors during fiscal year 2008. No additional compensation was provided to Messrs. Collins or Hawkins for their service as directors on the Board.
 
                                         
    Fees Earned or
    Stock
    Option
    All Other
       
Name
  Paid in Cash     Awards     Awards     Compensation(4)     Total  
 
Mr. Anderson
  $ 100,000     $ 123,333     $ 12,898     $ 8,462     $ 244,693  
Mr. Bonsignore(1)
    40,000       70,000                   110,000  
Dr. Brody(1)
    40,000       70,000                   110,000  
Mr. Calhoun(2)
    70,282       65,402       52,641             188,325  
Dr. Dzau(3)
    14,342       17,778       16,119             48,239  
Dr. Jackson
    98,333       123,333       12,898       15,074       249,638  
Mr. Lenehan
    81,675       105,833       12,898       9,690       210,096  
Ms. O’Leary
    98,333       123,333       12,898             234,564  
Mr. Powell(2)
    66,949       67,333       52,641             186,923  
Mr. Pozen
    101,666       123,333       12,898       19,077       256,974  
Mr. Rosso
    113,333       123,333       12,898       24,725       274,289  
Mr. Schuler
    98,333       123,333       12,898       6,598       241,162  
Mr. Sprenger(1)
    35,000       70,000                   105,000  
 
 
(1) Messrs. Bonsignore and Sprenger and Dr. Brody retired from the Board and the committees of the Board on which they served at the 2007 Annual Meeting. The fees shown are fees earned in fiscal year 2008 and are prorated based upon their retirement from the Board in August 2007.
 
(2) The fees shown for Messrs. Calhoun and Powell are fees earned in fiscal year 2008 and are prorated based upon their election to the Board in June 2007.
 
(3) The fees shown for Dr. Dzau are fees earned in fiscal year 2008 and are prorated based upon his appointment to the Board in February 2008.
 
(4) This column includes the value of the related spousal travel expenses, meals and related activities paid for fiscal year 2008, including related tax gross-ups paid to the spouses.
 
In April 2007, the Board approved changes to Medtronic’s non-employee director compensation program. The changes, effective September 1, 2007, include:
 
  •  increasing the annual retainer from $70,000 to $80,000;
 
  •  increasing the Audit Committee Chair annual cash stipend from $10,000 to $15,000;
 
  •  implementing an annual cash stipend of $5,000 for non-chair members of the Audit Committee; and
 
  •  changing the plan year from a September 1 to August 31 plan year to a plan year consistent with Medtronic’s fiscal year.
 
Consequently, compensation disclosed for fiscal year 2008 includes both (i) the portion of the September 1 through August 31 plan year that occurred within fiscal year 2008 (which was April 28, 2007 through August 31, 2007) and (ii) a shortened plan year for the September 1, 2007 to April 25, 2008 period.
 
Fees Earned or Paid in Cash.  The fees earned or paid in cash column represents the amount of annual retainer and annual cash stipend for Board and committee service. The annual cash retainer for the September 1 through August 31 plan year was $70,000 (with $35,000 of that amount being earned in fiscal year 2008), and the annual cash retainer for the shortened 2008 plan year was $53,333.
 
In addition, the Chairs of each of the Compensation, Quality and Technology, and Corporate Governance Committees received an annual cash stipend for the September 1 through August 31 plan year of $10,000 (with $5,000 of that amount being earned in fiscal year 2008), and a cash stipend of $6,667 for the shortened 2007-2008 plan year. Similarly, the chair of the Audit Committee received a cash stipend for the


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September 1 through August 31 plan year of $10,000 (with $5,000 of that amount being earned in fiscal year 2008), and a cash stipend of $10,000 for the shortened 2007-2008 plan year. Finally, non-chair members of the Audit Committee received a cash stipend of $3,333 for the shortened 2007-2008 plan year.
 
The annual cash retainer and annual cash stipend are paid in two installments — in the middle and at the end of a plan year. Members of the Special Committee are paid a cash fee of $2,500 at the end of each fiscal quarter. The annual cash retainer and annual cash stipend are reduced by 25% if a non-employee director does not attend at least 75% of the total meetings of the Board and Board committees on which such director served during the relevant plan year. The table on page 11 of this proxy statement under the section entitled “Committees of the Board and Meetings” shows on which committees the individual directors serve.
 
Stock Awards.  Directors are granted deferred stock units on the last business day of the plan year in an amount equal to the annual retainer in effect on such day (on a pro-rata basis for participants who are directors for less than the entire plan year and reduced by 25 percent for those directors who fail to attend at least 75 percent of the applicable meetings) divided by the average closing price of a share of Medtronic common stock for the last 20 trading days during the plan year. Dividends paid on Medtronic common stock are credited to a director’s stock unit account in the form of additional stock units. The balance in a director’s stock unit account will be distributed to the director in the form of shares of Medtronic common stock upon resignation or retirement from the Board in a single distribution or, at the director’s option, in five equal annual distributions. Amounts in the stock awards column show 100% of the grant date fair value of stock awards granted to each director in fiscal year 2008, which is recognized in the year of grant and equals the share-based compensation expense recognized in fiscal year 2008 for financial statement reporting purposes in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123(R)”) (disregarding forfeiture assumptions).
 
Option Awards.  Directors are granted stock options on the first business day of the plan year in an amount equal to the annual retainer divided by the fair market value of a share of Medtronic common stock on the date of grant (which will also be the exercise price of the option). These options expire at the earlier of the tenth anniversary of the date of grant or five years after the holder ceases to be a Medtronic director. On the date he or she first becomes a director, each new non-employee director receives (1) a one-time initial stock option grant for a number of shares of Medtronic common stock equal to two times the amount of the annual retainer divided by the fair market value of a share of Medtronic common stock on the date of grant (which will also be the exercise price of such option); and (2) a pro-rated stock option grant for a number of shares of Medtronic common stock equal to his or her annual retainer (pro-rated based on the number of days remaining in the plan year) divided by the fair market value of a share of Medtronic common stock on the date of grant (which will also be the exercise price of the option). Amounts in the option awards column represent the share-based compensation expense recognized in fiscal year 2008 for financial statement reporting purposes in accordance with SFAS No. 123(R) (disregarding forfeiture assumptions) based on the assumptions noted in the following table. The following table provides the fair value of options granted to the directors for which expense was recognized in fiscal year 2008 and the related assumptions used in the Black-Scholes model:
 
                         
    Stock Option Grant Date  
    June 22,
    September 1,
    February 21,
 
    2007     2007     2008  
 
Fair value of options granted
  $ 13.35     $ 12.77     $ 12.74  
Assumptions used:
                       
Risk free rate(1)
    5.01 %     4.25 %     3.22 %
Expected volatility(2)
    20.14 %     20.02 %     22.01 %
Expected life(3)
    5.17 yrs     5.17 yrs     6.50 yrs
Dividend yield(4)
    0.97 %     0.95 %     1.02 %


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(1) The risk-free rate is based on the grant date yield of a zero-coupon U.S. Treasury bond whose maturity period equals or approximates the option’s expected term.
 
(2) Beginning in the third quarter of fiscal year 2007, the expected volatility is based on a blend of historical volatility and an implied volatility of the Company’s common stock. Implied volatility is based on market traded options of the Company’s common stock. Prior to the third quarter of fiscal year 2007, the Company calculated the expected volatility based exclusively on the historical volatility.
 
(3) The Company analyzes historical employee stock option exercise and termination data to estimate the expected life assumption. Beginning in the third quarter of fiscal year 2008, the Company began to calculate the expected life assumption using the midpoint scenario, which combines historical exercise data with hypothetical exercise data, as the Company believes this data currently represents the best estimate of the expected life of a new employee option. Prior to the third quarter of fiscal year 2008, the Company calculated the expected life based solely on historical data.
 
(4) The dividend yield rate is calculated by dividing the Company’s annual dividend, based on the most recent quarterly dividend rate, by the closing stock price on the grant date.
 
Directors received the following stock option grants during fiscal year 2008:
 
                 
          Grant Date
 
Name
  # of Shares     Fair Value  
 
Mr. Anderson
    1,010     $ 12,898  
Mr. Calhoun
    2,977 (1)     39,743  
      1,010       12,898  
Dr. Dzau
    3,269 (2)     14,793  
      293 (2)     1,326  
Dr. Jackson
    1,010       12,898  
Mr. Lenehan
    1,010       12,898  
Ms. O’Leary
    1,010       12,898  
Mr. Powell
    2,977 (1)     39,743  
      1,010       12,898  
Mr. Pozen
    1,010       12,898  
Mr. Rosso
    1,010       12,898  
Mr. Schuler
    1,010       12,898  
 
 
(1) These shares reflect the one-time initial stock option grant made to Messrs. Calhoun and Powell in connection with their election to the Board in June 2007.
 
(2) These shares reflect the one-time initial stock option grant and annual grant made to Dr. Dzau in connection with his election to the Board in February 2008. These grants will vest 100% upon shareholder approval of Dr. Dzau’s election at the Annual Meeting of Shareholders on Thursday, August 21, 2008. Therefore, an additional $29,261 of expense related to these shares will be recognized in fiscal year 2009.
 
All non-employee director stock options described above vest and are exercisable in full on the date of grant, except that a director initially appointed by the Board will not be entitled to exercise any stock option until the director has been elected to the Board by Medtronic’s shareholders. Amounts in the grant date fair value column represent the share-based compensation expense recognized in fiscal year 2008 for financial statement reporting purposes in accordance with SFAS No. 123(R) (disregarding forfeiture assumptions).


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Stock Holdings.  Non-employee directors held the following restricted stock, stock options, and deferred stock units as of April 25, 2008:
 
                         
    Restricted
    Stock
    Deferred
 
Non-Employee Director
  Stock     Options     Stock Units  
 
Mr. Anderson
          21,486       7,270  
Mr. Calhoun
          3,987       1,307  
Dr. Dzau
          3,562       359  
Dr. Jackson
          17,807       7,957  
Mr. Lenehan
          4,397       2,074  
Ms. O’Leary
          37,409       9,034  
Mr. Powell
          3,987       1,343  
Mr. Pozen
          11,490       5,112  
Mr. Rosso
          51,962       10,225  
Mr. Schuler
    14,702       50,991       11,530  
 
To more closely align their interests with those of shareholders, directors are encouraged to own stock of Medtronic in an amount equal to five times the annual Board retainer fees. In addition, each director must retain, for a period of three years, 75% of the net after-tax profit shares realized from option exercises or share issuances resulting from grants made on or after April 26, 2003. For stock options, net after-tax profit shares are those shares remaining after payment of the option’s exercise price and income taxes. For share issuances, net gain shares are those remaining after payment of income taxes. Shares retained may be sold after three years. In the case of retirement or termination, the shares may be sold after the shorter of the remaining retention period or one year following retirement or termination, as applicable.
 
Deferrals.  Directors may defer all or a portion of their compensation through participation in Medtronic’s Capital Accumulation Plan, a nonqualified deferred compensation plan designed to allow participants to make contributions of their compensation before taxes are withheld and to earn returns or incur losses on those contributions based upon allocations of their balances to one or more investment alternatives, which are also investment alternatives that Medtronic offers its employees through its 401(k) supplemental retirement plan.
 
Charitable Giving.  As part of its overall program to promote charitable giving, The Medtronic Foundation matches gifts by Medtronic employees and directors to qualified educational institutions up to $7,000 per fiscal year. In addition, any individual who became a director prior to July 1, 1998 and who has served as a director for five or more years may recommend charitable institutions to which Medtronic will make a total contribution of $1 million at the time of the director’s death.
 
Complaint Procedure; Communications with Directors
 
The Sarbanes-Oxley Act of 2002 requires companies to maintain procedures to receive, retain and treat complaints received regarding accounting, internal accounting controls or auditing matters and to allow for the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters. We currently have such procedures in place. Our 24-hour, toll-free confidential compliance line is available for the submission of concerns regarding accounting, internal controls or auditing matters. Our independent directors may also be contacted via e-mail at independentdirectors@medtronic.com. Our Lead Director may be contacted via e-mail at leaddirector@medtronic.com. Communications received from shareholders may be forwarded directly to Board members as part of the materials sent before the next regularly scheduled Board meeting, although the Board has authorized management, in its discretion, to forward communications on a more expedited basis if circumstances warrant or to exclude a communication if it is illegal, unduly hostile or threatening or otherwise inappropriate. Advertisements, solicitations for periodical or other subscriptions and other similar communications generally will not be forwarded to the directors.


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Our Codes of Conduct
 
All Medtronic employees, including our Chief Executive Officer and other senior executives, are required to comply with our long-standing Code of Conduct to help ensure that our business is conducted in accordance with the highest standards of moral and ethical behavior. Our Code of Conduct covers all areas of professional conduct, including customer relationships, conflicts of interest, insider trading, intellectual property and confidential information, as well as requiring strict adherence to all laws and regulations applicable to our business. Employees are required to bring any violations and suspected violations of the Code of Conduct to the attention of Medtronic, through management or our legal counsel or by using Medtronic’s confidential compliance line. Our Code of Ethics for Senior Financial Officers, which is a part of the Code of Conduct, includes certain specific policies applicable to our Chief Executive Officer, Chief Financial Officer, Treasurer and Controller and to other senior financial officers designated from time to time by our Chief Executive Officer. These policies relate to internal controls, the public disclosures of Medtronic, violations of the securities or other laws, rules or regulations and conflicts of interest. The members of the Board of Directors are subject to a Code of Business Conduct and Ethics relating to director responsibilities, conflicts of interest, strict adherence to applicable laws and regulations and promotion of ethical behavior.
 
Our codes of conduct are published on our website, at www.medtronic.com under the Corporate Governance caption. We intend to disclose future amendments to, or waivers for directors and executive officers of, our codes of conduct on our website promptly following the date of such amendment or waiver.


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SHARE OWNERSHIP INFORMATION
 
Significant Shareholders.  The following table shows information as of June 23, 2008, concerning each person who is known by us to beneficially own more than 5% of our common stock.
 
                         
          Of Shares Beneficially
       
          Owned, Amount that
       
    Amount and Nature of
    May Be Acquired
    Percent
 
Name of Beneficial Owner
  Beneficial Ownership     Within 60 Days     of Class  
 
Capital World Investors 333 South Hope Street Los Angeles, CA 90071(1)
    61,819,620       N/A       5.5 %
 
 
(1) The information for security ownership of this beneficial owner is based on a Schedule 13G filed by Capital World Investors on February 11, 2008. The shares reported are as a result of Capital World Investors acting as investment adviser to various investment companies. Based upon 1,125,730,817 shares outstanding as of June 23, 2008, the shareholder beneficially owns approximately 5.5% of our shares outstanding.
 
Beneficial Ownership of Management.  The following table shows information as of June 23, 2008 concerning beneficial ownership of Medtronic’s directors, named executive officers identified in the Summary Compensation Table below, and all directors and executive officers as a group.
 
                 
          Of Shares Beneficially
 
    Amount and Nature of
    Owned, Amount that May Be
 
Name of Beneficial Owner
  Beneficial Ownership(5)     Acquired Within 60 Days  
 
Richard H. Anderson(1)
    32,851       30,346  
Jean-Luc Butel
    149,454       116,936  
David L. Calhoun
    17,234       6,884  
Arthur D. Collins, Jr.(2)
    2,948,070       2,229,497  
Michael F. DeMane
    291,095       260,459  
Victor J. Dzau, M.D. 
    5,511       5,511  
Gary L. Ellis
    324,517       270,890  
William A. Hawkins
    466,671       375,639  
Shirley Ann Jackson, Ph.D. 
    27,554       27,354  
James T. Lenehan
    18,061       8,061  
Stephen H. Mahle
    994,030       760,042  
Denise M. O’Leary
    48,033       48,033  
Kendall J. Powell
    6,920       6,920  
Robert C. Pozen(3)
    42,892       18,192  
Jean-Pierre Rosso
    64,777       63,777  
Jack W. Schuler
    549,630       64,111  
Directors and executive officers as a group (28 persons)(4)
    7,551,861       5,567,291  
 
 
(1) Mr. Anderson disclaims beneficial ownership of 25 shares that are owned by his minor son.
 
(2) Mr. Collins disclaims beneficial ownership of 30,000 shares that are held by The Collins Family Foundation, a charitable trust of which he is one of the trustees.
 
(3) Includes 24,700 shares owned jointly with Mr. Pozen’s spouse.
 
(4) As of June 23, 2008, no director or executive officer beneficially owns more than 1% of the shares outstanding. Medtronic’s directors and executive officers as a group beneficially own approximately .67% of the shares outstanding.
 
(5) Amounts include the shares shown in the last column, which are not currently outstanding but are deemed beneficially owned because of the right to acquire shares pursuant to options exercisable


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within 60 days (on or before August 22, 2008) and the right to receive shares for deferred stock units issued under the Medtronic, Inc. 1998 Outside Director Stock Compensation Plan (as amended and restated) within 60 days (on or before August 22, 2008) of a director’s resignation.
 
Section 16(a) Beneficial Ownership Reporting Compliance.  Based upon a review of reports and written representations furnished to it, Medtronic believes that during fiscal year 2008 all filings with the SEC by its executive officers and directors complied with requirements for reporting ownership and changes in ownership of Medtronic’s common stock pursuant to Section 16(a) of the Exchange, except that Gary L. Ellis failed to accurately report shares for taxes withheld on October 23, 2007, due to Medtronic’s administrative oversight, Jack W. Schuler failed to timely file a report for the purchase of shares on August 23, 2007, due to an oversight by Mr. Schuler’s advisors, and Kendall J. Powell failed to timely file a report for a sale of shares by his spouse on August 27, 2007, due to an oversight by Mr. Powell’s advisors. The amended reports were filed promptly when the errors were discovered.


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COMPENSATION DISCUSSION AND ANALYSIS
 
Overview
 
The compensation discussion and analysis describes all material elements of our compensation programs for our named executive officers during fiscal year 2008. The accompanying Summary Compensation Table and additional tables should be read for additional information relating to the compensation of our named executive officers.
 
The Compensation Committee of the Board of Directors has the authority and is the decision-making body on all matters of compensation related to our executive officers. The Compensation Committee establishes the compensation philosophy and approves all aspects of the executive compensation program including plan design and administration. For more information on the Compensation Committee, its members and its duties as identified in its charter, you should refer to the section entitled “Committees of the Board and Meetings” beginning on page 11 of this proxy statement.
 
Compensation Program Objectives and Philosophy
 
The goal of our compensation program for named executive officers is to support and enhance the Medtronic Mission. Our Mission has been in place since 1960, and it drives every aspect of our business. Its principles, in a condensed version below, speak to:
 
  •  Contributing to human welfare by application of biomedical engineering to develop instruments that alleviate pain, restore health and extend life;
 
  •  Directing growth in the biomedical engineering field;
 
  •  Striving without reserve for the greatest possible reliability and quality in our products and to be the unsurpassed standard of comparison and to be recognized as a company of dedication, honesty, integrity and service;
 
  •  Making a fair profit to meet our obligations, sustain our growth and reach our goals;
 
  •  Recognizing the personal worth of employees by providing an employment framework that allows personal satisfaction in work accomplished, security, advancement opportunities and means to share in the Company’s success; and
 
  •  Maintaining good citizenship as a company.
 
Our Mission lays the foundation for our unyielding standards for ethical and legal conduct and the utmost integrity in all of our activities. Our compensation program for named executive officers is aligned with these principles, and its objectives are established for this purpose. It is designed to:
 
  •  Emphasize performance-based compensation;
 
  •  Encourage strong financial performance by establishing challenging goals and leveraged incentive programs; and
 
  •  Encourage executive stock ownership and alignment with shareholder interests by linking a meaningful portion of compensation to the value of Medtronic common stock.
 
Our philosophy is to position total compensation at a level that is commensurate with Medtronic’s size and performance relative to other leading medical device and pharmaceutical companies, as well as a limited number of general industry companies. To do this, the Compensation Committee annually reviews the total compensation levels and mix of elements using public information from our peer group’s proxy statements and survey information from credible general industry surveys. The variable components of the program are designed to allow for market median pay for target performance, above-market median pay when performance is above target performance and below-market median pay when performance is below target performance. In addition, the equity components of the program align our executives with the interests of our shareholders and ensure that their total compensation will increase or decrease in direct correlation to the movement of our stock price.


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Program Overview
 
The following is an illustration of the major components of Medtronic’s compensation programs as applied to each named executive officer with the exception of Mr. Collins who, in his role as Chairman of the Board, received compensation consisting of base salary, a performance share plan (the “Performance Share Plan”) payout for the 2006 to 2008 performance period and a pro-rata annual incentive payment in fiscal year 2008.
 
     
 
•   Objective: Provide a base wage that is not subject to performance risk
•   Generally represents 12% to 27% of total compensation for the named executive officers(1)

•   Objective: Motivate executives to achieve annual business goals
•   Generally represents 14% to 19% of total compensation for the named executive officers(1)
•   All executive officers have corporate and (if applicable) business unit annual business goals


•   Objective: Motivate executives to focus on long-term shareholder value creation and strategic initiatives
•   Core long-term incentive program consists of three distinct components targeting delivery of long-term compensation at approximately the median of market competitive levels
•   Generally represents 55% to 74% of total compensation for the named executive officers


•   Objective: Supports succession planning, recruiting and retention
•   Used judiciously
•   Generally represents a premium over and above our competitive market


•   Objective: Ensure impartiality and objectivity in the event of a change-in-control situation to protect shareholder interests
•   Policy is consistent with design provisions and benefit levels at other similar companies

•   Given in lieu of perquisites
•   Represents a nominal amount of total compensation for the named executive officers (e.g., $40,000 for CEO)
 
 
(1) Total compensation is defined as the sum of base salary, target annual cash incentives, and the grant date fair value of long-term equity incentives, and does not necessarily tie to the values disclosed in the Summary Compensation Table and supplemental tables. The chart is not drawn to scale for any particular named executive officer.
 
The compensation mix in the illustration above reflects our pay philosophy, which emphasizes performance-based pay (annual and long-term incentives represent 73% to 88% of total compensation),


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and a focus on long-term financial measures and stock performance (55% to 74% of total compensation). In delivering a relatively large percentage of total compensation in the form of long-term incentives, our intent is to deliver maximum value to the named executive officer only when value is delivered to shareholders in the form of both stock performance and long-term financial performance. The percentages are calculated based on total direct compensation (base salary, annual incentives and long-term incentives) excluding special time-based restricted stock awards and excluding compensation related to relocation or expatriate duties.
 
Independent Compensation Consultant
 
The Compensation Committee has engaged Frederic W. Cook & Co., Inc., an independent outside compensation consulting firm, to advise the Compensation Committee on all matters related to executive officer and director compensation. Specifically, Frederic W. Cook & Co. conducts an annual proxy review of total compensation for named executive officers. In addition, the consultant provides relevant market data, updates on trends in executive and director compensation, advice on program design and specific compensation decisions for the Chief Executive Officer and advice on the recommendations made by the Chief Executive Officer with respect to the compensation of other executives. The consultant attended all of the Compensation Committee meetings in fiscal year 2008, as is Medtronic’s long-standing practice. The consultant also meets with the Compensation Committee in executive session as requested at each meeting. The compensation consultant only works with management with the express permission of the Compensation Committee. Any services performed for the Company are related to executive and director compensation and are solely in support of decision-making by the Compensation Committee.
 
Role of Chief Executive Officer in Compensation Decisions
 
In making compensation decisions for the named executive officers, the Compensation Committee solicits views of our Chief Executive Officer, who attends all Compensation Committee meetings at the Compensation Committee’s invitation. The Chief Executive Officer is not present during the executive session portions of the meetings, and he does not make specific recommendations to the Compensation Committee about his own compensation.
 
Change of Leadership
 
At the Annual Meeting in August 2007, Mr. Collins stepped down as Medtronic’s Chief Executive Officer. Since that time, Mr. Collins has served in the capacity of Chairman of the Board of Directors and remains an employee of the company. It is anticipated that Mr. Collins will continue in this role through the date of the Annual Meeting in August 2008, at which time he will retire from Medtronic.
 
Mr. Collins’ compensation for his one-year period as employee Chairman is $1,000,000. Although he received awards in fiscal year 2008 under incentive programs in which he was a participant prior to stepping down as Chief Executive Officer, he did not receive any new grants under the Company’s long-term incentive or stock compensation programs. As the Chief Executive Officer during part of fiscal year 2008, Mr. Collins’ fiscal year 2008 compensation is reported in this proxy statement.
 
Peer Companies
 
The Compensation Committee regularly conducts a comprehensive review of our peer group that includes an assessment of companies in the peer group as well as the size, performance and industry of companies outside the group. Such a review was conducted for fiscal year 2008 and resulted in a peer group consisting of twenty companies, including direct and indirect competitors in the medical device and pharmaceutical field as well as other leading companies. The peer group included six companies that were not a part of the peer group in fiscal year 2007. In addition, one peer company from fiscal year 2007 was acquired by a private group of investors. This peer group was selected based on discussions with, and recommendations from, the Compensation Committee’s independent compensation consultant. In establishing the peer group, all U.S.-based companies in Global Industry Classification Standard (GICS) sub-


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industry codes related to Medtronic’s industry were identified. This group was further reduced by eliminating companies with less than $1 billion in revenues. One exception was made to these requirements for 3M which, although not in one of the GICS sub-industry codes used to identify other peer group candidates, operates a large health care segment representing 30% of its revenue and is locally based. The final peer group was selected such that Medtronic is at approximately the median of the companies in terms of several size measures such as revenues and market capitalization.
 
The following table lists Medtronic’s fiscal year 2008 peer group, including Medtronic’s ranking relative to these companies based on financial data available at the time of consideration:
 
                 
    Revenue
    Market Cap
 
Company
  (Millions)     (Millions)  
 
3M
  $ 22,923     $ 54,366  
Abbott Laboratories
    22,476       84,283  
Allergan
    3,063       17,176  
Amgen
    14,268       74,960  
Bard (C.R.)
    1,986       8,239  
Baxter International
    10,378       32,497  
Becton Dickinson
    5,840       18,577  
Boston Scientific
    7,821       24,043  
Bristol-Myers Squibb
    17,914       53,274  
Genentech
    9,284       88,899  
Genzyme
    3,187       16,245  
Johnson & Johnson
    53,194       182,125  
Lilly (Eli)
    15,691       59,510  
Merck
    22,636       95,850  
Pfizer
    48,201       179,973  
St. Jude Medical
    3,302       14,022  
Schering-Plough
    10,547       34,902  
Stryker
    5,406       25,252  
Wyeth
    20,351       74,519  
Zimmer Holdings
    3,495       19,986  
                 
Medtronic
  $ 11,292     $ 58,094  
Medtronic Percentile Rank
    54th %tile       62nd %tile  
 
Base Salaries
 
With respect to base salaries, our objective is to establish salaries within a competitive range based on the market median base salary for our industry peer group and general industry survey data. Establishing market competitive base salaries aids in the attraction and retention of top talent and allows us to develop an overall pay program that appropriately reflects the market mix of fixed versus variable compensation.
 
The Compensation Committee solicits the views of our Chief Executive Officer on compensation matters as they relate to the Chief Operating Officer and members of senior management reporting to the Chief Executive Officer or the Chief Operating Officer. In making his recommendations to the Compensation Committee, the Chief Executive Officer assesses individual performance during the fiscal year, the individual’s current salary percentile relative to general industry labor market data, past salary treatment and the scope and complexity of the position.
 
In addition to the recommendations of the Chief Executive Officer, the Compensation Committee receives a detailed analysis of the named executive officers’ pay as compared to the peer group, presented by the independent consultant to the Compensation Committee, and general industry survey data


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provided by Management. After an evaluation of the analysis and the data presented, the Compensation Committee approves base salaries for named executives annually at its meeting in April.
 
Base salary percentage increases for fiscal year 2008 and for fiscal year 2009 (to date) are shown below:
 
                                         
    Fiscal Year
    Fiscal Year
    Percent Increase
    Fiscal Year
    Percent
 
Name
  2007     2008     (Decrease)     2009     Increase  
 
William A. Hawkins
  $ 775,000     $ 1,100,000       41.9     $ 1,177,000       7.0  
Gary L. Ellis
    525,000       600,000       14.3       636,000       6.0  
Michael F. DeMane
    530,000       725,000       36.8       N/A (1)     N/A (1)
Stephen H. Mahle
    595,000       620,000       4.2       620,000        
Jean-Luc Butel
    410,000       440,000       7.3       525,000 (2)     19.3 (2)
Arthur D. Collins, Jr. 
    1,275,000       1,000,000       (21.6 )     1,000,000        
 
 
(1) On April 29, 2008, it was announced that Mr. DeMane had informed Medtronic of his decision to resign as Chief Operating Officer effective April 30, 2008. Additional information related to Mr. DeMane’s departure can be found on page 51 of this proxy statement.
 
(2) Effective April 29, 2008, Mr. Butel received a promotion to the position of Senior Vice President and President, Medtronic International. Mr. Butel’s fiscal year 2009 salary increase of 19.3% consists of a 5.0% merit increase and a 13.6% promotional increase.
 
The fiscal year 2008 salaries for Mr. Hawkins and Mr. DeMane reflect their fiscal year-end annualized pay following mid-year promotions to Chief Executive Officer and Chief Operating Officer, respectively. Mr. Hawkins received an annual salary increase of 4.0% at the beginning of fiscal year 2008, bringing his salary to $806,000. Upon his promotion to Chief Executive Officer, Mr. Hawkins’ salary was increased to $1,100,000. Mr. DeMane received an annual salary increase of 5.1% at the beginning of fiscal year 2008, bringing his salary to $557,000. Upon his promotion to Chief Operating Officer, Mr. DeMane’s salary was increased to $725,000. Mr. Ellis received an annual salary increase of 6% at the beginning of fiscal year 2008, as well as a salary adjustment to align his pay more closely with competitive market data for his position. As a reflection of a majority of the named executive officers’ short tenure in their current roles, their salaries are approximately 86% to 95% of the competitive market for their positions. At the beginning of fiscal year 2008, Mr. Collins’ base pay in his role as Chief Executive Officer was $1,275,000. Upon stepping down as Chief Executive Officer and assuming the position of Chairman of the Board of Directors, Mr. Collins’ base salary was reduced by 21.6% to $1,000,000.
 
Annual Performance-Based Incentives
 
We deliver annual performance-based incentives to our named executive officers through the Medtronic, Inc. Executive Incentive Plan (“MIP”). Our objective is to establish MIP award targets within a competitive range based on the market median annual incentives for our competitive market. However, we establish an award range that allows above-market pay for above-market performance and below-market pay for below-market performance. It is important to note that our MIP award targets are set at competitive levels to allow us to attract and retain employees and offer a pay mix that is similar to those offered in the market in which we compete for talent.
 
Award Targets.  The Compensation Committee reviews, discusses and approves MIP award targets for named executive officers in June.
 
Our MIP award targets are established as a percentage of base salary earned during the fiscal year. The Plan provides that no incentives are earned unless a minimum (threshold) earning per share target is met, and that upon meeting this threshold the plan will provide participants a minimum award of 50% of target. Minimum awards (at the threshold level of performance) are 50% of the target amount and maximum payouts for named executive officers vary from 220% to 225% of the target amount.


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Performance Measures.  MIP award measures are reviewed and approved annually at the Compensation Committee’s June meeting. Financial measures are selected based on how effectively they impact, independently and together, the overall success of Medtronic.
 
The fiscal year 2008 financial measures for the portion of our plan based on Company performance were earnings per share, revenue growth, cash flow and two quality-related measures, with weights of 50%, 30%, 10%, 5% and 5%, respectively. Earnings per share is an aggregate measure that focuses on growth and equity management, and reflects how well we deliver value to our shareholders from our business operations. Revenue growth is a reflection of our ability to successfully bring new products to market, gain market share and expand the many markets that we serve. Cash flow is an indication of liquidity and reflects Medtronic’s flexibility in making certain business decisions, and for this purpose is defined as net income plus or minus changes in working capital and net property, plant and equipment. The first quality-related measure is related to savings in the cost of materials and inventory management and the second is related to a reduction in the number of observations made by regulatory bodies that result from audits or other actions. Target payouts for Company measures for fiscal year 2008 were based on performance targets with the following ranges: 10% to 18% growth in earnings per share, 10% to 15% revenue growth, cash flow ranging from $2,275 million to $2,717 million, scrap, obsolescence and physical inventory adjustments ranging from $149 million to $105 million, and 150% to 60% of established target for the number of observations. These are reasonably aggressive goals as compared to our peer group of companies and, as such, fully support our compensation philosophy. In addition, the earnings per share threshold was set at a 9% growth over the prior year’s actual results.
 
Once actual performance has been determined, the achievement percentage is determined by interpolating actual performance relative to the performance range for each measure. These achievement percentages are then weighted based on the applicable plan weightings and summed to arrive at an overall achievement percentage for the plan year. Actual payouts are determined by multiplying the executive’s eligible earnings for the plan year by their annual target percentage, and then by the overall achievement percent for their plan.
 
MIP awards paid to Messrs. Hawkins, Ellis, DeMane, Mahle and Collins are based 100% on Company performance measures. Mr. Collins’ award will be pro-rated based on the period of time in fiscal year 2008 in which he served as the Chief Executive Officer. In order to focus Mr. Butel on the achievement of business geography objectives, a significant portion, 75% of his MIP, is based on the performance of the business geography he leads. For 2008, these business unit measures included revenue growth (40% weight), earnings before interest and taxes (“EBIT”) (30%), the quality-related measures of scrap, obsolescence and physical inventory adjustments (7.5%) and on-time complaint reporting (7.5%), and two measures related to asset management — days sales outstanding (7.5%) and weighted average inventory weeks (7.5%). Target payouts for Mr. Butel’s business geography measures for fiscal year 2008 were based on performance targets within the following ranges: 12% to 21% revenue growth, $584 million to $639.3 million in EBIT, scrap, obsolescence and physical inventory adjustments ranging from $11.5 million to $9.4 million, on-time complaint reporting from 90% to 100% of target, days sales outstanding ranging from 85.4 to 73.9 days, and weighted average inventory weeks from 22.8 to 19.5 weeks.
 
In establishing performance measure targets, the Compensation Committee considered a number of factors including prior performance, forecast performance, industry expectations, and the annual operating plan. Finally, the competitive market, changes in the regulatory environment, and economic trends were also considered.
 
Fiscal Year 2008 Award Payments.  For fiscal year 2008, Medtronic’s earnings per share and revenue growth performance were below target. Medtronic’s earnings per share exceeded the minimum threshold amount required for an award. Return on net assets was below target, resulting in overall Company performance at 55.8% of target. Asia Pacific performance, which impacts Mr. Butel’s MIP, was at 78.5% of target.


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An overview of the fiscal year 2008 MIP program, including targets and award payments is presented below:
 
                                                 
    Target
    Payout Range
    Target
          Actual Paid
 
    Opportunity
    (as % of Base Salary)     Payout
    Actual
    as % of
 
Name
  as % of Salary     Minimum     Maximum     $     Amount Paid     Target  
 
William A. Hawkins(1)
    114       57       250     $ 1,133     $ 632,295       55.8  
Gary L. Ellis
    75       38       165       450       251,145       55.8  
Michael F. DeMane(1)
    90       45       197       602       335,926       55.8  
Stephen H. Mahle
    80       40       176       496       276,818       55.8  
Jean-Luc Butel
    70       35       156       308       241,657       78.5  
Arthur D. Collins, Jr. 
    120       60       264       490       273,623       55.8  
 
 
(1) Target opportunity as % of salary is pro-rata due to mid-year promotion
 
MIP Program Changes for Fiscal Year 2009
 
At the direction of the Compensation Committee, in fiscal year 2008 Management conducted a comprehensive review of the MIP with the intent of providing greater focus on Medtronic’s overall business objectives, reducing the overall number of performance measures and driving appropriate Company, business unit and business geography performance. Under the revised plan, effective for fiscal year 2009, the Company performance measures will consist of revenue growth, earnings per share, and cash flow, weighted 40%, 40% and 20%, respectively. For this purpose, cash flow is defined as profit after tax exclusive of special charges, plus or minus changes in accounts receivable, inventories, net property, plant and equipment, certain other operating assets and accounts payable, and excluding the Physio-Control business and the effects of foreign exchange rates. Performance measures for business geography heads have been revised to include revenue growth and EBIT for the relevant area of responsibility, weighted 40% each. The remaining 20% will be based on performance against two quantitative performance measures as determined annually for each business unit or geography. This determination will be made by the Chief Executive Officer, with the input of the respective business leader, prior to the start of the fiscal year and approved by the Compensation Committee to the extent that they apply to executive officers. Awards for executive officers will be based 100% on Company performance, with awards for executive officers who are the head of a business unit or geography weighted 50% on the performance of the Company and 50% on the performance of the relevant business unit or geography.
 
Long-Term Compensation
 
Long-term compensation allows us to provide incentives and rewards to those employees who are responsible for the strategic and long-term success of the company. Our objective is to align the actions of our named executive officers with the interests of shareholders, link a significant portion of their compensation to sustained financial results and growth in stock price, provide a competitive total compensation package, and aid in the attraction and retention of top talent. We provide our named executives with four types of long-term compensation: (1) stock options; (2) performance-based restricted stock; (3) cash-based long-term performance plan; and (4) time-based restricted stock units.
 
A goal of our program is to establish aggregate long-term compensation pay targets within a competitive range based on the median long-term incentives of our industry peer group of companies. We establish a pay range that allows aggregate payouts that are above market median pay for above target performance and below market median pay for below target performance.
 
Our program achieves an equal balance among the three primary components of the program (stock options, performance-based restricted stock, and performance-based cash) and to use time-based restricted stock in more limited circumstances for special recognition and retention purposes. This mix of long-term incentives is similar to that used by the companies in our peer group. By maintaining an equal balance of the three primary components, we underscore the importance of all of them. This supports our overall compensation philosophy and objectives — to reinforce alignment with shareholder interests, encourage strong financial performance through aggressive goals and highly leveraged programs, and emphasize performance-based compensation.


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Award Targets.  The Compensation Committee reviews, discusses and approves all long-term compensation pay targets for named executives in June after discussing and reviewing a comprehensive annual proxy executive compensation study provided by our external independent consultant. Once the market median long-term incentive compensation of the peer group of companies is determined for each named executive officer, that amount is allocated equally among the three primary components to establish the award targets for stock options, performance-based restricted stock, and the long-term performance plan.
 
Stock Options.  Stock options provide value only when the price of the stock appreciates over the grant price. This helps ensure a strong link between our executives and our shareholders.
 
As discussed above, stock option grant guidelines are approved by the Compensation Committee in June following a review of competitive market data. These guidelines consist of an award target and a minimum and maximum award range that varies from 50% to 200% of the targeted amount.
 
At the October Compensation Committee meeting, the Chief Executive Officer presents the Compensation Committee with his recommendations for option awards to the named executive officers. Award recommendations may be at, above or below the target amounts based on individual performance. The Chief Executive Officer makes no recommendations to the Compensation Committee regarding his own award. Based on this information, and competitive market data provided by the independent consultant, the Compensation Committee determines and approves annual stock option awards to the named executive officers. During the Compensation Committee meeting’s executive session (during which neither the Chief Executive Officer nor any other member of management is present), the Compensation Committee approves an annual stock option award for the Chief Executive Officer. All stock option grants have an exercise price that is equal to the closing market price of our shares on the date of grant, have a term of ten years and generally vest in equal increments of 25% each year beginning one year after the date of grant. Annual stock option awards to named executive officers are granted on the first business day of our fiscal third quarter.
 
For fiscal year 2008, stock option awards were granted at target amounts to all of the named executive officers with the exception of Mr. Collins, who was not granted an award. Stock option awards accounted for approximately 31% of total compensation for our Chief Executive Officer and approximately 18% to 25% of total compensation for the remaining named executive officers, excluding Mr. Collins. Mr. Hawkins’ 2008 stock option award was granted after his promotion to Chief Executive Officer, slightly increasing the proportion of his total compensation represented by the award.
 
Performance-Based Restricted Stock.  Performance-based restricted stock is used to focus executives on a key financial goal, diluted earnings per share, align executive interests with shareholder interests, and aid in the attraction and retention of top talent.
 
As discussed above, performance-based restricted stock grant targets for named executive officers are approved by the Compensation Committee in June following a review of our peer companies. Actual grants are approved by the Compensation Committee during the October meeting and made at the beginning of our fiscal third quarter and are equal to the grant targets (unlike stock options, there is no grant range provided). All performance-based restricted stock grants are made in the number of shares equal to the target award amount divided by the closing market price of our shares on the date of grant, rounded up to the nearest whole share. Performance-based restricted stock awards “cliff vest” 100% three years after the date of grant if the applicable performance goal is achieved.
 
The performance goal that must be achieved for the fiscal year 2008 performance-based restricted stock grants to vest is cumulative diluted earnings per share growth of 9% each year over three years. Diluted earnings per share is an appropriate measure of overall financial well being. Performance is measured over the three consecutive fiscal years beginning with the fiscal year during which the grant is made. If the performance goal is achieved, the stock will cliff vest 100% on the third anniversary of the date of grant. If the performance goal is not met, none of the awards vest.


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For fiscal year 2008, performance-based restricted stock awards were delivered at target grant amounts to all of the named executive officers with the exception of Mr. Collins, who was not granted an award. Performance-based restricted stock awards accounted for approximately 31% of total compensation for Mr. Hawkins and approximately 18% to 24% of total compensation for the remaining named executive officers, excluding Mr. Collins. Mr. Hawkins’ 2008 performance-based restricted stock award was granted after his promotion to Chief Executive Officer, slightly increasing the proportion of his total compensation represented by the award.
 
Cash-Based Long-Term Performance Plan.  Our objective with our Long-Term Performance Plan (“LTPP”) is to maintain the alignment of our named executive officers’ goals with our long-term financial performance goals. We feel this approach focuses our executives on sustained achievement of financial targets that are critical to our long-term success.
 
As discussed above, our LTPP grant targets for named executive officers are approved annually by the Compensation Committee in June following a review of our peer groups. Grants are made annually for overlapping three-year performance periods. Calculations of final awards are reviewed by the Compensation Committee each April based on year-end forecasts and confirmed in June by the Chairman of the Compensation Committee just prior to payout. For the 2008-2010 phase of the LTPP, no incentives are earned unless two thresholds of earnings per share and return on net assets are met. Minimum payouts (at the threshold level of performance) are 20% of the target amount and maximum payouts are 180% of the target amount. The minimum, target and maximum payouts to our named executive officers can be found in the Grants of Plan-Based Awards table on page 41 of this proxy statement.
 
For the LTPP, performance measure targets are set at or close to the same level as our long-term financial objectives. Target payouts for the fiscal year 2008 to fiscal year 2010 period are based on performance targets with the following ranges: average growth in diluted earnings per share of 9% to 17% per year over three years, average revenue growth of 8% to 16% per year over three years, and average return on net assets of 12% to 20% over three years. The objectives are weighted 50%, 30%, and 20%, respectively. In setting our performance measure targets, we consider a number of items — the most important of which is our strategic plan, which takes into account our current product lines and our timeline for the approval and introduction of new products.
 
Once actual performance over the three-year period has been determined, the achievement percentage is calculated by interpolating actual performance relative to the performance range for each measure. These achievement percentages are then weighted based on the appropriate plan weightings and summed to arrive at an overall achievement percent for the plan year. Actual payouts are determined by multiplying the executive’s grant target by the plan’s overall achievement percent.
 
In fiscal year 2008, LTPP awards were granted at target amounts to all of the named executive officers, with the exception of Mr. Collins, who was not granted an award. LTPP awards accounted for approximately 11% of total compensation for our Chief Executive Officer and approximately 16% to 22% of total compensation for the remaining named executive officers, excluding Mr. Collins. Because Mr. Hawkins’ 2008 LTPP grant was made prior to his promotion to Chief Executive Officer, it is a relatively small portion of his total fiscal-year compensation.
 
Fiscal year 2008 was also the final year of the 3-year performance period for the fiscal year 2006 through fiscal year 2008 phase of the Performance Share Plan, the predecessor to the LTPP. This predecessor plan was similar in design to the current LTPP except the plan was denominated in performance shares and the payout was 50% in cash and 50% in Medtronic stock. Performance targets for the fiscal year 2006 to fiscal year 2008 plan were as follows: average growth in diluted earnings per share of 9% to 17% per year over three years, average revenue growth of 9% to 17% per year over three years, and average return on net assets of 12% to 20% over three years. The objectives were weighted 50%, 30%, and 20%, respectively.
 
The target value of the cash portion of the 2008 award is determined by multiplying the participant’s overall target award by 50%. The target number of shares is determined by taking 50% of the participant’s


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overall target award and dividing it by the average stock price for the 20-day period ending on the first day of the performance period, rounding up to the nearest whole share. For the 2006 to 2008 Performance Share Plan, the average 20-day stock price was $51.5745.
 
For the three-year performance period covered by the fiscal year 2008 Performance Share Plan, the Company’s actual average diluted earnings per share growth was 135% of target and the actual average return on net assets was 148% of target. Medtronic’s average revenue growth over the three-year performance period was below the minimum performance level, resulting in an overall achievement percentage of 97.23%.
 
The payout of the cash portion of the award is calculated as the product of the target cash award and the plan’s overall achievement percentage. Similarly, the number of plan shares awarded is calculated as the product of the number of target shares and the plan’s overall achievement percentage.
 
The table below provides an overview of the 2006 to 2008 Performance Share Plan, including award targets and cash and stock award payments is presented below:
 
                                                           
    Target Awards       Actual Awards        
    Overall
                        Shares
    Total Value of
    Total Award Value
 
Name
  Target     Cash     # of Shares       Cash     Issued     Award(1)     as % of Target(1)  
William A. Hawkins
  $ 698,250     $ 349,125       6,770       $ 339,454       6,583     $ 678,742       97.2  
Gary L. Ellis
    356,250       178,125       3,454         173,191       3,359       346,314       97.2  
Michael F. DeMane
    375,000       187,500       3,636         182,306       3,536       364,552       97.2  
Stephen H. Mahle
    429,000       214,500       4,160         208,558       4,045       417,038       97.2  
Jean-Luc Butel
    292,875       146,438       2,840         142,381       2,762       284,735       97.2  
Arthur D. Collins, Jr. 
    1,468,750       734,375       14,240         714,033       13,846       1,427,656       97.2  
                                                           
 
 
(1) Value of the share portion of award calculated based on Medtronic’s closing stock price on June 13, 2008, the date of share issuance.
 
The Stock Awards Column in the Summary Compensation Table includes the share-based compensation expense recognized in accordance with SFAS 123(R) in fiscal year 2008 as required under applicable SEC rules, rather that the amounts shown in the table above.
 
Time-Based Restricted Stock Units.  Grants of time-based restricted stock units are periodically made to named executive officers for strategic reasons such as attraction, promotion, succession planning, special recognition and retention and must be approved by the Compensation Committee. While vesting on these awards is generally three- to five-year cliff vesting, specific circumstances will dictate the terms of these grants. All time-based restricted stock unit grants are made at a price equal to the closing market price of our shares on the date of grant.
 
As a result of the Company’s ongoing reviews of its retention strategy for its top officers, management recommended to the Compensation Committee, and the Compensation Committee approved, the following grant of time-based restricted stock units:
 
                         
    Face Value of
    Number of
    Vesting
   
Name
  Grant     Units    
Provisions
 
Dividend Treatment
 
Jean-Luc Butel
  $ 2,000,013       37,786     50% on the third and 50% on the fifth anniversary of grant date   Receives dividend
credits
 
There were no other grants of time-based restricted stock or restricted stock units made to the named executive officers during fiscal year 2008.
 
Adjustments for Special Charges
 
Medtronic’s performance-based plans require that when special charges (such as certain litigation, restructuring charges and in-process research and development charges) significantly impact operating income, this impact will be reviewed and evaluated by the Compensation Committee and potentially


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excluded in determining financial performance. The plans define significant as an impact in the “general amount of 5% of the operating income in the year incurred.” In addition, the Company has developed a set of principles to guide treatment of acquisitions and non-recurring items. Specifically:
 
  •  Non-recurring charges from acquisitions and other non-recurring items are generally excluded from the calculation of performance regardless of whether the impact is greater than or less than 5% of operating income. This exclusion occurs when the effect is positive or negative.
 
  •  Operating results from acquisitions which impact operating income below the 5% threshold can be included in the calculation of performance at the discretion of the Compensation Committee.
 
This provision benefits shareholders by allowing management to make decisions of material strategic importance without undue concern for impact on compensation. When such adjustments have been applied, they have had both a positive and negative impact on past awards.
 
In accordance with Medtronic’s policy, for fiscal year 2008 the Compensation Committee excluded a number of items from Medtronic’s results for the purposes of calculating performance on short-term and long-term incentive programs and the Medtronic Savings and Investment Plan. These items included non-recurring charges related to restructuring, litigation, intangible asset impairments and in-process research and development as reported in the financial tables accompanying Medtronic’s press release detailing 2008 fiscal year-end earnings. The rationale for each adjustment is to encourage management to make strategic decisions that are in the best interests of the Company without undue concern for the impact of those decisions on their compensation. The following table reconciles the adjustments made in fiscal year 2008 and provides a brief description of each adjustment:
 
             
    Twelve Months Ended
     
    April 25, 2008    
Explanation of Non-Recurring Adjustments
 
Diluted EPS, as reported
  $ 1.95      
Special charges
    0.04     Impairment charges recognized on intangible assets that were associated with our benign prostatic hyperplasia product line acquired in fiscal year 2002
Restructuring charges
    0.03     Charges related to restructuring initiated in fiscal year 2007 in our Physio-Control, Cardiac Rhythm Disease Management and CardioVascular businesses as well as fiscal year 2008 related to a global realignment initiative
Certain litigation charges
    0.24     Litigation charges related to settlement of certain lawsuits relating to the Marquis line of implantable cardioverter defibrillators and a reserve associated with litigation with Cordis Corporation
In-process research & development charges
    0.34     In-process research & development charges representing the cumulative impact of several acquisitions, a milestone payment associated with a patent cross-licensing agreement and the purchase of certain intellectual property
Dilution due to Kyphon acquisition
    0.08     Pro-forma diluted impact on Medtronic’s earnings per share as a result of the Kyphon acquisition
             
Non-GAAP diluted EPS
  $ 2.68      
             
 
The Compensation Committee reviewed and approved the above adjustments consistent with Medtronic’s long-standing principles as outlined above. These adjustments resulted in a payout of 55.81% under the annual incentive plan (MIP) and 97.23% under the 2006-2008 Performance Share Plan.


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Other Benefits and Perquisites
 
Medtronic provides broad-based benefit plans to all of its employees, including the named executive officers. These include:
 
Qualified Retirement Plans.  Medtronic sponsors a number of tax qualified retirement plans for its employees. In the United States, Medtronic changed its retirement plans effective May 1, 2005 in order to provide then current employees and employees hired after that date a choice of retirement plans in which they wish to participate. Employees hired prior to May 1, 2005 had the option of continuing in a defined benefit pension plan (the “Medtronic Retirement Plan”) or elect to participate in one of the new plans. Employees hired after that date choose to participate in either of the new plans, the Personal Pension Account, or the Personal Investment Account. The Personal Pension Account is a cash balance component of the previous defined benefit pension plan and the Personal Investment Account is a component of the Company’s tax qualified Savings and Investment Plan (the Company’s 401(k) plan). Additional details regarding these pension plans are provided on page 47 of this proxy statement.
 
Supplemental Retirement Plans.  Medtronic offers a Supplemental Executive Retirement Plan benefit. This plan is a nonqualified plan which is designed to provide all eligible employees, including the named executive officers, with benefits which supplement those provided under certain of the tax qualified plans maintained by Medtronic. The plans are designed to restore benefits lost under the Personal Pension Account, Personal Investment Account or the Medtronic Retirement Plan due to covered compensation limits established by the Internal Revenue Code. The Plan also restores benefits for otherwise eligible compensation deferred into the Medtronic, Inc. Capital Accumulation Plan Deferral Program (the “Capital Accumulation Plan”). The Supplemental Executive Retirement Plan uses the same benefit formula as the qualified plan and includes the same elements of compensation included in the qualified plan in addition to compensation deferred into the Capital Accumulation Plan. As such, the plan provides employees with no greater benefit than they would have received under the qualified plan in which they participate were it not for the covered compensation limits and deferrals into our Capital Accumulation Plan.
 
Nonqualified Deferred Compensation Plan.  Medtronic provides all eligible employees, including our named executive officers, with a market competitive nonqualified deferred compensation program through the Capital Accumulation Plan. Our plan allows named executive officers to make voluntary deferrals from their base pay and incentive payments. There is no Company contribution other than a credit of gain/loss related to the investment allocation choices made by the participants.
 
Business Allowance and Perquisites.  With the exception of Mr. Butel, who was on an expatriate assignment, we provide our named executive officers with a market competitive business allowance rather than perquisites such as an automobile program, financial and tax planning, and country club memberships. With the exception of Mr. Butel, the annual business allowances provided to our named executive officers in fiscal year 2008 ranged from $24,000 to $40,000. In addition, we pay up to $2,000 for the cost of an annual executive physical that exceeds coverage provided by the executive’s medical plans. We offer these opportunities to aid in the attraction and retention of top talent. For named executive officers on expatriate assignments, rather than providing a business allowance, we pay for certain housing and related living costs. These amounts are sometimes a significant part of an expatriate’s total compensation. These amounts are included in the “All Other Compensation” column of our summary compensation table.
 
Change of Control Agreements
 
The principal reasons for providing compensation in a change of control situation are two-fold: (1) to protect the compensation already earned by executives and to ensure that they will be treated fairly in the event of a change of control; and (2) to help ensure the retention and dedicated attention of key executives critical to the ongoing operation of the Company. Our change of control provisions support these principles. We believe that the interests of shareholders will be best served if the interests of our executive officers are aligned with them, and providing change of control benefits should eliminate, or at least reduce, the


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reluctance of senior management to pursue potential mergers or transactions that may be in the best interest of shareholders.
 
For fiscal year 2008, our change of control agreements for our named executive officers provided the following:
 
     
Agreement Provision
 
Description
 
Severance Triggers
  Termination by Medtronic other than for Cause or Disability Termination by the Executive for Good Reason
Severance Benefits
  3X base and bonus
    Accrued salary, accrued vacation, annual and long-term incentives (pro-rata payout on incentives)
    Continuation of certain insurance, retirement and welfare plan benefits for a period of time not exceeding three years
    Full excise tax gross up, if applicable. However, amounts payable under the agreement may be reduced in certain circumstances if the reduction would avoid the imposition of the excise tax and therefore the need for a gross up.
 
Our change of control agreements are discussed in more detail in the “Potential Payments Upon Termination or Change of Control” section below. Other than the agreement with Mr. DeMane that is described on page 51 of this proxy statement, we do not have employment contracts other than those associated with a change of control.
 
Policies Regarding Equity Holding, Sale and Transfer of Awards and Incentive Compensation Forfeiture
 
Equity Holding.  The Compensation Committee has approved the implementation of stock retention requirements. The Chief Executive Officer must retain, for a period of three years, 75% of the net after-tax profit shares realized from option exercises and 75% of the net gain shares relating to share issuances resulting from grants made on or after April 26, 2003. Other named executive officers must retain, for a period of three years, 50% of the net after-tax profit shares realized from option exercises or 50% of the net gain shares relating to share issuances resulting from grants made on or after April 26, 2003. For stock options, net after-tax profit shares are those shares remaining after payment of the option’s exercise price and applicable taxes. For share issuances, net gain shares are those shares remaining after payment of income taxes. Shares retained may be sold after three years. The retention requirements were established at a higher level for the Chief Executive Officer as a reflection of the increased scope of decision-making inherent in this position and to maintain increased alignment with long-term Company performance. In the case of retirement or termination, the shares may be sold after the shorter of the remaining retention period or one year following retirement/termination.
 
Modified stock retention guidelines apply to shares awarded to Mr. DeMane in fiscal year 2007 because he was a Swiss-based executive at this time. The modified guidelines allow Mr. DeMane to satisfy holding requirements by demonstrating ownership of an equivalent number of shares rather than holding shares from specific awards, which due to Swiss tax regulations would result in severe tax consequences.
 
As of April 25, 2008, all executive officers were in compliance with the stock retention requirements.
 
Sale and Transfer of Awards.  All stock option, restricted stock, restricted stock unit and performance-based restricted stock/restricted stock unit awards are granted under the Medtronic, Inc., 2003 Long-Term Incentive Plan. This plan specifically prohibits the sale, assignment and transfer of awards granted under the plan with limited exceptions such as the death of the award recipient. In addition, the Compensation Committee of the Board of Directors may allow an award holder to assign or transfer an award. Medtronic does have outstanding stock option awards granted under prior long-term incentive plans whose terms did allow awards to be transferred, however these plans are no longer available for new grants.


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Incentive Compensation Forfeiture.  Medtronic has a comprehensive Incentive Compensation Forfeiture Policy, which is designed to recoup improper payments or gains paid to executive officers. If the Board determines that any executive officer has received an improper payment or gain, which is an incentive payment or grant paid or awarded to the executive officer due to misconduct, the executive officer must return the improper payment or gain to the extent it would not have been paid or awarded had the misconduct had not occurred, including interest on any cash payments. “Misconduct” means any material violation of the Medtronic, Inc. Code of Conduct or other fraudulent or illegal activity for which an executive officer is personally responsible, as determined by the Board. All executive officers are required to agree to this policy in writing.
 
Tax and Accounting Implications
 
The Compensation Committee structures all compensation to be compliant with the $1 million deduction limitation of Section 162(m) of the Internal Revenue Code, which limits the amount of remuneration that Medtronic may deduct for our Chief Executive Officer and the three other highest-paid named executive officers, unless the Compensation Committee determines that compliance in a specific situation would not be in the best interests of Medtronic and its shareholders. In addition, the Compensation Committee structures all deferred compensation within the meaning of Section 409A of the Internal Revenue Code such that all named executive officers are not subject to the excise tax under Section 409A.
 
In light of the adoption by Medtronic of SFAS No. 123(R), Medtronic realigned its equity grant practices from an over reliance on stock options to a more balanced program. Consequently, the Compensation Committee now grants fewer stock options and more performance-based awards in the form of performance-based restricted stock and awards under the LTPP, which focuses our named executive officers not only on the performance of the stock, but also on specific performance measures that are critical to the long-term success of the business.
 
Medtronic Stock Grant Policy and Practice
 
All employee stock awards, which include restricted stock grants, restricted stock units and stock options, are approved either by the Compensation Committee of the Board or the internal stock committee (the “ISC”). In order to mitigate the effect on share dilution resulting from grants made under our stock-based compensation programs and to take advantage of favorable market conditions, we periodically repurchase shares of Medtronic stock. The Compensation Committee approves all stock awards to its executive officers as well as all awards which cannot be delegated to the ISC due to the size of the award. The ISC, which includes the Chief Executive Officer and the Senior Vice President, Chief Talent Officer, approves all other stock awards.
 
It is Medtronic’s policy to make stock and option grants on the first business day of each fiscal quarter for all grants approved by the Compensation Committee or the ISC during the preceding quarter. This policy was effective beginning in fiscal year 2007. Prior to adopting the current policy, stock grants were effective on the date of approval or, in certain cases, on a future effective date that was specifically identified in the resolutions at the time of approval.
 
The fair market value or exercise price on all Medtronic stock awards is established in the Medtronic, Inc. 2003 Long-Term Incentive Plan as the closing sale price of shares on the New York Stock Exchange on the date of grant. Medtronic has priced stock awards consistent with the plan and no backdating of stock options has occurred.


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COMPENSATION COMMITTEE REPORT
 
The Compensation Committee of the Company has reviewed and discussed the section of this proxy statement entitled “Compensation Discussion and Analysis” required by Item 402(b) of Regulation S-K with management. Based on such review and discussions, the Compensation Committee recommended to the Board that the section entitled “Compensation Discussion and Analysis” be included in this proxy statement.
 
COMPENSATION COMMITTEE:
 
     
Richard H. Anderson, Chair
   
Victor J. Dzau, M.D. 
  Kendall J. Powell
James T. Lenehan
  Jack W. Schuler


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EXECUTIVE COMPENSATION
 
SUMMARY COMPENSATION TABLE
 
The following table summarizes all compensation for each of the last two fiscal years awarded to, earned by or paid to the Company’s Chief Executive Officer, Chief Financial Officer and three other most highly compensated executive officers during fiscal year 2008, and Arthur D. Collins, Jr., who completed his tenure as Chief Executive Officer at the beginning of fiscal year 2008 (collectively, the “named executive officers”). You should refer to the section entitled “Compensation Discussion and Analysis” beginning on page 22 of this proxy statement to understand the elements used in setting the compensation for our named executive officers. A narrative description of the material factors necessary to understand the information in the table is provided below.
 
                                                                 
                                  Change in
             
                                  Pension
             
                                  Value and
             
                                  Nonqualified
             
                            Non-Equity
    Deferred
             
Name and Principal
  Fiscal
          Stock
    Option
    Incentive Plan
    Compensation
    All Other
       
Position(1)
  Year     Salary(2)     Awards     Awards     Compensation     Earnings     Compensation     Total  
 
Arthur D. Collins, Jr. 
    2008     $ 1,092,000     $ 3,622,613     $ 1,663,196     $ 987,656     $ 202,695     $ 23,414     $ 7,591,574  
Chairman
    2007       1,275,000       2,322,420       5,985,461       1,020,000       849,071       48,678       11,500,630  
William A. Hawkins
    2008       996,000       1,465,793       1,053,074       971,749       116,260       46,010       4,648,886  
President and Chief
    2007       775,000       1,726,476       1,261,157       490,963       119,907       38,809       4,412,312  
Executive Officer
                                                               
Gary L. Ellis
    2008       600,000       693,968       435,190       424,336       73,011       32,910       2,259,415  
Senior Vice President
    2007       525,000       462,861       534,401       295,313       167,499       33,184       2,018,258  
and Chief Financial Officer
                                                               
Michael F. DeMane(3)
    2008       671,000       1,062,106       629,486       518,232       57,813       304,104       3,242,741  
      2007       530,000       1,680,638       878,660       529,470       92,371       812,027       4,523,166  
Stephen H. Mahle
    2008       620,000       1,054,664       1,191,902       485,376       72,483       33,935       3,458,360  
Executive Vice
    2007       595,000       880,465       1,645,264       219,793       562,898       33,290       3,936,710  
President of Healthcare Policy and Regulatory
                                                               
Jean-Luc Butel
    2008       440,000       869,868       354,619       384,038       37,855       1,060,069       3,146,449  
Senior Vice President and President, International
                                                               
 
 
(1) At the 2007 Annual Meeting, Mr. Collins resigned as Chief Executive Officer of Medtronic, Mr. Hawkins was named President and Chief Executive Officer of Medtronic and Mr. DeMane was named Chief Operating Officer of Medtronic. Mr. Butel was not a named executive officer during 2007.
 
(2) At the beginning of fiscal year 2008, Mr. Collins’ base pay in his role as Chief Executive Officer was $1,275,000. Upon stepping down as Chief Executive Officer and assuming the position of Chairman of the Board of Directors, Mr. Collins’ base salary was reduced by 22% to $1,000,000. The fiscal year 2008 salaries for Mr. Hawkins and Mr. DeMane reflect mid-year promotions to Chief Executive Officer and Chief Operation Officer, respectively. Mr. Hawkins received an annual salary increase of 4.0% at the beginning of fiscal year 2008, bringing his salary to $806,000. Upon his promotion to Chief Executive Officer, Mr. Hawkins’ salary was increased to $1,100,000. Mr. DeMane received an annual salary increase of 5.1% at the beginning of fiscal year 2008, bringing his salary to $557,000. Upon his promotion to Chief Operating Officer, Mr. DeMane’s salary was increased to $725,000.
 
(3) Mr. DeMane resigned as Senior Vice President and Chief Operating Officer effective April 30, 2008, but is currently a Medtronic employee.
 
Salary.  The salary column represents the base salary earned by the named executive officer during fiscal year 2008. This column includes any amounts that the officer may have deferred under the Capital Accumulation Plan, which is included in the nonqualified deferred compensation table on page 48 of this


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proxy statement. Each of the named executive officers also contributed a portion of his salary to the Medtronic, Inc. Savings and Investment Plan.
 
Stock Awards.  The stock awards column represents the dollar amount of share-based compensation expense recognized in fiscal year 2008 for restricted stock and restricted stock units (including performance-based restricted stock and performance-based restricted stock units) (collectively, the “restricted stock awards”) granted to each of the named executive officers and share-based compensation recognized in fiscal year 2008 relating to the equity-based portions of our LTPP (formerly our Performance Share Plan), which includes long-term incentive compensation for the fiscal year 2006 to fiscal year 2008 and fiscal year 2007 to fiscal year 2009 periods. This column also includes compensation expense recognized in fiscal year 2008 for financial statement reporting purposes in accordance with SFAS No. 123(R) relating to the amendment of a restricted stock agreement originally awarded to Mr. Collins on October 30, 2006. Under the terms of the original award, Mr. Collins was granted 184,805 shares of performance-based restricted stock under our 2003 Long-Term Incentive Plan. The restrictions on the award lapse on the third anniversary of the grant date if Medtronic’s cumulative diluted earnings per share growth of 9% each year over three years is achieved. Mr. Collins’ October 2005 and 2004 grants provide that in the circumstance of death, disability or retirement, the restrictions lapse in their entirety. To clarify its intention that the October 2006 grant was to have been on terms consistent with the terms of the prior grants, in October 2007 the Compensation Committee amended the terms of the October 2006 grant to provide that in the circumstance of death, disability or retirement, the restrictions lapse in their entirety provided the performance goal is also achieved at the end of the three-year period. The expense recognized for restricted stock awards is equal to the grant date fair value, which is equal to the closing stock price on the date of grant and expensed over the vesting period.
 
Option Awards.  The option awards column represents the dollar amount of share-based compensation expense recognized in fiscal year 2008 for stock option awards granted to each of the named executive officers for financial statement reporting purposes in accordance with SFAS No. 123(R). The following table provides the fair value of options granted to the named executive officers for expense recognized in fiscal years 2007 and/or 2008 and the related assumptions used in the Black-Scholes model:
 
                                                         
    Stock Option Grant Date  
    October 24,
    August 28,
    October 23,
    October 21,
    October 19,
    October 30,
    October 29,
 
    2002     2003     2003     2004     2005     2006     2007  
 
Fair value of options granted
  $ 12.27     $ 11.87     $ 11.87     $ 11.99     $ 16.35     $ 12.25     $ 13.80  
Assumption used:
                                                       
Risk free rate(1)
    2.73 %     3.27 %     3.14 %     3.28 %     4.32 %     4.63 %     4.11 %
Expected volatility(2)
    26.3 %     23.9 %     23.9 %     21.8 %     25.0 %     20.0 %     22.96 %
Expected life(3)
    5.00 yrs       5.00 yrs       5.00 yrs       5.00 yrs       5.17 yrs       5.17 yrs       6.50 yrs  
Dividend yield(4)
    0.56 %     0.59 %     0.63 %     0.67 %     0.70 %     0.90 %     1.05 %
 
 
(1) The risk-free rate is based on the grant date yield of a zero-coupon U.S. Treasury bond whose maturity period equals or approximates the option’s expected term.
 
(2) Beginning in the third quarter of fiscal year 2007, the expected volatility is based on a blend of historical volatility and an implied volatility of the Company’s common stock. Implied volatility is based on market traded options of the Company’s common stock. Prior to the third quarter of fiscal year 2007, the Company calculated the expected volatility based exclusively on the historical volatility.
 
(3) The Company analyzes historical employee stock option exercise and termination data to estimate the expected life assumption. Beginning in the third quarter of fiscal year 2008, the Company began to calculate the expected life assumption using the midpoint scenario, which combines historical exercise data with hypothetical exercise data, as the Company believes this data currently represents the best estimate of the expected life of a new employee option. Prior to the third quarter of fiscal year 2008, the Company calculated the expected life based solely on historical data.
 
(4) The dividend yield rate is calculated by dividing the Company’s annual dividend, based on the most recent quarterly dividend rate, by the closing stock price on the grant date.


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Non-Equity Incentive Plan Compensation.  This column reflects the full Medtronic annual incentive plan cash payment earned by the named executive officers during fiscal year 2008 and payable in June 2008 and the cash portion of the 2006-2008 Performance Share Plan payable in June 2008. This column includes any amounts that the officer may have deferred under the Capital Accumulation Plan. These deferrals are not included in the nonqualified deferred compensation table on page 48 of this proxy statement because the payment was made after the end of fiscal year 2008. The table below reflects the compensation received by the named executive officer under each plan.
 
                 
    Executive Medtronic
    2006-2008 Performance
 
Name
  Incentive Plan     Share Plan  
 
Arthur D. Collins, Jr. 
  $  273,623     $  714,033  
William A. Hawkins
    632,295       339,454  
Gary L. Ellis
    251,145       173,191  
Michael F. DeMane
    335,926       182,306  
Stephen H. Mahle
    276,818       208,558  
Jean-Luc Butel
    241,657       142,381  
 
Change in Pension Value and Nonqualified Deferred Compensation Earnings.  This column includes the estimated aggregate increase in the accrued pension benefit under Medtronic’s defined benefit pension plan. The change in the present value of the accrued value is impacted by variables such as additional years of service, age and the discount rate used to calculate the present value of the change. The Company changed its discount rate in valuing pension liabilities from 6.0% in fiscal year 2007 to 6.75% for the fiscal year 2008 plan year. The higher discount rate used to determine the change in pension value contributed to a significant decrease in the change in pension value from fiscal year 2007 to fiscal year 2008 in comparison with the change in pension value from fiscal year 2006 to fiscal year 2007. Assumptions are described in Note 13 to our consolidated financial statements in our annual report for fiscal year 2008 accompanying this proxy statement.
 
Also included for fiscal year 2007 is $1,473 in above-market earnings on Mr. Mahle’s deferred compensation earnings.
 
All Other Compensation.  The all other compensation column includes the following:
 
                                         
                Registrant
             
                Contributions to
             
          Perquisites and
    Defined
             
    Fiscal
    Other Personal
    Contribution
    Expatriate
       
Name
  Year     Benefits(1)     Plans(2)     Expenses(3)     Total  
 
Arthur D. Collins, Jr. 
    2008     $  14,504     $ 8,910     $     $ 23,414  
      2007       40,098       8,580             48,678  
William A. Hawkins
    2008       37,100       8,910             46,010  
      2007       30,229       8,580             38,809  
Gary L. Ellis
    2008       24,000       8,910             32,910  
      2007       24,604       8,580             33,184  
Michael F. DeMane
    2008       24,000       8,910       271,194       304,104  
      2007       97       8,580       803,350       812,027  
Stephen H. Mahle
    2008       25,025       8,910             33,935  
      2007       24,710       8,580             33,290  
Jean-Luc Butel
    2008             8,910       1,051,159       1,060,069  
 
 
(1) The aggregate value of perquisites and other personal benefits for Mr. Collins in fiscal year 2008 was $14,504. This amount reflects a business allowance, paid in lieu of perquisites, of $40,000, which was prorated to reflect the time in fiscal year 2008 in which Mr. Collins served as the Chief Executive Officer. The aggregate value of perquisites and other personal benefits for Mr. Hawkins was $37,100, which reflects a business allowance paid in lieu of perquisites as well as a gift received upon his promotion to Chief Executive Officer. The aggregate value of perquisites and other personal benefits for Mr. Ellis and Mr. DeMane was $24,000, which reflects a business allowance paid in lieu of perquisites. The aggregate value of perquisites and other personal benefits for Mr. Mahle was $25,025, which reflects a


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business allowance paid in lieu of perquisites, as well as reimbursement for an annual physical examination. Amounts for fiscal 2007 were reported in the Company’s 2007 Proxy Statement.
 
(2) This amount reflects the contribution by Medtronic to match named executive officer contributions to their Medtronic 401(k) supplemental retirement plan. Medtronic matches employee contributions of up to 6% of eligible compensation. The plan makes a minimum contribution of $.50 and a maximum of $1.50, with any contribution over the minimum determined based on earnings per share performance target levels. The fiscal year 2008 match of $.66 was based on achievement of an adjusted diluted earnings per share of $2.68.
 
(3) For fiscal year 2008, of the $271,194 relating to Mr. DeMane’s expatriate assignment in Europe, $44,989 was in the form of home purchase assistance and $51,094 was for shipping expenses related to his repatriation. Additional categories of expatriation expense are a cost of living differential, an automobile allowance, family educational expense, host housing allowance, payments for storage, repatriation expense and miscellaneous assignment-related expenses. All incremental costs were calculated by reference to the actual amount paid by Medtronic for fiscal year 2008. Medtronic paid Mr. DeMane portions of his compensation in Swiss Francs, which was converted based on published market exchange rates as determined on a quarterly basis. For fiscal year 2008, of the $1,051,159 relating to Mr. Butel’s expatriate assignment in Japan, $475,108 was for foreign-income tax payments, $247,648 was in the form of a host housing allowance and $123,444 was in the form of an automobile allowance. Additional categories of expatriation expense are a cost of living differential, payments for home leave and a family allowance, family educational expense, financial planning payments and miscellaneous assignment-related expenses. Amounts for fiscal year 2007 for Mr. DeMane were reported in the Company’s 2007 Proxy Statement. Medtronic pays Mr. Butel portions of his compensation in Japanese Yen, which is converted based on published market exchange rates as determined on a quarterly basis.


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GRANTS OF PLAN-BASED AWARDS
 
The following table summarizes all plan-based award grants to each of the named executive officers during fiscal year 2008. You should refer to the Compensation Discussion and Analysis sections entitled “Annual Performance-Based Incentives” on page 26 and “Long-Term Compensation” beginning on page 28 to understand how plan-based awards are determined. A narrative description of the material factors necessary to understand the information in the table is provided below.
 
                             
        Estimated Future Payouts
 
        Under Non-Equity
 
    Award
  Incentive Plan Awards  
Name
  Type   Threshold     Target     Maximum  
 
Arthur D. Collins, Jr.(1)
  MIP   $ 245,138     $ 490,277     $ 1,078,609  
    LTPP                  
William A. Hawkins(2)
  MIP     566,471       1,132,943       2,492,474  
    LTPP     180,000       900,000       1,620,000  
Gary L. Ellis
  MIP     225,000       450,000       990,000  
    LTPP     110,000       550,000       990,000  
Michael F. DeMane(2)
  MIP     300,955       601,910       1,324,203  
    LTPP     120,000       600,000       1,080,000  
Stephen H. Mahle
  MIP     248,000       496,000       1,091,200  
    LTPP     150,000       750,000       1,350,000  
Jean-Luc Butel
  MIP     154,000       308,000       683,760  
    LTPP     60,000       300,000       540,000  
 
 
(1) Reflects pro-rata MIP performance target based on the time in fiscal year 2008 in which Mr. Collins served as the Chief Executive Officer.
 
(2) Reflects pro-rata MIP performance target due to mid-year promotion.
 
                                                             
                    Estimated
    All Other
    All Other
             
                    Future
    Stock
    Option
    Exercise
       
                    Payouts
    Awards:
    Awards:
    or Base
    Grant Date
 
                    Under Equity
    Number of
    Number of
    Price of
    Fair Value
 
                    Incentive Plan
    Shares of
    Securities
    Option
    of Stock
 
    Award
  Grant
    Approve
    Awards
    Stock or
    Underlying
    Awards
    and Option
 
Name
  Type   Date     Date     Target (#)     Units (#)     Options (#)     ($/Sh)     Awards  
 
Arthur D. Collins, Jr. 
  OPT                                          
    PBRSA                                          
William A. Hawkins
  OPT     10/29/07       10/17/07                   188,403       47.77       2,599,961  
    PBRSA     10/29/07       10/17/07       52,335                         2,500,043  
Gary L. Ellis
  OPT     10/29/07       10/17/07                   41,868       47.77       577,778  
    PBRSA     10/29/07       10/17/07       11,514                         550,024  
Michael F. DeMane
  OPT     10/29/07       10/17/07                   69,082       47.77       953,332  
    PBRSA     10/29/07       10/17/07       18,841                         900,035  
Stephen H. Mahle
  OPT     10/29/07       10/17/07                   56,521       47.77       779,990  
    PBRSA     10/29/07       10/17/07       15,701                         750,037  
Jean-Luc Butel
  OPT     10/29/07       10/17/07                   23,028       47.77       317,786  
    PBRSA     10/29/07       10/17/07       6,281                         300,043  
    RSU     04/30/07       04/18/07             37,786                   2,000,013  
 
MIP = Annual performance-based plan award granted under the Medtronic, Inc. Executive Incentive Plan
LTPP = Long-term performance plan award granted under the Medtronic, Inc. 2003 Long-Term Incentive Plan
OPT = Nonqualified stock options granted under the Medtronic, Inc. 2003 Long-Term Incentive Plan
PBRSA = Performance-based restricted stock granted under the Medtronic, Inc. 2003 Long-Term Incentive Plan
RSU = Restricted stock units granted under the Medtronic, Inc. 2003 Long-Term Incentive Plan


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Estimated Future Payouts Under Non-Equity Incentive Plan Awards.  Amounts in these columns represent future cash payments under the 2007-2009 LTPP and cash payments made in June 2008 under the annual performance-based plan for fiscal year 2008 at threshold, target and maximum performance. The LTPP provides for annual grants that are earned over a three-year period. Upon meeting a minimum performance threshold, awards under the LTPP can range from 20% to 180% of the original grant based on company performance relative to the following metrics: three-year cumulative diluted earnings per share, three-year average annual revenue growth and three-year average after-tax return on net assets. Similarly, the MIP provides for annual grants based upon meeting a minimum performance threshold. Awards under the MIP can range from 50% to 225% of the original determination based on both company performance relative to diluted earnings per share, average annual revenue growth and average after-tax return on net assets in fiscal year 2008. The maximum award under the Plan is $3,000,000.
 
Estimated Future Payouts Under Equity Incentive Plan Awards.  Amounts in this column represent grants of performance-based restricted stock, all of which have an October 29, 2007 grant date. Performance-based restricted stock grants vest 100% on the third anniversary of the date of grant assuming that Medtronic achieves a minimum three-year cumulative diluted earnings per share threshold.
 
All Other Stock Awards.  Amounts in the all other stock awards column represents grants of restricted stock or restricted stock units.
 
All Other Option Awards/Exercise or Base Price of Option Awards.  The exercise or base price of all option awards is the closing market price of Medtronic common stock on the date of grant. Option awards vest 25% on each anniversary of the date of grant over a four year period.
 
Grant Date Fair Value of Stock and Option Awards.  This column represents the grant date fair value of each equity award granted in fiscal year 2008 computed in accordance with SFAS No. 123(R). For a discussion of the assumptions used in calculating the amount recognized for stock options granted on October 29, 2007, see page 38 of this Proxy Statement. The expense recognized for restricted stock awards is equal to the grant date fair value, which is equal to the closing stock price on the date of grant and is expensed over the vesting period.


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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
 
The table below reflects all outstanding equity awards made to each of the named executive officers that are outstanding at the end of fiscal year 2008. The market or payout value of unearned shares, units or other rights that have not vested equals $49.42, which was the closing price of Medtronic’s common stock on the New York Stock Exchange on April 25, 2008, and for performance-based restricted stock and for Performance Share Plan awards presumes that the target performance goals are met.
 
                                                                                 
                                  Stock Awards  
                                              Equity Incentive
 
                                              Plan Awards:
 
    Option Awards                 Unearned Shares,
 
          Number of
                            Units or Other
 
          Securities
                                  Rights That Have
 
          Underlying
                                  Not Vested  
          Unexercised
    Option
                Shares or Units of Stock That Have Not Vested           Market
 
          Options (#)     Exercise
    Option
                Market
          or Payout
 
    Option
    Exer-
    Unexer-
    Price
    Expiration
    Grant
    Number
    Value
    Number
    Value
 
Name
  Grant Date     cisable     cisable     ($)     Date     Date     (#)     ($)     (#)     ($)  
 
Arthur D.
Collins, Jr. 
    10/28/1998       70,520               31.91       10/28/2008       10/23/2003       43,469       2,148,238                  
      04/28/1999       10,656               37.59       04/28/2009       10/21/2004       40,000       1,976,800                  
      05/01/1999       99,204               35.97       05/01/2009       10/19/2005       35,249       1,742,006                  
      10/27/1999       120,755               33.13       10/27/2009       10/30/2006                       51,335       2,536,976  
      04/30/2000       100,658               51.94       04/30/2010                                          
      10/26/2000       116,223               51.63       10/26/2010                                          
      04/27/2001       61,589               44.25       04/27/2011                                          
      10/25/2001       298,851               43.50       10/25/2011                                          
      04/26/2002       27,821               43.81       04/26/2012                                          
      10/24/2002       289,726               44.87       10/24/2012                                          
      04/25/2003       34,098               48.08       04/25/2013                                          
      10/23/2003       282,548               46.01       10/23/2013                                          
      04/30/2004       42,927               50.46       04/30/2014                                          
      10/21/2004       195,000       65,000       50.00       10/21/2014                                          
      10/19/2005       114,558       114,558       56.74       10/19/2015                                          
      10/30/2006       16,201       138,604       48.70       10/30/2016                                          
William A. Hawkins
    01/07/2002       82,305               48.60       01/07/2012       05/15/2006       40,775       2,015,101                  
      01/07/2002       36,214               48.60       01/07/2012       10/30/2006                       18,481       913,331  
      10/24/2002       49,031               44.87       10/24/2012       10/29/2007                       52,335       2,586,396  
      10/23/2003       65,204               46.01       10/23/2013                                          
      10/21/2004       75,000       25,000       50.00       10/21/2014                                          
      04/29/2005       7,591               52.70       04/29/2015                                          
      04/29/2005       5,462               52.70       04/29/2015                                          
      10/19/2005       37,892       37,893       56.74       10/19/2015                                          
      10/30/2006       16,940       50,822       48.70       10/30/2016                                          
      10/29/2007               188,403       47.77       10/29/2017                                          
Gary L. Ellis
    10/28/1998       12,538               31.91       10/28/2008       6/24/2005       9,485       468,749                  
      4/28/1999       2,618               37.59       4/28/2009       7/31/2006       19,795       978,269                  
      5/1/1999       13,328               35.97       5/1/2009       10/30/2006                       11,294       558,149  
      10/27/1999       19,623               33.13       10/27/2009       10/29/2007                       11,514       569,022  
      4/30/2000       23,590               51.94       4/30/2010                                          
      10/26/2000       17,434               51.63       10/26/2010                                          
      4/27/2001       15,579               44.25       4/27/2011                                          
      10/25/2001       32,184               43.50       10/25/2011                                          
      4/26/2002       5,257               43.81       4/26/2012                                          
      10/24/2002       33,430               44.87       10/24/2012                                          
      4/25/2003       7,189               48.08       4/25/2013                                          
      10/23/2003       32,602               46.01       10/23/2013                                          
      4/30/2004       4,246               50.46       4/30/2014                                          
      10/21/2004       22,500       7,500       50.00       10/21/2014                                          


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                                  Stock Awards  
                                              Equity Incentive
 
                                              Plan Awards:
 
    Option Awards                 Unearned Shares,
 
          Number of
                            Units or Other
 
          Securities
                                  Rights That Have
 
          Underlying
                                  Not Vested  
          Unexercised
    Option
                Shares or Units of Stock That Have Not Vested           Market
 
          Options (#)     Exercise
    Option
                Market
          or Payout
 
    Option
    Exer-
    Unexer-
    Price
    Expiration
    Grant
    Number
    Value
    Number
    Value
 
Name
  Grant Date     cisable     cisable     ($)     Date     Date     (#)     ($)     (#)     ($)  
 
      10/19/2005       18,505       18,506       56.74       10/19/2015                                          
      10/30/2006       10,267       30,801       48.70       10/30/2016                                          
      10/29/2007               41,868       47.77       10/29/2017                                          
Michael F. DeMane
    03/17/2000       5,694               52.69       03/17/2010       05/15/2006       40,775       2,015,101                  
      08/09/2000       8,889               56.25       08/09/2010       10/30/2006                       12,321       608,904  
      10/26/2000       19,371               51.63       10/26/2010       10/29/2007                       18,841       931,122  
      10/25/2001       32,184               43.50       10/25/2011                                          
      10/24/2002       49,031               44.87       10/24/2012                                          
      10/23/2003       65,204               46.01       10/23/2013                                          
      10/21/2004       45,000       15,000       50.00       10/21/2014                                          
      10/19/2005       23,793       23,793       56.74       10/19/2015                                          
      10/30/2006       11,293       33,882       48.70       10/30/2016                                          
      10/29/2007               69,082       47.77       10/29/2017                                          
Stephen H. Mahle
    05/01/1998       3,774               26.50       05/01/2008       10/30/2006                       15,401       761,117  
      05/01/1998       31,062               26.50       05/01/2008       10/29/2007                       15,701       775,943  
      10/28/1998       20,374               31.91       10/28/2008                                          
      04/28/1999       4,496               37.59       04/28/2009                                          
      05/01/1999       39,826               35.97       05/01/2009                                          
      10/27/1999       51,321               33.13       10/27/2009                                          
      04/30/2000       34,581               51.94       04/30/2010                                          
      10/26/2000       48,427               51.63       10/26/2010                                          
      04/27/2001       27,226               44.25       04/27/2011                                          
      06/28/2001       31,381               47.80       06/28/2011                                          
      10/25/2001       80,460               43.50       10/25/2011                                          
      04/26/2002       10,841               43.81       04/26/2012                                          
      10/24/2002       78,004               44.87       10/24/2012                                          
      04/25/2003       14,054               48.08       04/25/2013                                          
      10/23/2003       76,071               46.01       10/23/2013                                          
      04/30/2004       8,144               50.46       04/30/2014                                          
      10/21/2004       52,500       17,500       50.00       10/21/2014                                          
      10/19/2005       26,436       26,437       56.74       10/19/2015                                          
      10/30/2006       13,860       41,582       48.70       10/30/2016                                          
      10/29/2007               56,521       47.77       10/29/2017                                          
Jean-Luc Butel
    8/28/2003       40,445               49.45       8/28/2003       8/28/2003       15,167       749,553                  
      10/23/2003       26,082               46.01       10/23/2013       10/30/2006                       6,161       304,477  
      4/30/2004       3,964               50.46       4/30/2014       4/30/2007                       37,786       1,867,384  
      10/21/2004       19,500       6,500       50.00       10/21/2014       10/29/2007                       6,281       310,407  
      4/29/2005       4,555               52.70       4/29/2015                                          
      10/19/2005       16,743       16,744       56.74       10/19/2015                                          
      10/30/2006       5,647       16,941       48.70       10/30/2016                                          
      10/29/2007               23,028       47.77       10/29/2017                                          

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The table below shows the vesting schedule for all unexercisable options. All options vest on the anniversary of the grant date in the year indicated.
 
                                         
          Vesting Schedule for Unexercisable Options  
Name
  Grant Date     2008     2009     2010     2011  
 
Arthur D. Collins, Jr. 
    10/21/2004       65,000                          
      10/19/2005       57,279       57,279                  
      10/30/2006       46,201       46,201       46,202          
William A. Hawkins
    10/21/2004       25,000                          
      10/19/2005       18,946       18,947                  
      10/30/2006       16,941       16,940       16,941          
      10/29/2007       47,100       47,101       47,101       47,101  
Gary L. Ellis
    10/21/2004       7,500                          
      10/19/2005       9,253       9,253                  
      10/30/2006       10,267       10,267       10,267          
      10/29/2007       10,467       10,467       10,467       10,467  
Michael F. DeMane
    10/21/2004       15,000                          
      10/19/2005       11,896       11,897                  
      10/30/2006       11,294       11,294       11,294          
      10/29/2007       17,270       17,271       17,270       17,271  
Stephen H. Mahle
    10/21/2004       17,500                          
      10/19/2005       13,218       13,219                  
      10/30/2006       13,861       13,860       13,861          
      10/29/2007       14,130       14,130       14,130       14,131  
Jean-Luc Butel
    10/21/2004       6,500                          
      10/19/2005       8,372       8,372                  
      10/30/2006       5,647       5,647       5,647          
      10/29/2007       5,757       5,757       5,757       5,757  
 
The amounts shown in the column entitled “Shares or Units of Stock That Have Not Vested” of the Outstanding Equity Awards at Fiscal Year-End table are restricted stock and restricted stock units that have not yet vested. The table below shows the vesting schedules for all outstanding restricted stock and restricted stock unit grants.
 
                                                 
          Vesting Schedule for Unvested
 
          Restricted Stock and RSUs  
Name
  Grant Date     2008     2009     2010     2011     2012  
 
Arthur D. Collins, Jr. (1)
    10/23/2003       43,469                                  
      10/21/2004               40,000                          
      10/19/2005                       35,249                  
      10/30/2006               51,335                          
William A. Hawkins
    05/15/2006               40,775                          
      10/30/2006               18,481                          
      10/29/2007                       52,335                  
Gary L. Ellis
    06/24/2005               9,485                          
      07/31/2006                       19,795                  
      10/30/2006               11,294                          
      10/29/2007                       11,514                  
Michael F. DeMane
    05/15/2006               40,775                          
      10/30/2006               12,321                          
      10/29/2007                       18,841                  
Stephen H. Mahle
    10/30/2006               15,401                          
      10/29/2007                       15,701                  
Jean-Luc Butel
    08/28/2003       15,167                                  
      10/30/2006               6,161                          
      04/30/2007                       18,893               18,893  
      10/29/2007                       6,281                  
 
 
(1) Mr. Collins’ 2003, 2004, 2005 and 2006 grants vest immediately in the event of death, disability or retirement.


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The amounts shown in the column entitled “Equity Incentive Plan Awards: Unearned Shares, Units or Other Rights That Have Not Vested” of the Outstanding Equity Awards at Fiscal Year End table that correspond to an October 30, 2006 and October 29, 2007 grant date reflect performance-based restricted stock awards that vest on the third anniversary of the date of grant. The amount that corresponds to an April 30, 2007 grant date reflects a time based restricted stock unit award that vests 50% on the third anniversary and 50% on the fifth anniversary of the grant date.
 
Messrs. Collins, Hawkins, DeMane and Mahle also own 355,037, 83,065, 61,249 and 62,941 restricted/deferred stock units, respectively, that are fully vested and will be distributed following their retirement.
 
OPTION EXERCISES AND STOCK VESTED
 
The table below includes information related to options exercised by each of the named executive officers and their restricted stock awards that have vested during fiscal year 2008. The table also includes the value realized for such options and restricted stock awards. For options, the value realized on exercise is equal to the difference between the market price of the underlying shares at exercise and the exercise price of the options. For stock awards, the value realized on vesting is equal to the market price of the underlying shares at vesting.
 
                                 
    Option Awards     Stock Awards  
    Number of Shares
          Number of Shares
       
    Acquired
    Value Realized
    Acquired
    Value Realized
 
    on Exercise
    on Exercise
    on Vesting
    on Vesting
 
Name
  (#)     ($)     (#)(1)     ($)  
 
Arthur D. Collins, Jr. 
    599,756     $ 17,968,411       58,033     $ 2,826,079  
William A. Hawkins
                36,917       1,954,402  
Gary L. Ellis
    23,082       594,536       3,359       166,225  
Michael F. DeMane
                64,204       3,224,764  
Stephen H. Mahle
    31,596       995,143       34,379       1,828,805  
Jean-Luc Butel
                2,762       136,682  
 
 
(1) Includes shares received pursuant to the Performance Share Plan for the fiscal year 2006 to fiscal year 2008 grant cycle by each named executive officer in June of 2008.


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PENSION BENEFITS
 
The table below includes information with respect to Medtronic’s pension plan for each of the named executive officers as of January 31, 2008, which is the measurement date used for financial statement reporting purposes. A narrative description of the material factors necessary to understand the information in the table is provided below.
 
                             
                    Payments
 
              Present Value of
    During
 
        Number of Years
    Accumulated
    Last Fiscal
 
Name
 
Plan Name
  Credited Service     Benefit($)     Year($)  
 
Arthur D. Collins, Jr. 
  Medtronic, Inc. Retirement Plan     15.7     $ 420,719     $  —  
    Medtronic, Inc. SERP             3,373,544        
William A. Hawkins
  Medtronic, Inc. Retirement Plan     6.0       68,582        
    Medtronic, Inc. SERP             396,174        
Gary L. Ellis
  Medtronic, Inc. Retirement Plan     18.2       199,928        
    Medtronic, Inc. SERP             445,371        
Michael F. DeMane
  Medtronic, Inc. Retirement Plan     8.8       85,881        
    Medtronic, Inc. SERP             343,297        
Stephen H. Mahle
  Medtronic, Inc. Retirement Plan     35.5       1,256,723        
    Medtronic, Inc. SERP             1,919,428        
Jean-Luc Butel
  Medtronic, Inc. Retirement Plan     4.4       48,804        
    Medtronic, Inc. SERP             93,961        
 
The Medtronic, Inc. Retirement Plan (the “Plan”) is a funded, tax-qualified, noncontributory defined-benefit pension plan that covers all eligible employees employed with the Company prior to April 30, 2005, including the named executive officers. Effective May 1, 2005 the Company froze the Plan to new entrants and provided all eligible employees the option of continuing to accrue retirement benefits under the Plan or participate in one of two new options being offered. All named executive officers elected to continue participation in the Plan. Benefits under the Plan are based upon the employee’s years of credited service and the average of the employee’s highest five consecutive years of covered compensation during the employee’s career while covered under the Plan. Employees have the option of providing for a survivorship benefit upon the employee’s death by making the appropriate election at the time of retirement. Covered compensation includes base salary, formula bonus and incentive plan payments, sales commissions, salary reduction contributions (such as a cafeteria plan or medical plan), salary continuation payments for short-term disability, but excludes compensation paid under the Company’s LTPP or the Performance Share Plan. In addition, the IRS limits the amount of Covered Compensation that can be used in the benefit calculation. For the Plan year ended April 30, 2008, that limit is $225,000. Normal retirement age under the plan is age 65. Eligible employees may retire upon reaching age 55 with at least ten years of service or upon reaching age 62 without regard to years of service. Mr. Collins and Mr. Mahle were eligible for early retirement at the end of fiscal year 2008. Any retirement prior to normal retirement age is considered “early retirement.”
 
Benefits under the Plan are calculated as a monthly annuity by taking 40% of the final average covered compensation less a social security allowance (which varies by individual based upon year of birth) and multiplying this result by years of credited service under the Plan. That result is then divided by 30 to yield the benefit at normal retirement age, with an early retirement factor applied to calculate the early retirement benefit.
 
The Plan currently limits pensions paid under the Plan to an annual maximum of $175,000, payable at age 65 in accordance with IRS requirements. The Company also has an unfunded Supplemental Executive Retirement Plan (the “SERP”) that provides out of the general assets of the Company an amount substantially equal to the difference between the amount that would have been payable to the executive under the Plan in the absence of legislation limiting pension benefits and earnings that may be considered in calculating pension benefits and the amount actually payable under the Plan. Compensation


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used in the calculation of the SERP benefit includes eligible compensation in excess of the IRS limitation and amounts deferred to the Capital Accumulation Plan. Upon retirement or termination of employment the amount of retirement benefits earned under the SERP are calculated and if the lump sum value is less than $100,000, it is paid out as a lump sum six months after retirement or termination. If the lump sum value exceeds $100,000, the value is paid out over a 15 year period in the form of a monthly annuity commencing six months after retirement or termination. In the event of the employee’s death prior to the completion of the 15 year payment cycle, any remaining benefits from the SERP are payable per the beneficiary designation on record. If a beneficiary is not named the benefit is payable to the employee’s surviving spouse, if there is no surviving spouse, to the children or if no survivors, the estate.
 
NONQUALIFIED DEFERRED COMPENSATION
 
The table below includes information with respect to the deferral of compensation on a basis that is not tax-qualified for each of the named executive officers for fiscal year 2008. A narrative description of the material factors necessary to understand the information in the table is provided below.
 
                         
    Executive
    Aggregate
    Aggregate
 
    Contributions
    Earnings
    Balance
 
    in Last FY
    in Last FY
    at Last FYE
 
Name
  ($)     ($)     ($)  
 
Arthur D. Collins, Jr. 
  $ 2,336,876     $ (685,591 )   $ 27,958,474  
William A. Hawkins
    1,898,922       (329,924 )     4,387,628  
Gary L. Ellis
          (4,248 )     57,843  
Michael F. DeMane
    3,645,230       (813 )     4,119,102  
Stephen H. Mahle
    1,676,470       (190,063 )     4,543,448  
Jean-Luc Butel
          (367 )     4,994  
 
Executive Contributions in Last Fiscal Year.  This column includes the following amounts that were reported in the Summary Compensation Table for the most recent fiscal year as shown on page 37 of this proxy statement: Mr. Collins — base salary in the amount of $173,077; Mr. Hawkins — base salary in the amount of $61,538; Mr. DeMane — base salary in the amount of $51,539; Mr. Ellis and Mr. Butel did not defer income in fiscal year 2008. Fiscal year 2008 annual incentive deferral amounts of $269,656, $200,000 and $331,055 for Mr. Collins, Mr. Hawkins and Mr. DeMane, respectively, were made in June 2008 (which is in fiscal year 2009) and are not reflected in this column. 2006-2008 Performance Share Plan cash based award deferral amounts of $703,679 and $179,663 for Mr. Collins and Mr. DeMane, respectively, were made in June 2008 (which is in fiscal year 2009) and are not reflected in this column.
 
The Capital Accumulation Plan allows U.S. executives of Medtronic to defer:
 
  •  Up to 50% of their base salary;
 
  •  Up to 100% of their annual incentive plan payments; and
 
  •  Up to 100% of their cash long-term incentive plan payments.
 
The deferral amounts are subject to a minimum floor of $10,000. Medtronic does not make any contributions to the deferral plan — the aggregate balances shown above represent amounts that the named executive officers earned but elected to defer, plus earnings (or losses).
 
Aggregate Earnings in Last Fiscal Year.  Participants receive credits of gains or losses daily based on funds that are indexed to 11 investment alternatives, which are all also available under the Medtronic


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supplemental retirement plan 401(k). Investment returns for these investment alternatives are shown below:
 
         
    Return on Funds
 
    April 27,
 
    2007 to April 25,
 
    2008  
 
Medtronic Stock
    (6.70 )%
Medtronic Interest Income
    4.68  
Wellington Fund Inv
    1.67  
Explorer Fund Investor
    (10.20 )
Morgan Growth(1)
    (0.98 )
500 Index Fund Inv
    (4.75 )
PRIMECAP Fund Investor
    3.84  
Windsor II Fund Inv
    (9.99 )
U.S. Growth Fund Investor(1)
    (2.40 )
International Growth Inv
    2.62  
Total Bond Mkt Index Inv
    6.20  
Extended Mkt Index Inv
    (7.65 )
 
 
(1) On November 12, 2007, the Vanguard Morgan Growth Fund was added to the investment alternatives. The Vanguard Morgan Growth Fund is a replacement for the U.S. Growth Fund Investor which was eliminated from the plan effective February 1, 2008. The above fund returns reflect performance of these funds over the full fiscal year.
 
Participants in the deferred compensation plan prior to amendments may also have all or a portion of their balances earning interest based on the 10-year average of the 10-year T-note rate (or, in certain situations, up to 120% of that rate for funds originally invested in the Plan). For calendar year 2007, the 10-year T-note interest rate was 5.12%, and for calendar year 2008, the 10-year T-note interest rate is 5.12%.
 
When participants elect to defer amounts, they also select when the amounts will ultimately be distributed. Distributions may be made on a certain date (as long as that date is at least five years beyond the period of deferral) or at retirement, or for specified employees under Section 409A of the Internal Revenue Code, six months after the date of retirement (in the form of a lump sum distribution or installments over five, 10 or 15 years). All distributions are made in cash, and there are limited opportunities to change the distribution elections. These include a hardship withdrawal and a “redeferral” election that must be made at least 12 months prior to a scheduled payment (and only if the redeferral is for at least an additional five years).
 
Medtronic previously sponsored a non-qualified employee stock ownership plan (“ESOP”) to restore certain qualified employee benefits that could not be allocated due to IRS limitations. The ESOP expired in May 2005, and no additional contributions were made by Medtronic into the ESOP after that time.
 
The ESOP vests 20% per year of service. When an employee retires under Medtronic’s retirement eligibility rules, the account is 100% vested. Dividends are credited to the ESOP account each year and the account balance is distributed in a lump sum of shares of Medtronic stock in the fiscal year following termination or retirement. Active employees cannot take distributions from the account.
 
Aggregate Balance at Last Fiscal Year-End.  The amounts in this column include 355,037 shares of restricted stock units and 12,120 shares under the ESOP for Mr. Collins, 83,065 shares of restricted stock units and 803 shares under the ESOP for Mr. Hawkins, 1,170 shares under the ESOP for Mr. Ellis, 61,429 shares of restricted stock units and 1,550 shares under the ESOP for Mr. DeMane and 62,941 shares of restricted stock units and 4,408 shares under the ESOP for Mr. Mahle and 101 shares under the ESOP for Mr. Butel, all of which have previously been deferred. This column includes the following amounts, which were reported in the Summary Compensation Table for the most recent fiscal year or prior years: $14,692,473 for Mr. Collins, $4,261,612 for Mr. Hawkins, $3,893,027 for Mr. DeMane, and $3,150,033 for Mr. Mahle.


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POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL
 
Named executive officers are not entitled to any benefits upon death, disability, early retirement, normal retirement or termination for cause other than those benefits that are offered to all employees. Named executive officers are not entitled to any additional benefits upon termination not for cause except under circumstances of change of control as described below.
 
Medtronic’s executive officers, including the named executive officers, have change of control agreements (the “Agreements”) with Medtronic. The Agreements operate only upon the occurrence of a “change of control” as described below. Absent a “change of control,” the Agreements do not require Medtronic to retain the executives or to pay them any specified level of compensation or benefits.
 
Each Agreement provides that for three years after a “change of control” there will be no adverse change in the executive’s salary, bonus, opportunity, benefits or location of employment. If during this three-year period the executive’s employment is terminated by Medtronic other than for cause, or if the executive terminates his employment for good reason (as defined in the Agreements, and including compensation reductions, demotions, relocation and excess travel), the executive is entitled to receive payment of accrued salary and annual and long-term incentives through the date of termination as well as accrued vacation pay, accrued pension benefits and any outstanding deferred compensation, and, except in the event of death or disability, a lump sum severance payment equal to three times the sum of his or her base salary and annual bonus. The executive is also entitled to the continuation of certain insurance and other welfare and retirement plan benefits for a period of time not exceeding three years. Further, if the executive is required to pay any federal excise tax on the payments associated with the change of control, an additional payment (“gross-up”) is required in an amount such that after the payment of all taxes, income and excise, the executive will be in the same after-tax position as if no such excise tax had been imposed. However, payments will be reduced (and no gross-up will be necessary) to the extent that the total value of payments and benefits to which the executive is entitled is equal to or less than 110% of the “safe harbor” amount under the excise tax rules. To the extent payments exceed 110% of the safe harbor, the gross-up will be paid.
 
Generally, and subject to certain exceptions, a “change of control” is deemed to have occurred if: (a) a majority of Medtronic’s Board of Directors becomes comprised of persons other than persons for whose election proxies have been solicited by the Board, or who are then serving as directors appointed by the Board to fill vacancies caused by death or resignation (but not removal) of a director or to fill newly created directorships; (b) another party becomes the beneficial owner of at least 30% of Medtronic’s outstanding voting stock; or (c) Medtronic merges or consolidates with another party (other than certain limited types of mergers), or exchanges shares of voting stock of Medtronic for shares of another corporation pursuant to a statutory exchange, sells or otherwise disposes of all or substantially all of Medtronic’s assets, or is liquidated or dissolved.
 
In addition, similar events also constitute a “change of control” under certain of Medtronic’s compensation plans. If a “change of control” of Medtronic occurs, awards under Medtronic’s annual incentive plans will accelerate and, subject to certain limitations set forth in the plan, each participant will be entitled to a final award based on certain assumptions as to target performance and salary. Medtronic’s long-term incentive plans and related agreements provide that in the event of a “change of control” of Medtronic, all stock options will become immediately exercisable in full, all restrictions under outstanding restricted stock or units will immediately lapse, and performance share awards will immediately vest and pay out in a pro rata amount based on the portion of the performance period elapsed prior to the “change of control” and, based on certain assumptions as to the anticipated performance, which would have been achieved during the remainder of the performance period.
 
If a “change of control” occurs during a plan year, subject to certain limitations, Medtronic’s matching contribution to the 401(k) supplemental retirement plan shall equal the greater of Medtronic’s target percentage matching contribution (currently 75% of the first 6% of a participant’s contribution in fiscal year 2007), or if the “change of control” occurs after the first quarter of a plan year, the percentage contribution


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Medtronic would have made upon completion of the plan year based on performance as most recently projected by Medtronic prior to the “change of control” and disregarding the effects of the “change of control.”
 
The table below reflects additional estimated payments for our named executive officers as a result of Agreements existing, and assuming the change of control occurred, on April 25, 2008.
 
                                                                         
                Performance
                                     
                Shares/
                                     
                Long-Term
    Accelerated
          Present
          Estimated
       
          Excess
    Performance
    Vesting
    Restricted
    Value of
          Tax
       
    Severance
    Annual
    Plan
    of Stock
    Stock Unit
    Increased
          Gross-
       
    Amount
    Incentive
    Payouts
    Options
    Vesting
    Pension
    Other
    Up(8)
    Total
 
Name
  ($)(1)     Award(2)     ($)(3)     ($)(4)     ($)(5)     Benefits(6)     ($)(7)     ($)     ($)  
 
Arthur D. Collins, Jr. 
  $ 7,142,788     $ 1,107,306     $ 613,833     $ 99,795     $ 8,579,312     $ 1,933,532     $ 90,734     $     $ 19,567,300  
William A. Hawkins
    5,196,886             1,387,080       347,457       5,553,128       493,272       97,945       4,726,118       17,801,885  
Gary L. Ellis
    2,667,023       37,863       847,660       91,259       2,602,902       340,988       64,452       2,082,274       8,734,421  
Michael F. DeMane(9)
    3,574,796       130,672       924,720       138,380       3,602,224             86,985             8,457,778  
Stephen H. Mahle
    2,861,539       57,029       586,450       123,199       1,537,061       790,842       58,592             6,014,711  
Jean-Luc Butel
    2,271,682       75,571       462,360       50,194       3,251,144       403,312       97,478       1,695,163       8,306,903  
 
 
(1) This amount is three times the sum of (1) the executive’s base salary at the time of termination and (2) the greater of the 2008 fiscal year’s annual bonus or the average of the annual bonuses for the three most recently completed fiscal years.
 
(2) This amount represents the difference between the three-year average bonus and the fiscal year 2008 annual bonus in circumstances in which the three-year average bonus is greater than the fiscal year 2008 annual bonus.
 
(3) This amount represents the unvested projected payments of the 2007-2009 Long-Term Performance Plan and the unvested projected payments of the 2008-2010 Long-Term Performance Plan.
 
(4) This amount represents the market gain (or intrinsic value) of unvested options as of April 25, 2008 at the closing price on that date of $49.42.
 
(5) This amount represents the value of unvested restricted stock as of April 25, 2008 at the closing price on that date of $49.42.
 
(6) This amount reflects the estimated present value of additional pension benefits due to the named executive officer upon a change of control assuming an additional 3-years of age and service. The change in control agreement to which Mr. DeMane was a party does not provide for the payment of pension benefits upon a change of control.
 
(7) This amount represents the estimated value of the continuation of company contributions to the Medtronic, Inc. Savings and Investment Plan, health and miscellaneous welfare benefits.
 
(8) This amount represents the estimated 280(g) tax gross-up payment.
 
(9) Michael DeMane resigned as Chief Operating Officer of Medtronic on April 30, 2008, and entered into an agreement with Medtronic to address the terms of his continued employment with Medtronic.
 
The agreement provides that Mr. DeMane will remain an employee until May 31, 2009 or, if earlier, the date of an event of default under the agreement. During the term of his employment he will continue to receive his current salary and will be eligible to participate in the broad-based benefit plans, programs and arrangements generally available to Medtronic U.S. employees, including participating in Medtronic’s incentive plan for fiscal year 2009. If Mr. DeMane remains an employee until May 31, 2009, then Medtronic will pay him lump sum separation amounts of $362,500 and $688,750, representing six months salary and his bonus for fiscal year 2009, respectively. Mr. DeMane also will be entitled to tax equalization amounts for income that he earned as an employee of Medtronic that is subject to non-US taxes, consistent with Medtronic’s tax equalization policy. The agreement contains confidentiality, non-compete and non-solicitation provisions.


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EQUITY COMPENSATION PLAN INFORMATION
 
The following table provides information about Medtronic’s common stock that may be issued upon the exercise of options, warrants and rights under all existing equity compensation plans in effect as of April 25, 2008, including the Medtronic, Inc. 2003 Long-Term Incentive Plan, the 2005 Employees Stock Purchase Plan, the Medtronic, Inc. — Kyphon Inc. 2002 Stock Plan and the 1998 Outside Director Stock Compensation Plan.
 
                         
    (a)(1)           (c)(1)  
    Number of securities
    (b)     Number of securities remaining
 
    to be issued
    Weighted average
    available for future issuance
 
    upon exercise
    exercise price
    under equity compensation
 
    of outstanding options,
    of outstanding options,
    plans (excluding securities
 
Plan Category
  warrants and rights     warrants and rights     reflected in column (a))  
 
Equity compensation plans approved by security holders(2)
    90,939,756     $ 46.89       18,882,207  
Equity compensation plans not approved by security holders(3)
    3,828,094(4 )   $ 25.93       3,034,575  
 
 
(1) Column (a) includes 1,955,827 shares representing deferred awards, performance awards and restricted stock units in approved plans and 368,219 restricted stock units in unapproved plans. These shares increase the number of shares in column (a) and decrease the number of shares in column (c). Column (c) includes 5,074,963 shares available for issuance as of April 25, 2008 under the 2005 Employees Stock Purchase Plan.
 
(2) Awards under the 2003 Long Term Incentive Plan may consist of stock options, stock appreciation rights, restricted stock, other stock-based awards and cash-based awards, except that no more than 50% (approximately 30,000,000 shares) of all shares may be granted in the aggregate pursuant to restricted stock or other stock-based awards payable in shares. In addition, no more than 5% of the shares shall be granted pursuant to restricted stock awards if such award shall vest in full prior to three years from the award date or if a condition to such vesting is based, in whole or in part, upon performance of the shares or any aspect of Medtronic’s operations and such vesting could occur over a period of less than one year from the award date.
 
(3) On November 2, 2007, Medtronic consummated the acquisition of Kyphon Inc. (“Kyphon”) and it became our wholly owned subsidiary. Kyphon was a public company and issued options under its Kyphon Inc. 2002 Stock Plan. The Kyphon Inc. 2002 Stock Plan was adopted by Medtronic’s Board of Directors on December 13, 2007 and was renamed the Medtronic, Inc. — Kyphon Inc. 2002 Stock Plan (the “Kyphon Plan”). We did not seek shareholder approval of the Kyphon Plan because Kyphon’s stockholders had previously approved the plan. In connection with the acquisition, all unvested options to purchase shares of Kyphon’s common stock were converted into the right to receive an aggregate of 3,485,663 shares of Medtronic’s common stock with a weighted average exercise price of $27.73 per share and all unvested Kyphon restricted stock units were converted into an aggregate of 401,566 Medtronic restricted stock units. Options granted prior to the merger for new hires are generally exercisable 25% in the first year and monthly for the next three years and have a term of ten years. Options granted other than for new hires prior to the merger are generally exercisable monthly for 48 months and have a term of ten years. Options granted post merger are generally exercisable in three or four equal installments and have a term of ten years.
 
(4) The table includes information regarding options, warrants or rights assumed in connection with acquisitions completed prior to April 25, 2008. In connection with such acquisitions, Medtronic has assumed options, warrants and rights to purchase securities of the acquired company that were outstanding at the time of the acquisition, and has treated these as options, warrants and rights to acquire Medtronic common stock based upon conversion ratios negotiated in each acquisition. As of April 25, 2008, 3,783,075 shares of Medtronic common stock were issuable upon the exercise of options, warrants and rights assumed in connection with acquisitions and the weighted average exercise price of such options, warrants and rights was $25.95 per share. No additional options, warrants or rights may be granted under the plans that govern options, warrants or rights assumed in connection with acquisitions except under the Kyphon Plan.


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REPORT OF THE AUDIT COMMITTEE
 
The Audit Committee represents and assists the Board of Directors in its oversight of the integrity of Medtronic’s financial reporting. In particular, the Audit Committee reviews the independence, qualifications and performance of Medtronic’s independent registered public accounting firm and the performance of its internal auditors. The Audit Committee also has responsibility for Medtronic’s compliance with legal and regulatory requirements. As of the date of this report, the Audit Committee consisted of the five members listed below, each of whom is an independent director in accordance with SEC and New York Stock Exchange requirements and each of whom meets additional independence standards applicable to audit committee members. Denise M. O’Leary, David L. Calhoun, Shirley Ann Jackson, Ph.D., Robert C. Pozen and Jean-Pierre Rosso each qualify as an “audit committee financial expert” within the meaning of that term as defined by the SEC pursuant to Section 407 of the Sarbanes-Oxley Act of 2002.
 
Medtronic’s management is responsible for preparing Medtronic’s financial statements and the overall reporting process, including Medtronic’s system of internal controls. The Audit Committee is directly responsible for the compensation, appointment and oversight of Medtronic’s independent registered public accounting firm, PricewaterhouseCoopers LLP (“PricewaterhouseCoopers”), that reports directly to the Audit Committee. The independent registered public accounting firm is responsible for auditing the financial statements and expressing an opinion on the conformity of the audited financial statements with generally accepted accounting principles in the United States (“U.S. GAAP”) and auditing management’s internal controls over financial reporting. The Audit Committee also meets privately in separate executive sessions periodically with management, internal audit and representatives from Medtronic’s independent registered public accounting firm.
 
In this context, the Audit Committee has held discussions with management and PricewaterhouseCoopers. Management represented to the Audit Committee that Medtronic’s consolidated financial statements were prepared in accordance with U.S. GAAP, and the Audit Committee has reviewed and discussed the audited financial statements with management and PricewaterhouseCoopers.
 
PricewaterhouseCoopers has advised the Audit Committee that, in its opinion, the consolidated balance sheets and the related consolidated statements of earnings, shareholders’ equity and cash flows that accompany Medtronic’s 2008 Annual Report present fairly, in all material respects, the financial position of Medtronic and its subsidiaries at April 25, 2008 and April 27, 2007, and the results of Medtronic’s operations and cash flows for each of the three fiscal years in the period ended April 25, 2008 in conformity with U.S. GAAP.
 
The Audit Committee also has discussed with PricewaterhouseCoopers the matters required to be discussed by Statement on Auditing Standards No. 61 (Communication With Audit Committees), as amended, and requested any other relevant input from PricewaterhouseCoopers. PricewaterhouseCoopers provided to the Audit Committee the written disclosures and letter required by Independent Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the Audit Committee discussed with PricewaterhouseCoopers their independence.
 
Based on the considerations above, the Audit Committee recommended to the Board of Directors, and the Board has approved, the inclusion of the audited financial statements in Medtronic’s Annual Report on Form 10-K for fiscal year 2008 for filing with the Securities and Exchange Commission. The Audit Committee has selected PricewaterhouseCoopers as Medtronic’s independent registered public accounting firm for fiscal year 2009. Audit and any permitted non-audit services provided to Medtronic by PricewaterhouseCoopers are pre-approved by the Audit Committee.
 
     
AUDIT COMMITTEE:
   
     
Denise M. O’Leary, Chair
  Robert C. Pozen
David L. Calhoun
  Jean-Pierre Rosso
Shirley Ann Jackson, Ph.D.
   


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Audit and Non-Audit Fees
 
The following table presents fees for professional audit services rendered by PricewaterhouseCoopers for the audit of Medtronic’s annual financial statements for the fiscal years ended April 27, 2007 and April 25, 2008, and fees billed for other services rendered by PricewaterhouseCoopers.
 
                 
    2007     2008  
 
Audit Fees(1)
  $ 5,650,000     $ 7,097,000  
Audit-Related Fees(2)
    241,000       80,000  
Tax Fees(3)
    252,000       270,000  
All Other Fees(4)
    39,000       36,000  
 
 
(1) Audit services consisted principally of assistance with Medtronic’s domestic and international audits, statutory audits and Sarbanes-Oxley 404 certification. The increase in Audit Fees in fiscal year 2008 resulted primarily by the acquisition of Kyphon and a negative foreign exchange impact.
 
(2) Audit-related services consisted principally of assistance with matters related to audits of employee benefits plans and corporate development.
 
(3) The fiscal years 2007 and 2008 tax advisory services were provided principally for assistance with transfer pricing and tax compliance.
 
(4) In fiscal years 2007 and 2008, other services included subscriptions to audit-related software and industry benchmark studies.
 
PROPOSAL 2 — RATIFICATION OF SELECTION OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
 
The Audit Committee has selected PricewaterhouseCoopers, certified public accountants and independent registered public accounting firm, as Medtronic’s independent registered public accounting firm for the fiscal year ending April 24, 2009. As required by the Audit Committee Charter, the Board of Directors is submitting the selection of PricewaterhouseCoopers for shareholders’ ratification at the Annual Meeting. If the shareholders do not so ratify, the Audit Committee will reconsider its selection.
 
Representatives of PricewaterhouseCoopers are expected to be present at the Annual Meeting, will have the opportunity to make a statement if they desire and are expected to be available to respond to appropriate questions.
 
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THIS APPOINTMENT.


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PROPOSAL 3 — APPROVAL OF THE MEDTRONIC, INC.
2008 STOCK AWARD AND INCENTIVE PLAN
 
We have adopted a new omnibus incentive compensation plan called the Medtronic, Inc. 2008 Stock Award and Incentive Plan. In this proposal, we are asking our shareholders to approve the Stock Award and Incentive Plan. If this plan is approved, no further equity awards will be granted pursuant to the Amended and Restated 1994 Stock Award Plan, the Medtronic, Inc. 1998 Outside Director Stock Compensation Plan, the Medtronic, Inc. — Kyphon Inc. 2002 Stock Plan, and the Medtronic, Inc. 2003 Long-Term Incentive Plan. Assuming this plan is approved, equity awards made on and after the approval will be made under the Stock Award and Incentive Plan. In addition, if approved, the Stock Award and Incentive Plan will, following the current fiscal year, replace the Medtronic, Inc. Executive Incentive Plan as the plan governing annual bonus awards to our executive officers.
 
One purpose of this request is to enable us to grant awards under the plan that are not subject to the limits on deductibility imposed by Section 162(m) of the Internal Revenue Code of 1986, as amended. Section 162(m) generally does not allow a publicly held company to obtain tax deductions for compensation of more than $1 million paid in any year to its chief executive officer or any of its other three highest-paid executive officers other than the chief executive officer and chief financial officer. Payments that are “performance-based” in accordance with conditions specified under Section 162(m) are exempt from this limitation. One of those conditions is that shareholders approve the material terms of the performance goals that will be used to determine the amount of performance-based compensation to be paid.
 
Our Board of Directors recommends that shareholders approve the material terms of the Stock Award and Incentive Plan as described below.
 
Summary of the Plan
 
The following description of the Stock Award and Incentive Plan is only a summary of certain provisions thereof and is qualified in its entirety by reference to the full text of the Stock Award and Incentive Plan, a copy of which is included as an exhibit to this proxy statement.
 
Purpose of the Plan
 
The purpose of the Stock Award and Incentive Plan is to give us a competitive advantage in attracting, retaining, and motivating officers, employees, directors, and consultants, to provide financial rewards that are intended to be deductible to the maximum extent possible as “performance-based compensation” within the meaning of Section 162(m), and to provide us with an incentive plan that gives officers, employees, directors, and consultants financial incentives directly linked to shareholder value.
 
Administration of the Plan
 
The Stock Award and Incentive Plan will be administered by a committee selected by our Board of Directors and composed of two or more directors. Each committee member will be a non-employee director as defined under federal securities law and an outside director as defined by regulations promulgated under Section 162(m). Unless otherwise determined by the Board of Directors, our Compensation Committee will administer the Stock Award and Incentive Plan.
 
The committee will have exclusive and final authority to administer and interpret the Stock Award and Incentive Plan, including the power to:
 
  •  Determine eligibility for participation;
 
  •  Establish performance goals for each participant;
 
  •  Determine the types of awards to be granted to participants; and
 
  •  Interpret the terms and provisions of the plan and any award.


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Any determination made by the committee under the Stock Award and Incentive Plan will be made in the sole discretion of the committee, and such determinations will be final and binding on all persons.
 
The committee may delegate any of its powers and responsibilities in respect of the Stock Award and Incentive Plan, and our full Board of Directors may exercise any of the committee’s powers and responsibilities. However, the committee may not delegate any of its powers or responsibilities, and the full Board of Directors may not exercise any of those powers or responsibilities, to the extent that those actions would cause an award that is intended to be exempt from the limits on deductibility under Section 162(m) to lose that exemption or would cause an award to a director or executive officer to fail to be exempt from short-swing profit recovery under Section 16(b) of the Exchange Act.
 
Eligible Participants in the Plan
 
The committee may select any or all of the following classes of persons to be granted awards under the plan:
 
  •  Members of our Board of Directors;
 
  •  Officers of, employees of, and consultants to Medtronic, Inc. and/or any of our subsidiaries or affiliates; and
 
  •  Individuals who have accepted offers of employment or consultancy from Medtronic, Inc., or from our subsidiaries or affiliates.
 
As of June 26, 2008, we had 12 members of the Board of Directors, approximately 38,000 officers and employees and an unknown number of consultants.
 
Limits on Awards We May Issue Under the Plan
 
Share Limits.  The maximum number of shares of our common stock that may be issued pursuant to awards granted under the Stock Award and Incentive Plan is 50,000,000. The maximum number of shares that may be issued pursuant to incentive stock options granted under the plan is 50,000,000. For purposes of these limits, we will count each share issued pursuant to a stock option or stock appreciation right as one share, but each share issued pursuant to any other award as three shares. No individual participant may be granted awards under the plan relating to more than 2,000,000 shares during any fiscal year, although for purposes of the individual limit we will count each share issued pursuant to awards under the plan as one share.
 
The committee will adjust these maximums, and the number of shares that may be issued in respect of awards granted under the plan, in certain specified circumstances such as stock splits, mergers, and other transactions. The committee may also adjust performance goals in the event of unusual or recurring events and other extraordinary items as approved by the committee, except to the extent that doing so would cause an award intended to be exempt from Section 162(m) to fail to be exempt.
 
Shares underlying awards under the Stock Award and Incentive Plan that expire, or that are forfeited or terminated without being exercised, do not count towards these share limits. In addition, if we grant awards in assumption or in substitution for an award of a company or business we acquire, shares issued in connection with the assumed or substituted awards will not count towards the share limits. However, if the exercise price of any option granted under the plan, or the tax obligations relating to any award, are satisfied by delivering shares to us, or if a stock appreciation right is settled for shares, the gross number of shares subject to the award counts towards the share limits.
 
Limits on Certain Cash Awards.  The Stock Award and Incentive Plan authorizes the committee to grant awards entitling a participant to payment of cash amounts subject to the attainment of certain performance goals established in accordance with the requirements of Section 162(m). We refer to such awards as “performance cash awards.” No individual participant may be paid more than $10,000,000 in respect of such awards during any fiscal year, including any amounts earned during such fiscal year and deferred.


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Types of Awards We May Issue Under the Plan
 
The Stock Award and Incentive Plan will allow us to grant awards based on shares of our common stock, including stock options, stock appreciation rights, restricted stock, unrestricted stock, restricted stock units, other stock-based awards, performance-based restricted stock, and performance units. The closing price of a share of our common stock on the New York Stock Exchange on June 26, 2008 was $51.08. The Stock Award and Incentive Plan will also allow us to grant awards denominated in cash that are payable upon the attainment of performance goals established by the committee.
 
Stock Options.  The Stock Award and Incentive Plan enables the committee to grant options to purchase our common stock at specified exercise prices to participants. Options may be granted as “incentive stock options,” which are intended to qualify for favorable tax treatment under federal tax law, or “nonqualified stock options,” which are not intended to receive such favorable treatment.
 
Under the Stock Award and Incentive Plan, the committee determines the number of options to be granted to each participant. Unless otherwise determined by the committee, each option grant will be evidenced by a stock option agreement that specifies the option exercise price, whether the options are intended to be “incentive stock options” or “nonqualified stock options,” the duration of the options, the number of shares underlying the options, and any additional terms determined by the committee.
 
Generally, options will be subject to vesting during a period of at least one year following the date of grant. Up to five percent of shares available for grant as options and stock appreciation rights, however, may be granted without regard to these limitations on vesting conditions.
 
The Stock Award and Incentive Plan provides that the committee may determine the exercise prices of options, but (except in limited circumstances involving awards assumed in certain corporate transactions) the exercise price of any option cannot be less than the fair market value of a share of our common stock on the date of grant. All options we grant under the plan will expire no later than ten years from the date we grant them.
 
The methods of exercising an option under the plan are set forth in the plan itself. Stock options issued under the Stock Award and Incentive Plan are nontransferable except by will or the laws of descent, except for “nonqualified options,” which will be transferable on terms set by the committee. The granting of an option under the Stock Award and Incentive Plan does not give the participant the rights of a shareholder; the participant gains those rights only after the option is exercised and the shares underlying the option are registered.
 
The committee may not (except in limited circumstances involving certain corporate transactions) amend an option granted under the Stock Award and Incentive Plan to decrease its exercise price. The committee also may not cancel any option in conjunction with the grant of any new option with a lower exercise price, or take any action that would be treated as a “repricing” of the option, unless that action is approved by our shareholders.
 
Stock Appreciation Rights.  The Stock Award and Incentive Plan also enables the committee to grant awards of stock appreciation rights to participants. A stock appreciation right entitles the participant to receive, upon exercise, an amount equal to the excess, if any, of the fair market value of a share of our common stock over the exercise price of the stock appreciation right.
 
The plan provides that the committee may determine the exercise price of any stock appreciation right, but (except in limited circumstances involving awards assumed in certain corporate transactions) the exercise price cannot be less than the fair market value of a share of our common stock on the date the stock appreciation right is granted. Stock appreciation rights we issue under the Stock Award and Incentive Plan will, unless otherwise determined by the committee, be evidenced by an award agreement, which will specify the exercise price, the number of shares underlying the rights, and other limitations, terms, and conditions determined by the committee. Under the plan, we will be able to grant “tandem SARs,” which are stock appreciation rights granted in conjunction with an option, and “free-standing SARs,” which are stock appreciation rights not granted in conjunction with an option.


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A “tandem SAR” may be granted on the same date as the related option, will be exercisable only at the time the related option is exercisable, and will have the same exercise price as the related option. When the related option is exercised or forfeited, the “tandem SAR” will terminate or be forfeited; and when the “tandem SAR” is exercised or forfeited, the related option will similarly terminate or be forfeited.
 
Generally, stock appreciation rights will be subject to vesting during a period of at least one year following the date of grant. Up to five percent of shares available for grant as options and stock appreciation rights, however, may be granted without regard to these limitations on vesting conditions.
 
The methods of exercising a stock appreciation right granted under the plan are set forth in the plan itself. Stock appreciation rights issued under the Stock Award and Incentive Plan will not be transferable except by will or the laws of descent, except for “free-standing SARs,” which will be transferable on terms set by the committee.
 
The committee may not (except in limited circumstances involving certain corporate transactions) amend a SAR granted under the Stock Award and Incentive Plan to decrease its exercise price. The committee also may not cancel any SAR in conjunction with the grant of any new SAR with a lower exercise price, or take any action that would be treated as a “repricing” of the SAR, unless that action is approved by our shareholders.
 
Restricted Stock.  The Stock Award and Incentive Plan also enables the committee to grant awards of restricted stock to participants. Restricted stock awards are actual shares of our common stock issued to a participant, subject to conditions on grant, transferability, or vesting based on continued service of the participant, the satisfaction of performance goals, or both. We refer to awards of restricted stock subject to conditions on grant, transferability, or vesting based on the satisfaction of performance goals as “performance-based restricted stock.”
 
Generally, any award of restricted stock will be subject to vesting during a period of at least three years following the date of grant, although a vesting period of at least one year is permissible for performance-based restricted stock. An award of restricted stock may, however, vest in part on a pro rata basis before the expiration of any vesting period, and up to five percent of shares available for grant as awards other than options and stock appreciation rights, including restricted stock, may be granted without regard to these limitations on vesting conditions.
 
Except for restrictions imposed by the committee, a recipient of a grant of restricted stock has the rights of a shareholder with respect to the restricted stock, including the right to vote the stock and to receive all dividends and other distributions paid with respect to the restricted stock. During the restriction period set by the committee with respect to restricted stock, however, the recipient may not sell, transfer, pledge, exchange, or otherwise encumber shares of restricted stock.
 
Restricted Stock Units.  The Stock Award and Incentive Plan also enables the committee to grant restricted stock units, which are awards representing a specified number of hypothetical shares of our common stock. The plan enables the committee to issue restricted stock units subject to conditions on grant or vesting based on continued service of the participant, conditions based on the satisfaction of performance goals, or both. We refer to awards of restricted stock units subject to conditions on grant or vesting based on the satisfaction of performance goals as “performance units.”
 
Generally, any award of restricted stock units will be subject to vesting during a period of at least three years following the date of grant, although a vesting period of at least one year is permissible for performance units. An award of restricted stock units may, however, vest in part on a pro rata basis before the expiration of any vesting period, and up to five percent of shares available for grant as awards other than options and stock appreciation rights, including restricted stock units, may be granted without regard to these limitations on vesting conditions.
 
Because restricted stock units are not actual, issued shares of our common stock, recipients do not have the rights of a shareholder, but an award of restricted stock units may call for the payment of dividend equivalents (see “Other Stock-Based Awards” below). Restricted stock units may not be sold, transferred,


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pledged, or otherwise encumbered before the units have vested. Restricted stock units that vest will be settled in cash or in shares of our common stock or a combination thereof, as determined by the committee. Settlement will occur either at the time of vesting or on a deferred basis, as determined by the committee or, if the committee permits, by election of the recipient.
 
Other Stock-Based Awards.  The Stock Award and Incentive Plan also enables the committee to grant other stock-based awards. Other stock-based awards are awards that are valued by reference to our shares, including unrestricted stock, dividend equivalents and convertible debentures. Awards of unrestricted stock may only be granted in lieu of compensation that would otherwise be due and payable to the participant. Generally, an other stock-based award that is not an option, stock appreciation right, or grant of unrestricted stock will be subject to vesting during a period of at least three years following the date of grant, although a vesting period of at least one year is permissible if vesting of the award is conditioned on performance goals. Such an award may, however, vest in part on a pro rata basis before the expiration of any vesting period, and up to five percent of shares available for grant as awards other than options and stock appreciation rights, including the other stock-based awards described above, may be granted without regard to these limitations on vesting conditions.
 
Performance-Based Awards.  As noted above, the Stock Award and Incentive Plan authorizes the committee to grant performance cash awards, performance-based restricted stock, and performance units. We refer to these kinds of awards collectively as “performance-based awards.” We anticipate that annual bonus awards for our executive officers, as well as cash-denominated long-term incentive awards for our executive officers, will be granted pursuant to the provisions of the plan authorizing performance cash awards.
 
The committee may determine that a performance-based award is intended to be exempt from the limits on deductibility under Section 162(m). In such cases, in order to meet the requirements for that exemption, the goals must be based on one or more of the following criteria set forth in the plan: sales, net sales, revenue, revenue growth or product revenue growth, operating income (before or after taxes), return on invested capital, return on capital employed, pre- or after-tax income (before or after allocation or corporate overhead and bonus), net earnings, earnings per share, consolidated earnings before or after taxes (including earnings before any or all of the following: interest, taxes, depreciation and amortization), net income, gross profit, gross margin, year-end cash, debt reductions, book value per share, return on equity, expense management, return on investment, improvements in capital structure, profitability of an identifiable business unit or product, maintenance or improvements of profit margins, stock price, market share, costs, cash flow, working capital, return on assets or net assets, asset turnover, inventory turnover, economic value added (economic profit) or equivalent metrics, comparison with various stock market indices, appreciation in and/or maintenance of share price, reductions in costs, regulatory achievements, implementation, completion or attainment of measurable objectives with respect to research, development, products or projects and recruiting or maintaining personnel, and total shareholder return; each as measured with respect to the Company or one or more affiliates, subsidiaries, divisions, business units, or business segments of the Company, either in absolute terms or relative to the performance of one or more other companies or an index covering multiple companies.
 
Change of Control.  Unless otherwise provided in an award agreement, upon a change of control (as defined in the plan), each award granted under the Stock Award and Incentive Plan will immediately vest in full and become exercisable and transferable unless the award is replaced by a qualifying replacement award that satisfies certain conditions set forth in the plan. (We refer to awards that replace awards under the plan following a change of control as “replacement awards,” and those being replaced as “replaced awards.”) In the case of performance awards, awards that are not replaced will be deemed to be earned and payable, adjusted pro rata for the amount of the performance period that has elapsed as of the date of the change of control, based on the greater of the applicable target level or the level of achievement of the applicable performance goals through the date of the change of control.
 
Replacement awards must be of the same type as the replaced award, have a value at least equal to that of the replaced award, if the underlying replaced award was an equity-based award, relate to publicly


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traded securities, and have terms and conditions no less favorable to the participant than the replaced award. Also, replacement awards must become fully vested and, if applicable, exercisable and free of restrictions, upon the termination of a participant’s employment, by the Company without cause or by the participant for good reason (as each is defined in the Stock Award and Incentive Plan), during the two years following the date of the change of control. Any options or stock appreciation rights held by the participant as of the change of control, or granted pursuant to a replacement award, will remain exercisable following such a termination until the earlier of (1) the third anniversary of the change of control and (2) the expiration of the term of the option or stock appreciation right.
 
Effective Date; Term; Amendment to Plan
 
The Stock Award and Incentive Plan is effective as of June 26, 2008, subject to and contingent upon approval by at least a majority of the votes cast on the issue by our shareholders in response to this proposal. The plan has a term of ten years.
 
Our Board of Directors, or the committee, may amend, alter, or discontinue the plan, but no amendment, alteration, or discontinuation may be made that would materially impair the rights of a participant with respect to a previously granted award without the participant’s consent (with certain limited exceptions). In addition, no amendment may be made without the approval of our shareholders if (1) approval of our shareholders is required by applicable law, (2) the amendment would materially increase the benefits to participants under the plan, (3) the amendment would materially increase the number of securities to be issued under the plan, (4) the amendment would materially modify the requirements for participation in the plan, or (5) the amendment would accelerate the vesting of any restricted stock or restricted stock units under the plan, except as otherwise provided in the plan.
 
Federal Income Tax Consequences
 
The following is a summary of certain U.S. federal income tax consequences of awards we may make under the Stock Award and Incentive Plan. The discussion is general in nature; we have not taken into account a number of considerations which may apply in light of the circumstances of a particular participant. The income tax consequences under applicable state and local tax laws may not be the same as under U.S. federal income tax laws.
 
Non-Qualified Stock Options.  The participant will not recognize taxable income at the time of a grant of a non-qualified stock option, and we will not be entitled to a tax deduction at that time. A participant will recognize compensation taxable as ordinary income (and be subject to income tax withholding) upon exercise of a nonqualified stock option; the recognized compensation will be equal to the excess of the fair market value of the shares purchased over their exercise price. We generally will be entitled to a corresponding deduction upon exercise of a nonqualified stock option.
 
Incentive Stock Options.  The participant will not recognize taxable income at the time of a grant of an incentive stock option. The participant will also not recognize taxable income (except for purposes of the alternative minimum tax) upon exercise of an incentive stock option.
 
If the shares acquired by exercise of an incentive stock option are held for the longer of (1) two years from the date the option was granted and (2) one year from the date the shares were purchased, any gain or loss arising from disposition of those shares, based on the excess of the amount realized upon the disposition over the original exercise price, will be taxed as a long term capital gain or loss, and we will not be entitled to any deduction. If, however, the shares acquired are not held for the periods described above, then in the year of disposition the recipient will recognize compensation taxable as ordinary income, equal to the excess of the lesser of (1) the amount realized upon such disposition and (2) the excess of the fair market value of such shares on the date of exercise over the exercise price. We generally will be entitled to a corresponding deduction at that time. The excess of any amount realized in the disposition over the fair market value of the stock on the exercise date will be treated as a capital gain.


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Stock Appreciation Rights.  The recipient will not recognize taxable income at the time of a grant of a stock appreciation right, and we will not be entitled to a tax deduction at that time. Upon exercise, however, the recipient will recognize compensation taxable as ordinary income (and subject to income tax withholding) equal to the fair market value of any shares delivered and the amount of cash paid by us in settlement of the rights, and we generally will be entitled to a corresponding deduction at that time.
 
Restricted Stock.  The recipient of restricted stock will not recognize taxable income at the time of a grant of shares of restricted stock, and we will not be entitled to a tax deduction at such time, unless the participant makes an election under Section 83(b) of the Internal Revenue Code to be taxed at that time. If that election is made, the participant will recognize compensation taxable as ordinary income (and subject to income tax withholding) at the time of the grant, equal to the excess of the fair market value of the shares at such time over the amount, if any, paid for such shares. If such election is not made, the participant will recognize compensation taxable as ordinary income (and subject to income tax withholding) at the time the restrictions lapse, in an amount equal to the excess of the fair market value of the shares at such time over the amount, if any, paid for such shares. We will generally be entitled to a corresponding deduction at the time the ordinary income is recognized by the recipient, except to the extent that the deduction limits of Section 162(m) apply.
 
In addition, a participant receiving dividends with respect to restricted stock for which the above-described election has not been made, and prior to the time the restrictions lapse, will recognize compensation taxable as ordinary income (and subject to income tax withholding) rather than dividend income. We will generally be entitled to a corresponding deduction, except to the extent that the deduction limits of Section 162(m) apply.
 
Restricted Stock Units.  The recipient will not recognize taxable income at the time of a grant of a restricted stock unit, and we will not be entitled to a tax deduction at that time. The recipient will recognize compensation taxable as ordinary income (and subject to income tax withholding), however, at the time of the settlement of the award, equal to the fair market value of any shares delivered and the amount of cash paid by us. We will be entitled to a corresponding deduction, except to the extent that the deduction limits of Section 162(m) apply.
 
Unrestricted Stock.  The recipient of unrestricted stock, and of restricted stock subject only to restrictions on transferability, will recognize compensation taxable as ordinary income (and subject to income tax withholding) at the time of the grant, equal to the excess of the fair market value of the shares at such time over the amount, if any, paid for such shares. We will generally be entitled to a corresponding deduction at that time, except to the extent that the deduction limits of Section 162(m) apply.
 
The foregoing general tax discussion is intended for the information of our shareholders considering how to vote with respect to this proposal, and not as tax guidance to participants in the Stock Award and Incentive Plan. We strongly urge participants to consult their own tax advisors regarding the federal, state, local, foreign, and other tax consequences of participating in the Stock Award and Incentive Plan.
 
New Plan Benefits
 
Performance Cash Awards.  Because the amount of performance cash awards that we will pay under the Stock Award and Incentive Plan are based on satisfaction of certain performance goals, we cannot determine at this time what amounts, if any, will be paid to our executive officers under the plan. Generally, however, we believe that, had the plan been used to determine annual cash incentive awards for fiscal year 2008, the awards granted to our executive officers would have been materially similar to those actually made for fiscal year 2008. The annual cash incentive awards paid to our named executive officers for fiscal year 2008 are set forth in the “Executive Medtronic Incentive Plan” column in the “Non-Equity Incentive Plan Compensation” section on page 39 of this proxy statement.
 
Stock Awards.  We expect that, if the Stock Award and Incentive Plan is approved by our shareholders, we will make grants of share-based awards to our directors consistent with the grant practices


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currently in effect under the 1998 Outside Director Stock Compensation Plan. We estimate the number of shares we will grant to directors during fiscal year 2009 in the table below.
 
The committee has not yet determined, and we cannot now anticipate, what other equity-based grants will be made under the plan if it is approved. Accordingly, we cannot determine the grants, if any, that the committee may, in its discretion, decide to make to our executive officers under the Stock Award and Incentive Plan during the 2009 fiscal year, and the table below therefore does not include any information about such grants. Generally, however, we believe that, had the plan been used to determine equity-based awards for fiscal year 2008, the awards granted to our executive officers would have been materially similar to those actually made during fiscal year 2008. The equity awards granted to our named executive officers are set forth in the “Grants of Plan-Based Awards” table on page 41 of this proxy statement.
 
The following table shows, in the format required by the SEC, the currently known information about the amounts that may be paid to our executive officers and directors during fiscal year 2009 under the Stock Award and Incentive Plan. As explained above, we are not able to determine the amount of performance cash awards that will be granted, or the number of shares underlying equity-based awards we will grant to our named executive officers, under the plan in fiscal year 2009.
 
         
    Performance Cash
  Equity-Based
Name and Position
  Awards (in Dollars)   Awards (in Shares)
 
Arthur D. Collins, Jr. 
  Not determinable   Not determinable
Chairman
       
William A. Hawkins
  Not determinable   Not determinable
President and Chief Executive Officer
       
Gary L. Ellis
  Not determinable   Not determinable
Vice President and Chief Financial Officer
       
Michael F. DeMane
  Not determinable   Not determinable
Stephen H. Mahle
  Not determinable   Not determinable
Executive Vice President of Healthcare Policy
       
Jean-Luc Butel
  Not determinable   Not determinable
Senior Vice President and President, International
       
All Executive Officers, as a Group
  Not determinable   Not determinable
All Non-Employee Directors, as a Group
  Not applicable   16,109(1)
All Employees, as a Group
  Not determinable   Not determinable
 
 
(1) This estimate reflects the anticipated award that we expect to grant to non-employee directors during fiscal year 2009. The number of shares granted to directors is determined based on Medtronic’s closing share price on the date of grant. The number of shares described in the table is based on a closing share price of $49.42, which was the closing share price on April 25, 2008.
 
Vote Required; Board Recommendation
 
The regulations promulgated under Section 162(m) require the affirmative vote of a majority of the votes cast on the issue at the meeting to approve the Medtronic, Inc. 2008 Stock Award and Incentive Plan.
 
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE MEDTRONIC, INC. 2008 STOCK AWARD AND INCENTIVE PLAN.


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OTHER INFORMATION
 
Expenses of Solicitation
 
Medtronic will bear the costs of soliciting proxies, including the reimbursement to record holders of their expenses in forwarding proxy materials to beneficial owners. Directors, officers and regular employees of Medtronic, without extra compensation, may solicit proxies personally or by mail, telephone, fax, telex, telegraph or special letter.
 
We have engaged The Proxy Advisory Group, LLC to assist in the solicitation of proxies and provide related advice and informational support, for a services fee and the reimbursement of customary disbursements that are not expected to exceed $15,000 in the aggregate.
 
Shareholder Proposals and Director Nominations
 
In order for a shareholder proposal to be considered for inclusion in Medtronic’s proxy statement for the 2009 Annual Meeting, the written proposal must be received by the Corporate Secretary at Medtronic’s offices no later than March 20, 2009. The proposal must comply with SEC regulations regarding the inclusion of shareholder proposals in company-sponsored proxy materials.
 
Medtronic’s restated articles of incorporation provide that a shareholder may present a proposal or nominee for director from the floor that is not included in the proxy statement if proper written notice is received by the Corporate Secretary at Medtronic’s offices not less than 50 nor more than 90 days prior to the Annual Meeting date. If less than 60 days notice of the meeting date is given, the submission will be considered timely if it is received by the 10th day after notice of the meeting is given. Any such proposal or nomination must provide the information required by Medtronic’s restated articles of incorporation and comply with any applicable laws and regulations. If the shareholder does not also comply with the requirements of Rule 14a-4(c)(2) under the Exchange Act, Medtronic may exercise discretionary voting authority under proxies it solicits to vote in accordance with its best judgment on any such shareholder proposal or nomination.
 
All submissions to, or requests from, the Corporate Secretary should be made to Medtronic’s principal offices at 710 Medtronic Parkway, Minneapolis, Minnesota 55432, Attn: Corporate Secretary.
 
Delivery of Documents to Shareholders Sharing an Address
 
The SEC has adopted amendments to its rules regarding delivery of proxy statements and annual reports to shareholders sharing the same address. We may satisfy these delivery rules by delivering a single proxy statement and annual report to an address shared by two or more of our shareholders. This delivery method, referred to as “householding,” can result in significant cost savings for us. In order to take advantage of this opportunity, we have delivered only one proxy statement and annual report to multiple shareholders who share an address unless Medtronic has received contrary instructions from one or more of the shareholders. Medtronic will deliver promptly, upon written or oral request, a separate copy of the proxy statement and annual report to a shareholder at a shared address to which a single copy of the documents was delivered. Shareholders who wish to receive a separate copy of the proxy statement and annual report, now or in the future, should submit their request by contacting Broadridge, either by calling toll-free at (800) 542-1061, or by writing to Broadridge, Householding Department, 51 Mercedes Way, Edgewood, New York 11717. Shareholders sharing an address who are receiving multiple copies of proxy materials and annual reports and wish to receive a single copy of such materials in the future should submit their request by contacting us in the same manner. If you are the beneficial owner, but not the record holder, of Medtronic’s shares and wish to receive only one copy of the proxy statement and annual report in the future, you will need to contact your broker, bank or other nominee to request that only a single copy of each document be mailed to all shareholders at the shared address in the future.


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Other
 
Medtronic’s 2008 Annual Report, including financial statements, is being sent to shareholders of record as of June 23, 2008, together with this proxy statement.
 
MEDTRONIC WILL FURNISH TO SHAREHOLDERS WITHOUT CHARGE A COPY OF ITS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED APRIL 25, 2008, UPON RECEIPT OF WRITTEN REQUEST ADDRESSED TO: INVESTOR RELATIONS DEPARTMENT, MEDTRONIC, INC., 710 MEDTRONIC PARKWAY, MINNEAPOLIS, MINNESOTA 55432.
 
The Board of Directors knows of no other matter to be presented at the Annual Meeting. If any other business properly comes before the Annual Meeting or any adjournment thereof, the proxies will vote on that business in accordance with their best judgment.
 
By Order of the Board of Directors,
 
(Signature to come)
 
Terrance L. Carlson
Corporate Secretary
MEDTRONIC, INC.


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Appendix A
 
MEDTRONIC, INC.
2008 STOCK AWARD AND INCENTIVE PLAN
 
SECTION 1.  Purpose; Definitions.
 
1.1.     Purpose. The purpose of this Medtronic, Inc. 2008 Stock Award and Incentive Plan (this “Plan”) is to give the Company and its Affiliates and Subsidiaries (each as defined below) a competitive advantage in attracting, retaining, and motivating officers, employees, directors, and consultants, to provide financial rewards that are intended to be deductible to the maximum extent possible as “performance-based compensation” within the meaning of Section 162(m) of the Code (as defined below), and to provide the Company and its Subsidiaries and Affiliates with an incentive plan that gives officers, employees, directors, and consultants financial incentives directly linked to shareholder value. This Plan is intended to be a successor to the Company’s Amended and Restated 1994 Stock Award Plan, the Medtronic, Inc. 1998 Outside Director Stock Compensation Plan, the Medtronic, Inc. Executive Incentive Plan, the Medtronic, Inc. — Kyphon Inc. 2002 Stock Plan, and the Medtronic, Inc. 2003 Long-Term Incentive Plan, and to serve as the Company’s primary vehicle for equity compensation awards and long-term cash incentive awards for employees, directors, and other service providers, as well as annual bonus awards for the Company’s executive officers. Following the date that this Plan is approved by the Company’s shareholders, no further equity compensation awards shall be granted pursuant to any other Company plan (it being understood that outstanding awards under such plans will continue to be settled pursuant to the terms of such plans).
 
1.2.     Definitions. Certain terms used herein have definitions given to them in the first place in which they are used. In addition, for purposes of this Plan, the following terms are defined as set forth below:
 
(a) “Act” means the Securities Exchange Act of 1934, as amended from time to time, any regulations promulgated thereunder, and any successor thereto.
 
(b) “Administrator” shall have the meaning set forth in Section 2.2.
 
(c) “Affiliate” means a corporation or other entity controlled by, controlling, or under common control with, the Company.
 
(d) “Applicable Exchange” means the New York Stock Exchange or such other securities exchange as may at the applicable time be the principal market for the Common Stock.
 
(e) “Award” means an Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit, Other Stock-Based Award, or Performance Award granted pursuant to the terms of this Plan.