##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2007
 or
 o
    
    Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
 For the transition period fromto
 COMMISSION FILE NUMBER: 000-49798
 THORATEC CORPORATION
 (Exact name of registrant as specified in its charter)
 California
(State or other jurisdiction of incorporation or 
organization)
    
    94-2340464
(I.R.S. Employer Identification No.)6035 Stoneridge Drive, Pleasanton, California
(Address of principal executive offices)
    
    94588
(Zip Code)
 (925) 847-8600
(Registrants telephone number, including area code)
 Indicate by check mark whether the registrant: þ o
 Indicate by check mark whether the registrant is, a large accelerated filer, an accelerated filer
or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act):
 þ o o
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act):
 o þ




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##### 



THORATEC CORPORATION AND SUBSIDIARIES
 TABLE OF CONTENTS
 Part I. Financial InformationItem 1. Condensed Consolidated Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of June 30, 2007 and December 30, 2006Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2007 and July 1, 2006Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and July 1, 2006Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2007 and July 1, 2006Notes to Condensed Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosure About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 4. Submission of Matters to a Vote of Security HoldersItem 6. ExhibitsSignaturesExhibitsEXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  
 Thoratec, the Thoratec logo, Thoralon, TLC-II, HeartMate, and HeartMate II are registered
trademarks of Thoratec Corporation, and IVAD is a trademark of Thoratec Corporation.CentriMag is a registered trademark of Levitronix LLC.ITC, A-VOX Systems, AVOXimeter, HEMOCHRON, ProTime, Surgicutt, Tenderlett, Tenderfoot, and IRMA are
registered trademarks of International Technidyne Corporation (ITC), our wholly-owned subsidiary. 2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 THORATEC CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (unaudited)
(in thousands)
 June 30,
    
    
    December 30,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    16,889
    
    
    $
    67,453Short-term available-for-sale investments
    
    
    184,393
    
    
    
    127,025Restricted short-term investments
    
    
    
    
    
    
    1,681Receivables, net of allowances of $639 and $491, respectively
    
    
    42,237
    
    
    
    43,718Inventories
    
    
    58,010
    
    
    
    49,666Deferred tax assets
    
    
    5,945
    
    
    
    6,623Prepaid expenses and other assets
    
    
    7,007
    
    
    
    2,986Total current assets
    
    
    314,481
    
    
    
    299,152Property, plant and equipment, net
    
    
    46,509
    
    
    
    45,808Goodwill
    
    
    98,494
    
    
    
    98,494Purchased intangible assets, net
    
    
    128,053
    
    
    
    134,349Deferred tax assets
    
    
    220
    
    
    
    1,006Other assets
    
    
    16,303
    
    
    
    12,326Total Assets
    
    $
    604,060
    
    
    $
    591,135LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    8,882
    
    
    $
    13,591Accrued compensation
    
    
    11,331
    
    
    
    12,043Accrued income taxes
    
    
    450
    
    
    
    3,691Other accrued liabilities
    
    
    4,208
    
    
    
    4,136Total current liabilities
    
    
    24,871
    
    
    
    33,461Senior subordinated convertible notes
    
    
    143,750
    
    
    
    143,750Long-term deferred tax liability
    
    
    44,562
    
    
    
    46,421Other
    
    
    7,919
    
    
    
    2,430Total Liabilities
    
    
    221,102
    
    
    
    226,062Shareholders equity:Common shares: authorized 100,000; issued and outstanding 53,581 and 52,329, respectively
    
    
    445,690
    
    
    
    427,941Accumulated deficit
    
    
    (63,697
    )
    
    
    (63,675
    )Accumulated other comprehensive income (loss):Unrealized loss on investments
    
    
    (98
    )
    
    
    (16
    )Cumulative translation adjustments
    
    
    1,063
    
    
    
    823Total accumulated other comprehensive income
    
    
    965
    
    
    
    807Total Shareholders Equity
    
    
    382,958
    
    
    
    365,073Total Liabilities and Shareholders Equity
    
    $
    604,060
    
    
    $
    591,135
  3




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THORATEC CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
(in thousands, except per share data)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    July 1,
    
    
    June 30,
    
    
    July 1,2007
    
    
    2006
    
    
    2007
    
    
    2006Product sales
    
    $
    57,333
    
    
    $
    54,783
    
    
    $
    114,643
    
    
    $
    103,538Cost of product sales
    
    
    23,648
    
    
    
    22,654
    
    
    
    46,445
    
    
    
    42,762Gross profit
    
    
    33,685
    
    
    
    32,129
    
    
    
    68,198
    
    
    
    60,776Operating expenses:Selling, general and administrative
    
    
    19,134
    
    
    
    19,191
    
    
    
    41,079
    
    
    
    37,251Research and development
    
    
    10,767
    
    
    
    9,757
    
    
    
    21,660
    
    
    
    19,342Amortization of purchased intangible assets
    
    
    3,143
    
    
    
    2,973
    
    
    
    6,296
    
    
    
    5,947Litigation
    
    
    
    
    
    
    390
    
    
    
    
    
    
    
    447Total operating expenses
    
    
    33,044
    
    
    
    32,311
    
    
    
    69,035
    
    
    
    62,987Income (loss) from operations
    
    
    641
    
    
    
    (182
    )
    
    
    (837
    )
    
    
    (2,211
    )Other income and (expense):Interest expense
    
    
    (1,074
    )
    
    
    (1,005
    )
    
    
    (2,142
    )
    
    
    (2,108
    )Interest income and other
    
    
    1,766
    
    
    
    1,791
    
    
    
    3,953
    
    
    
    3,492Income (loss) before income tax benefit (expense)
    
    
    1,333
    
    
    
    604
    
    
    
    974
    
    
    
    (827
    )Income tax benefit (expense)
    
    
    (80
    )
    
    
    (267
    )
    
    
    4
    
    
    
    234Net income (loss)
    
    $
    1,253
    
    
    $
    337
    
    
    $
    978
    
    
    $
    (593
    )Net income (loss) per share, basic and diluted
    
    $
    0.02
    
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    (0.01
    )Shares used to compute net income (loss) per share:Basic
    
    
    53,370
    
    
    
    52,291
    
    
    
    53,055
    
    
    
    52,254Diluted
    
    
    54,728
    
    
    
    53,316
    
    
    
    54,421
    
    
    
    52,254
  4




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THORATEC CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
(in thousands)
 Six Months EndedJune 30,
    
    
    July 1,2007
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    978
    
    
    $
    (593
    )Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization
    
    
    10,755
    
    
    
    9,958Investment discount amortization
    
    
    369
    
    
    
    114Write-down of investment
    
    
    215
    
    
    
    Non-cash interest and other expenses
    
    
    542
    
    
    
    401Tax benefit related to stock options
    
    
    1,961
    
    
    
    2,120Share-based compensation expense
    
    
    6,231
    
    
    
    5,441Excess tax benefits from share-based compensation
    
    
    (1,147
    )
    
    
    (1,985
    )Loss on disposal of assets
    
    
    50
    
    
    
    10Change in net deferred tax liability
    
    
    (925
    )
    
    
    (2,359
    )Changes in assets and liabilities:Receivables
    
    
    538
    
    
    
    447Inventories
    
    
    (10,094
    )
    
    
    694Prepaid expenses and other assets
    
    
    (1,185
    )
    
    
    (117
    )Accounts payable and other liabilities
    
    
    (5,172
    )
    
    
    (4,949
    )Income taxes
    
    
    (4,137
    )
    
    
    (1,011
    )Other
    
    
    (55
    )
    
    
    (97
    )Net cash provided by (used in) operating activities
    
    
    (1,076
    )
    
    
    8,074Cash flows from investing activities:Purchases of investments
    
    
    (202,283
    )
    
    
    (111,475
    )Sales of  investments
    
    
    144,375
    
    
    
    73,908Maturities
of investments and restricted investments
    
    
    1,712
    
    
    
    31,020Purchases of property, plant and equipment, net
    
    
    (3,408
    )
    
    
    (20,802
    )Net cash used in investing activities
    
    
    (59,604
    )
    
    
    (27,349
    )Cash flows from financing activities:Proceeds from stock option exercises
    
    
    8,612
    
    
    
    9,754Proceeds from stock issued under employee stock purchase plan
    
    
    1,084
    
    
    
    860Excess tax benefits from share-based compensation
    
    
    1,147
    
    
    
    1,985Repurchase and retirement of common shares
    
    
    (775
    )
    
    
    (16,112
    )Net cash provided by (used in) financing activities
    
    
    10,068
    
    
    
    (3,513
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    48
    
    
    
    315Net decrease in cash and cash equivalents
    
    
    (50,564
    )
    
    
    (22,473
    )Cash and cash equivalents at beginning of period
    
    
    67,453
    
    
    
    35,109Cash and cash equivalents at end of period
    
    $
    16,889
    
    
    $
    12,636Supplemental disclosure of cash flow information:Cash paid for taxes
    
    $
    3,600
    
    
    $
    1,042Cash paid for interest
    
    $
    1,707
    
    
    $
    1,707Supplemental disclosure of non-cash investing and financing activities:Transfers of equipment from inventory
    
    $
    1,977
    
    
    $
    855
  5




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THORATEC CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (unaudited)
(in thousands)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    July 1,
    
    
    June 30,
    
    
    July 1,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    1,253
    
    
    $
    337
    
    
    $
    978
    
    
    $
    (593
    )Other net comprehensive income (loss):Unrealized
gain (loss) on investments
(net of taxes of $55 and $49 for
the three months ended and $55 and
$87 for the six months ended June
30, 2007 and July 1, 2006,
respectively)
    
    
    (83
    )
    
    
    73
    
    
    
    (82
    )
    
    
    131Foreign currency translation
adjustments (net of taxes of none
and $79 for the three months ended
and none and $90 for the six
months ended June 30, 2007 and
July 1, 2006, respectively)
    
    
    225
    
    
    
    276
    
    
    
    240
    
    
    
    315Comprehensive income (loss)
    
    $
    1,395
    
    
    $
    686
    
    
    $
    1,136
    
    
    $
    (147
    )
  6




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THORATEC CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 1. Basis of Presentation
   2. Income Taxes
     7




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3. Recently Issued Accounting Pronouncements
 Definition of Settlement in
FASB Interpretation No. 48
   4. Cash and cash equivalents
  5. Investments
  8




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6. Financial Instruments
     7. Inventories
  As ofJune 30,
    
    
    December 30,2007
    
    
    2006(in thousands)Finished goods
    
    $
    25,823
    
    
    $
    22,527Work in process
    
    
    8,365
    
    
    
    7,008Raw materials
    
    
    23,822
    
    
    
    20,131Total
    
    $
    58,010
    
    
    $
    49,666
  9




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8. Property, Plant and Equipment, net
  As ofJune 30,
    
    
    December 30,2007
    
    
    2006(in thousands)Land
    
    $
    4,096
    
    
    $
    4,096Building
    
    
    12,040
    
    
    
    12,038Building lease
    
    
    2,285
    
    
    
    2,285Equipment
    
    
    51,044
    
    
    
    47,904Rental equipment
    
    
    10,131
    
    
    
    8,612Building and leasehold improvements
    
    
    16,775
    
    
    
    16,258Total
    
    
    96,371
    
    
    
    91,193Accumulated depreciation and amortization
    
    
    (49,862
    )
    
    
    (45,385
    )Property, plant and equipment, net
    
    $
    46,509
    
    
    $
    45,808
  9. Other Assets
   10. Goodwill and Purchased Intangible Assets
   10




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As of June 30, 2007Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    Amount(in thousands)Patents and trademarks
    
    $
    38,515
    
    
    $
    (23,227
    )
    
    $
    15,288Core technology
    
    
    37,485
    
    
    
    (11,034
    )
    
    
    26,451Developed technology
    
    
    125,742
    
    
    
    (40,152
    )
    
    
    85,590Customer and distributor relationships and other
    
    
    897
    
    
    
    (173
    )
    
    
    724Total purchased intangible assets
    
    $
    202,639
    
    
    $
    (74,586
    )
    
    $
    128,053
 As of December 30, 2006Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    Amount(in thousands)Patents and trademarks
    
    $
    38,515
    
    
    $
    (21,350
    )
    
    $
    17,165Core technology
    
    
    37,485
    
    
    
    (10,275
    )
    
    
    27,210Developed technology
    
    
    125,742
    
    
    
    (36,564
    )
    
    
    89,178Customer and distributor relationships and other
    
    
    897
    
    
    
    (101
    )
    
    
    796Total purchased intangible assets
    
    $
    202,639
    
    
    $
    (68,290
    )
    
    $
    134,349
  11. Contingencies
  12. Long-Term Debt
   11




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Fiscal Year2004(in millions)Long Term Debt Offering Proceeds:Principal amount of convertible notes at maturity
    
    $
    247.4Original issue discount
    
    
    (103.7
    )Debt issuance costs
    
    
    (4.3
    )Net proceeds
    
    $
    139.4
       12




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13. Share-Based Compensation
       Equity Plans
   13




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Stock Options
    Three Months Ended
    
    Six Months EndedJune 30, 2007
    
    July 1, 2006
    
    June 30, 2007
    
    July 1, 2006Risk-free interest
rate (weighted average)
    
    
    4.73
    %
    
    
    5.02
    %
    
    
    4.81
    %
    
    
    4.53
    %Expected volatility
    
    
    40
    %
    
    
    40
    %
    
    
    40
    %
    
    
    40
    %Expected option life (years)
    
    
    5.02 to 6.06
    
    
    
    3.52 to 4.62
    
    
    
    5.08 to 6.06
    
    
    
    3.84 to 5.22Dividends
    
    None
    
    
    None
    
    
    None
    
    
    None
   14




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Number of
    
    
    Weighted
    
    
    Weighted AverageOptions
    
    
    Average Exercise
    
    
    Remaining Contract(in thousands)
    
    
    Price Per Share
    
    
    Life (years)Outstanding options at December 30, 2006
    
    
    6,585
    
    
    $
    14.65
    
    
    
    6.74Granted
    
    
    561
    
    
    
    18.26Exercised
    
    
    (727
    )
    
    
    11.84Forfeited or expired
    
    
    (170
    )
    
    
    17.13Outstanding options at June 30, 2007
    
    
    6,249
    
    
    $
    15.24
    
    
    
    6.45Outstanding options exercisable at June 30, 2007
    
    
    4,259
    
    
    $
    13.53
    
    
    
    5.41Outstanding
options expected to become exercisable at June 30, 2007
    
    
    5,778
    
    
    $
    14.90
    
    
    
    6.26
 Restricted Stock
    Number of
    
    
    Weighted AverageShares
    
    
    Grant Date Fair(in thousands)
    
    
    ValueOutstanding unvested restricted stock at December 30, 2006
    
    
    422
    
    
    $
    17.63Granted
    
    
    504
    
    
    
    18.21Vested
    
    
    (133
    )
    
    
    16.53Forfeited or expired
    
    
    (28
    )
    
    
    18.53Outstanding unvested restricted stock at June 30, 2007
    
    
    765
    
    
    $
    18.17
 Restricted Stock Units
   Number of
    
    
    Weighted Average
    
    
    Weighted AverageUnits
    
    
    Grant Date Fair
    
    
    Remaining Contract(in thousands)
    
    
    Value
    
    
    (in years)Outstanding units at December 30, 2006
    
    
    10
    
    
    $
    19.08
    
    
    
    1.74Granted
    
    
    14
    
    
    
    18.25Released
    
    
    (2
    )
    
    
    20.27Forfeited or Expired
    
    
    
    
    
    
    Outstanding units at June 30, 2007
    
    
    22
    
    
    $
    18.47
    
    
    
    1.94
 15




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Employee Stock Purchase Plan
   Risk-free interest rate
    
    
    5.01%Expected volatility
    
    
    40%Expected option life
    
    0.50 yearsDividends
    
    None
  14. Net Income (Loss) Per Share
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    July 1,
    
    
    June 30,
    
    
    July 1,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands, except per share data)Net income (loss)
    
    $
    1,253
    
    
    $
    337
    
    
    $
    978
    
    
    $
    (593
    )Weighted average number of common shares-basic
    
    
    53,370
    
    
    
    52,291
    
    
    
    53,055
    
    
    
    52,254Dilutive
effect of stock-based compensation plans
    
    
    1,358
    
    
    
    1,025
    
    
    
    1,366
    
    
    
    Weighted average number of common shares-diluted
    
    
    54,728
    
    
    
    53,316
    
    
    
    54,421
    
    
    
    52,254Net income (loss) per common share, basic and diluted
    
    $
    0.02
    
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    (0.01
    )
  .
 16




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15. Business Segment and Geographical Data
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    July 1,
    
    
    June 30,
    
    
    July 1,2007
    
    
    2006
    
    
    2007
    
    
    2006As Restated
    
    
    
    
    
    
    As Restated(e)
    
    
    
    
    
    
    (e)(in thousands)Product sales:Cardiovascular
    
    $
    34,153
    
    
    $
    35,797
    
    
    $
    69,691
    
    
    $
    65,612ITC
    
    
    23,180
    
    
    
    18,986
    
    
    
    44,952
    
    
    
    37,926Total product sales
    
    $
    57,333
    
    
    $
    54,783
    
    
    $
    114,643
    
    
    $
    103,538Income (loss) before income taxes and other:Cardiovascular (a)(d)
    
    $
    1,268
    
    
    $
    2,700
    
    
    $
    2,395
    
    
    $
    3,336ITC(a)(d)
    
    
    1,861
    
    
    
    796
    
    
    
    3,259
    
    
    
    1,486Corporate (b)(d)
    
    
    (2,488
    )
    
    
    (3,288
    )
    
    
    (6,491
    )
    
    
    (6,586
    )Litigation (c)
    
    
    
    
    
    
    (390
    )
    
    
    
    
    
    
    (447
    )Income (loss) from operations
    
    
    641
    
    
    
    (182
    )
    
    
    (837
    )
    
    
    (2,211
    )Other income and (expense):Interest expense (b)
    
    
    (1,074
    )
    
    
    (1,005
    )
    
    
    (2,142
    )
    
    
    (2,108
    )Interest income and other (b)
    
    
    1,766
    
    
    
    1,791
    
    
    
    3,953
    
    
    
    3,492Income (loss) before income tax
benefit (expense)
    
    $
    1,333
    
    
    $
    604
    
    
    $
    974
    
    
    $
    (827
    )
 As
ofJune 30,
    
    
    December 30,2007
    
    

2006(in
thousands)Total assets:Cardiovascular
    
    $
    319,520
    
    
    $
    319,604ITC
    
    
    61,471
    
    
    
    58,030Corporate (b)
    
    
    223,069
    
    
    
    213,501Total assets
    
    $
    604,060
    
    
    $
    591,135
 
 (a)
    
    Includes amortization expense on purchased intangible assets of $2.9 million and $5.9 million
for the three and six months ended June 30, 2007, respectively, and $2.9 million and $5.9
million for the three and six months ended July 1, 2006, respectively, related to the
Cardiovascular segment. The ITC segment includes amortization expense on purchased intangible
assets of $0.2 million and $0.4 million for the three and six months ended June 30, 2007,
respectively, and $40,000 and $79,000 for the three and six months ended July 1, 2006,
respectively.(b)
    
    Represents unallocated costs and income, not specifically identified to any particular business segment.(c)
    
    Relates to litigation expenses not specifically identified to a particular business
segment.(d)
    
    Includes SFAS No. 123(R) expense of $1.5 million, $0.8 million and $0.6 million for
Cardiovascular, ITC and Corporate, respectively, for the three months ended June 30, 2007 and
$1.4 million, $0.8 million and $0.4 million for Cardiovascular, ITC and Corporate,
respectively, for the three months ended July 1, 2006 and SFAS No. 123(R) expense of $3.4
million, $1.6 million and $1.2 million for Cardiovascular, ITC and Corporate, respectively,
for the six months ended June 30, 2007 and $2.8 million, $1.5 million and $0.7 million for Cardiovascular, ITC and Corporate, respectively, for
the six months ended July 1, 2006.(e)
    
    The restatement is to reclassify certain general and administrative expenses from the
Corporate to the Cardiovascular segment on a basis consistent with our 2005 Annual Report on
Form 10-K. As a result of this restatement, for the three months ended July 1, 2006, income
before taxes from the Cardiovascular segment increased by $1.3 million and the loss before
taxes from Corporate increased by $1.3 million. In addition, for the six months ended July 1,
2006, income before taxes from the Cardiovascular segment decreased by $0.4 million and the
loss before taxes from Corporate decreased by $0.4 million. 17




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    July 1,
    
    
    June 30,
    
    
    July 1,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands)Domestic
    
    $
    41,222
    
    
    $
    42,065
    
    
    $
    84,900
    
    
    $
    78,711International
    
    
    16,111
    
    
    
    12,718
    
    
    
    29,743
    
    
    
    24,827Total product sales
    
    $
    57,333
    
    
    $
    54,783
    
    
    $
    114,643
    
    
    $
    103,538
 18




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward-Looking Statements
 This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These statements can be identified by the words expects, projects,
hopes, believes, intends, should, estimate, will, would, may, anticipates,
plans, could and other similar words. Actual results, events or performance could differ
materially from these forward-looking statements based on a variety of factors, many of which are
beyond our control. Therefore, readers are cautioned not to put undue reliance on these statements.
Factors that could cause actual results or conditions to differ from those anticipated by these and
other forward-looking statements include those more fully described in the Risk Factors section
of our 2006 Annual Report on Form 10-K (the 2006 Annual Report) and in other documents we file
with the Securities and Exchange Commission (SEC). These forward-looking statements speak only as
of the date hereof. We are not under any obligation, and we expressly disclaim any obligation, to
publicly release the results of any revisions to these forward-looking statements that may be made
to reflect events or circumstances after the date hereof, or to reflect the occurrence of
unanticipated events.
 The following presentation of managements discussion and analysis of our financial condition
and results of operations should be read together with our condensed consolidated financial
statements included in this Quarterly Report on Form 10-Q .
 Overview
     Our Business Model
   
    
    Circulatory Support Products.Our mechanical circulatory support products include the
PVAD, IVAD, HeartMate XVE, HeartMate II and CentriMag for acute, intermediate and long-term
mechanical circulatory support for patients with advanced HF. We also manufacture and sell
small diameter grafts using our proprietary materials to address the vascular access market for
hemodialysis.
 19




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##### Table of Contents




    
    Point-of-Care Diagnostics.Our point-of-care products include diagnostic test systems
that monitor blood coagulation while a patient is being administered certain
anticoagulants, as well as monitor blood gas/electrolytes, oxygenation and chemistry
status.
    
    Incision. Our incision products include devices used to obtain a patients blood sample
for diagnostic testing and screening for platelet function.
 Cardiovascular Division
  
    
    The PVAD is an external, pulsatile ventricular assist device for short to intermediate
term mechanical circulatory support. This device provides left, right and biventricular
mechanical circulatory support. The PVAD is approved by the FDA for use as a
bridge-to-transplantation (BTT), including home discharge, and for post-cardiotomy
myocardial recovery.
    
    The IVAD is an implantable, pulsatile, ventricular assist device approved for BTT,
including home discharge, and for post-cardiotomy myocardial recovery and provides left,
right, or biventricular mechanical circulatory support. The IVAD utilizes the same internal
working components as the PVAD, but has an outer housing made of a titanium alloy that
makes it more suitable for implantation.
    
    The HeartMate XVE is an implantable, pulsatile, left ventricular assist device for
intermediate and longer-term mechanical circulatory support and is the only device approved
in the U.S., Europe and Canada for permanent support of patients ineligible for heart
transplantation. The unique, textured blood-contacting surface of this device eliminates
the need for systemic anticoagulation. The system is comprised of the blood pump and a
wearable controller and batteries providing a high degree of patient freedom and mobility.
    
    The HeartMate II is an implantable, continuous flow, left ventricular assist device
consisting of a miniature rotary blood pump designed to provide intermediate and long-term
mechanical circulatory support. Its design is intended to be not only smaller, but also
simpler, quieter, and longer lasting than other commercially available ventricular assist
devices. The HeartMate II is CE Mark approved for distribution in Europe, and is in Phase
II pivotal trial in the U.S.
    
    CentriMag is an external device for short-term mechanical circulatory support
consisting of a single-use blood pump, a motor and a device console. This device is 510(k)
approved by the FDA for patients requiring extracorporeal circulatory support during
cardiac surgery.
    20




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##### Table of Contents



ITC Division
  
    
    The Hemochron point-of-care coagulation system is used to monitor a patients
coagulation while being administered anticoagulants in various settings. For instance, it
is used in the cardiovascular operating room and cardiac catheterization lab to monitor the
drug Heparin, and in an anticoagulation clinic to monitor the drug warfarin. The system
consists of a small portable analytical instrument and disposable test cuvettes.
    
    The IRMA point-of-care blood gas/electrolyte and chemistry system is used to monitor a
patients blood gas/electrolyte and chemistry status. The system consists of a small,
portable analytical instrument and disposable test cartridges.
    
    The AVOXimeter system is used to assess a patients oxygenation status and is commonly
used in the cardiac catherization lab, the intensive care unit (ICU), the neonatal
intensive care unit (NICU) and the emergency department. The system consists of a small,
portable instrument and disposable test cuvettes.
    
    The ProTime coagulation monitoring system is used to monitor patients coagulation
while they are taking oral anticoagulants such as warfarin, and can be prescribed for use
by patients at home or can be used in the physicians office or clinic. The system consists
of a small, portable analytical instrument and disposable test cuvettes.
    
    The Hemoglobin Pro is used by professionals, mainly in the doctors office, to test for
anemia. It provides quick results from a very small blood sample. The system consists of a
small, portable, hand-held test meter and disposable test strips.
    
    The Tenderfoot, the Tenderlett and the Surgicutt incision products are used by
professionals to obtain a patients blood sample for diagnostic testing. The Tenderfoot is
a heel stick used for infant testing, the Tenderlett is used for finger incisions and the
Surgicutt is used to perform screening tests to determine platelet function. These products
feature permanently retracting blades for safe, incision with minimal pain, as compared to
traditional lancets, which puncture the skin.
  21




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##### Table of Contents



Critical Accounting Policies and Estimates
  Revenue Recognition
    Reserves
     22




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##### Table of Contents



Income Taxes
      Evaluation of Purchased Intangibles and Goodwill for Impairment
   Valuation of Share-Based Awards
  23




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##### Table of Contents



Results of Operations
  Three Months Ended
    
    Six Months EndedJune 30,
    
    July 1,
    
    June 30,
    
    July 1,2007
    
    2006
    
    2007
    
    2006Product sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of product sales
    
    
    41
    
    
    
    41
    
    
    
    40
    
    
    
    41Gross profit
    
    
    59
    
    
    
    59
    
    
    
    60
    
    
    
    59Operating expenses:Selling, general and administrative
    
    
    33
    
    
    
    35
    
    
    
    36
    
    
    
    36Research and development
    
    
    19
    
    
    
    18
    
    
    
    19
    
    
    
    19Amortization of purchased
intangible assets
    
    
    6
    
    
    
    5
    
    
    
    6
    
    
    
    6Litigation
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    Total operating expenses
    
    
    58
    
    
    
    59
    
    
    
    61
    
    
    
    61Income (loss) from operations
    
    
    1
    
    
    
    
    
    
    
    (1
    )
    
    
    (2
    )Interest expense
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )Interest income and other
    
    
    3
    
    
    
    3
    
    
    
    4
    
    
    
    3Income (loss) before income tax
benefit (expense)
    
    
    2
    
    
    
    1
    
    
    
    1
    
    
    
    (1
    )Income tax benefit (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    
    2
    %
    
    
    1
    %
    
    
    1
    %
    
    
    (1
    )%
  Three months ended June 30, 2007 and July 1, 2006
 Product Sales
  
    
    Cardiovascular product sales decreased by $1.7 million, because of a decrease in sales
of our Thoratec product line resulting from variability in the BTT
market and increased usage of short term devices, partially offset by an increase in international sales of HeartMate II. In addition, product sales from CentriMag, contributed to increased sales
with no comparative sales in the second quarter of 2006.
    
    Point-of-care diagnostic product sales increased by $4.2 million, due primarily to
increases in sales of our alternative site and incision products resulting from market
expansion and competitor product recalls. In addition, product sales from the AVOXimeter
system contributed to the increase in sales in the second quarter of 2007, with no
comparative sales in the second quarter of 2006.
  24




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##### Table of Contents



Gross Profit
  
    
    Cardiovascular gross profit percentage remained consistent, as a result of unfavorable
product mix offset by improved foreign currency exchange rates.
    
    ITC gross profit percentage increased by 3.0% due to improved manufacturing variances.
 Selling, General and Administrative
  
    
    Cardiovascular costs increased by $0.4 million, primarily due to increase in personnel
costs, related to the expansion of our sales force and marketing development initiatives, as
we prepare to launch our HeartMate II, partially offset by lower outside consulting
expenses.
    
    ITC costs increased by $0.3 million, primarily due to higher personnel costs. In
addition, there was an increase in selling costs related to AVOXimeter products with no
comparative costs in the second quarter of 2006.
    
    Corporate costs decreased by $0.8 million because of
2006 CEO transition costs and lower personnel expenses.
 Research and Development
  Amortization of Purchased Intangible Assets
  Interest Expense
  25




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##### Table of Contents



Interest Income and Other
  Income Taxes
   Six months ended June 30, 2007 and July 1, 2006
 Product Sales
  
    
    Cardiovascular product sales increased $4.1 million,
primarily due to higher sales of HeartMate II, partially offset by lower sales in our Thoratec product line resulting from variability in the BTT
market and increased usage of short term devices. In addition,
total product sales from CentriMag also contributed to the increase in sales, with no
comparative sales in the first six months of 2006.
    
    Point-of-care diagnostic product sales increased by $7.0 million, primarily due to an
increase in sales of our hospital point-of-care along with an increase in alternative site
and incision products resulting from market expansion and competitor product recalls. In
addition, product sales from the AVOXimeter system also contributed to the increase in
sales, with no comparative sales in the first six months of 2006.
 26




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##### Table of Contents



Gross Profit
  
    
    Cardiovascular gross profit percentage increased 0.2% due to improved foreign currency
exchange rates offset by unfavorable product mix.
    
    ITC division gross profit percentage increased by 3.0% due to improved manufacturing
variances.
 Selling, General and Administrative
  
    
    Cardiovascular costs increased by $1.6 million, primarily due to an increase in personnel
costs related to our preparation for the launch of our HeartMate II and related increase in
share-based compensation costs.
    
    ITC costs increased by $1.1 million, primarily due to higher personnel costs and
consulting fees. In the first six months of 2007 included costs related to the AVOXimeter
products with no comparative costs in the first six months of 2006.
    
    Corporate costs increased by $1.1 million because of higher consulting and legal expenses
related to the review we conducted of our stock option granting practices in the first six
months of 2007 as compared to the first six months of 2006.
 Research and Development
  Amortization of Purchased Intangible Assets
  Interest Expense
  27




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##### Table of Contents



Interest Income and Other
  Income Taxes
   Liquidity and Capital Resources
   28




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Off Balance Sheet Arrangements
  Contractual Obligations
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 Interest Rate Risk
   Foreign Currency Rate Fluctuations
  29




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
  Disclosure Controls and Procedures
   30




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##### Table of Contents



Changes to Internal Controls
  Inherent Limitations on Controls and Procedures
   
 PART II. OTHER INFORMATION
 
 ITEM 1A. RISK FACTORS
  31




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##### Table of Contents



ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   Total number
    
    
    Approximateof shares
    
    
    value of sharespurchased
    
    
    authorized to beunder
    
    
    purchased underTotal number
    
    
    
    
    
    
    publicly
    
    
    publiclyof shares
    
    
    Average price
    
    
    announced
    
    
    announcedpurchased (1)
    
    
    paid per share
    
    
    programs (2)
    
    
    programs(in thousands, except per share data)April 1, 2007 through April 28, 2007
    
    
    2.2
    
    
    $
    21.22
    
    
    
    
    
    
    $
    April 29, 2007 through May 26, 2007
    
    
    0.9
    
    
    
    18.37
    
    
    
    
    
    
    
    May 27, 2007 through June 30, 2007
    
    
    2.1
    
    
    
    19.17
    
    
    
    
    
    
    
    Total
    
    
    5.2
    
    
    $
    19.88
    
    
    
    
    
    
    $
    
 
 (1)
    
    Shares purchased that were not part of our publicly announced repurchase programs represent
the surrender value of shares of restricted stock used to pay income taxes due upon vesting,
and do not reduce the dollar value that may yet be purchased under our publicly announced
repurchase programs.(2)
    
    Our share repurchase programs, which authorized us to repurchase up to a total of $130
million of the Companys common shares, were publicly announced on February 11, 2004 as a $25
million program, on May 12, 2004 as a $60 million program, on July 29, 2004 as a $25 million
program and on February 2, 2006 as a $20 million program. These programs authorize us to
acquire shares in the open market or in privately negotiated transactions and do not have an
expiration date. No shares were repurchased under these programs during the three months ended
June 30, 2007. 32




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##### Table of Contents



ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  1.
    
    To elect the following directors to serve for the ensuing year until their successors are
elected:
 Number of VotesFor
    
    WithheldGerhard F. Burbach
    
    
    46,518,672
    
    
    
    1,615,905Howard E. Chase
    
    
    46,312,625
    
    
    
    1,821,952J. Daniel Cole
    
    
    46,552,709
    
    
    
    1,581,868Neil F. Dimick
    
    
    47,980,928
    
    
    
    153,649D. Keith Grossman
    
    
    46,265,020
    
    
    
    1,869,557J. Donald Hill
    
    
    47,826,801
    
    
    
    307,776Daniel M. Mulvena
    
    
    47,885,105
    
    
    
    249,472
 2.
    
    To ratify of the appointment of Deloitte & Touche LLP as the Companys independent auditors
for its fiscal year ending December 29, 2007:
 Number of VotesFor
    
    
    47,991,524Against
    
    
    126,435Abstain
    
    
    16,617
 33




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##### Table of Contents



ITEM 6. EXHIBITS
 10.1
    
    Thoratec Corporation Amended and Restated Deferred Compensation Plan Effective January 1, 2005.31.1
    
    Section 302 Certification of Chief Executive Officer.31.2
    
    Section 302 Certification of Chief Financial Officer.32.1
    
    Section 906 Certification of Chief Executive Officer.32.2
    
    Section 906 Certification of Chief Financial Officer.
 34




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##### Table of Contents



SIGNATURES
  THORATEC CORPORATIONDate: August 9, 2007
    /s/ Gerhard F. BurbachGerhard F. BurbachChief Executive OfficerDate: August 9, 2007
    /s/ David V. SmithDavid V. SmithChief Financial Officer 35