##### 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 July 2, 2005
 or
 o
    
    Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
 for the transition period from            to
 COMMISSION FILE NUMBER: 1-8145
 THORATEC CORPORATION
 (Exact name of registrant as specified in its charter)
 California(State or other jurisdiction of
    
    94-2340464incorporation or organization)
    
    (I.R.S. Employer Identification No.)6035 Stoneridge Drive, Pleasanton, California
    
    94588(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (925) 847-8600
 Indicate by check mark whether the registrant: þ o
 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act): þ o




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THORATEC
CORPORATION AND SUBSIDIARIES
 TABLE OF CONTENTS
 Part I. Financial InformationItem 1. Condensed Consolidated Financial Statements (unaudited)
    
    
    3Condensed Consolidated Balance Sheets as of July 2, 2005 and January 1, 2005
    
    
    3Condensed Consolidated Statements of Operations for the Three and Six Months Ended July 2, 2005 and
July 3, 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 2, 2005 and July 3, 2004
    
    
    5Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended July 2,
2005 and July 3, 2004
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosure of Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    34Part II. Other Information
    
    
    35Item 1. Legal Proceedings
    
    
    35Item 4. Submission of Matters to a Vote of Security Holders
    
    
    35Item 6. Exhibits
    
    
    35Signatures
    
    
    36Exhibits
    
    
    37EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 THORATEC CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (unaudited)
(in thousands)
 July 2,
    
    January 1,2005
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    20,396
    
    
    $
    16,017Short-term available-for-sale investments
    
    
    150,104
    
    
    
    129,842Restricted short-term investments
    
    
    3,347
    
    
    
    3,362Receivables, net of allowances of $856 and $708 respectively
    
    
    29,625
    
    
    
    33,051Inventories
    
    
    39,953
    
    
    
    39,141Deferred tax asset
    
    
    6,470
    
    
    
    6,470Prepaid expenses and other assets
    
    
    3,722
    
    
    
    3,873Total current assets
    
    
    253,617
    
    
    
    231,756Property, plant and equipment, net
    
    
    27,104
    
    
    
    27,584Goodwill
    
    
    94,097
    
    
    
    94,097Purchased intangible assets, net
    
    
    147,537
    
    
    
    153,141Restricted long-term investments
    
    
    3,221
    
    
    
    4,845Long-term deferred tax asset
    
    
    6,430
    
    
    
    6,381Other assets
    
    
    6,364
    
    
    
    6,611Total Assets
    
    $
    538,370
    
    
    $
    524,415Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    
    7,528
    
    
    
    7,699Accrued compensation
    
    
    9,814
    
    
    
    9,507Accrued income tax
    
    
    4,272
    
    
    
    2,299Other accrued expenses
    
    
    6,022
    
    
    
    6,001Total current liabilities
    
    
    27,636
    
    
    
    25,506Senior subordinated convertible notes
    
    
    143,750
    
    
    
    143,750Long-term deferred tax liability and other liabilities
    
    
    61,219
    
    
    
    63,051Total liabilities
    
    
    232,605
    
    
    
    232,307Shareholders Equity:Common shares; 100,000 authorized; issued and
outstanding 49,185 and 48,735, respectively
    
    
    373,519
    
    
    
    364,775Deferred compensation
    
    
    (1,173
    )
    
    
    (1,586
    )Accumulated deficit
    
    
    (66,442
    )
    
    
    (71,514
    )Accumulated other comprehensive income (loss):Unrealized loss on investments
    
    
    (285
    )
    
    
    (325
    )Cumulative translation adjustments
    
    
    146
    
    
    
    758Total accumulated other comprehensive income (loss)
    
    
    (139
    )
    
    
    433Total shareholders equity
    
    
    305,765
    
    
    
    292,108Total Liabilities and Shareholders Equity
    
    $
    538,370
    
    
    $
    524,415
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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 EndedJuly 2,
    
    July 3,
    
    July 2,
    
    July 3,2005
    
    2004
    
    2005
    
    2004Product sales
    
    $
    47,588
    
    
    $
    40,603
    
    
    $
    98,076
    
    
    $
    83,395Cost of product sales
    
    
    18,387
    
    
    
    16,314
    
    
    
    38,435
    
    
    
    34,035Gross profit
    
    
    29,201
    
    
    
    24,289
    
    
    
    59,641
    
    
    
    49,360Operating expenses:Selling, general and administrative
    
    
    14,806
    
    
    
    13,774
    
    
    
    29,623
    
    
    
    26,787Research and development
    
    
    7,925
    
    
    
    7,380
    
    
    
    15,644
    
    
    
    14,718Amortization of purchased intangible assets
    
    
    2,800
    
    
    
    2,931
    
    
    
    5,604
    
    
    
    5,862Litigation and other costs
    
    
    (1
    )
    
    
    
    
    
    
    177
    
    
    
    133Total operating expenses
    
    
    25,530
    
    
    
    24,085
    
    
    
    51,048
    
    
    
    47,500Income from operations
    
    
    3,671
    
    
    
    204
    
    
    
    8,593
    
    
    
    1,860Other income and (expense):Interest expense
    
    
    (1,037
    )
    
    
    (418
    )
    
    
    (2,045
    )
    
    
    (418
    )Interest income and other
    
    
    1,034
    
    
    
    475
    
    
    
    1,870
    
    
    
    939Income before income tax expense
    
    
    3,668
    
    
    
    261
    
    
    
    8,418
    
    
    
    2,381Income tax expense
    
    
    (1,247
    )
    
    
    (54
    )
    
    
    (2,862
    )
    
    
    (881
    )Net income
    
    $
    2,421
    
    
    $
    207
    
    
    $
    5,556
    
    
    $
    1,500Net income per share, basic and diluted
    
    $
    0.05
    
    
    $
    0.00
    
    
    $
    0.11
    
    
    $
    0.03Shares used to compute net income per share:Basic
    
    
    48,735
    
    
    
    53,722
    
    
    
    48,470
    
    
    
    54,907Diluted
    
    
    50,146
    
    
    
    55,175
    
    
    
    49,530
    
    
    
    56,315
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THORATEC CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 (in thousands)
 Six Months EndedJuly 2,
    
    July 3,2005
    
    2004Cash flows from operating activities:Net income
    
    $
    5,556
    
    
    $
    1,500Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    9,445
    
    
    
    9,327Investment premium amortization
    
    
    288
    
    
    
    270Non-cash interest and other expenses
    
    
    313
    
    
    
    418Tax benefit related to stock options
    
    
    2,062
    
    
    
    388Amortization of deferred compensation
    
    
    481
    
    
    
    455Loss on disposal of assets
    
    
    158
    
    
    
    1Change in net deferred tax liability
    
    
    (2,111
    )
    
    
    (1,698
    )Changes in assets and liabilities:Receivables
    
    
    3,426
    
    
    
    275Inventories
    
    
    (1,564
    )
    
    
    (3,257
    )Prepaid expenses and other assets
    
    
    151
    
    
    
    (696
    )Accounts payable and other liabilities
    
    
    2,305
    
    
    
    2,443Other
    
    
    139
    
    
    
    (7
    )Net cash provided by operating activities
    
    
    20,649
    
    
    
    9,419Cash flows from investing activities:Purchases of available-for-sale investments
    
    
    (53,265
    )
    
    
    (52,310
    )Sales of available-for-sale investments
    
    
    20,808
    
    
    
    31,050Maturities of available-for-sale investments
    
    
    13,535
    
    
    
    16,620Purchases of property, plant and equipment, net
    
    
    (2,866
    )
    
    
    (3,628
    )Net cash used in investing activities
    
    
    (21,788
    )
    
    
    (8,268
    )Cash flows from financing activities:Net proceeds from issuance of convertible notes
    
    
    
    
    
    
    139,181Proceeds from stock option exercises, net
    
    
    7,684
    
    
    
    2,070Proceeds from stock issued under employee stock purchase plan
    
    
    684
    
    
    
    788Repurchase of common stock
    
    
    (2,238
    )
    
    
    (71,759
    )Net cash provided by financing activities
    
    
    6,130
    
    
    
    70,280Effect of exchange rate changes on cash and cash equivalents
    
    
    (612
    )
    
    
    60Net increase in cash and cash equivalents
    
    
    4,379
    
    
    
    71,491Cash and cash equivalents at beginning of period
    
    
    16,017
    
    
    
    18,270Cash and cash equivalents at end of period
    
    $
    20,396
    
    
    $
    89,761Supplemental disclosure of cash flow information:Cash paid for taxes
    
    $
    1,044
    
    
    $
    465Cash paid for interest
    
    $
    1,707
    
    
    $
    Supplemental disclosure of non-cash investing and financing activities:Transfers of equipment from inventory
    
    $
    752
    
    
    $
    208
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THORATEC CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (unaudited)
 (in thousands)
 Three Months Ended
    
    Six Months EndedJuly 2,
    
    July 3,
    
    July 2,
    
    July 3,2005
    
    2004
    
    2005
    
    2004Net income
    
    $
    2,421
    
    
    $
    207
    
    
    $
    5,556
    
    
    $
    1,500Other net comprehensive income :Unrealized gain (loss) on
investments (net of taxes of
$(58) and $102 for the three
months ended and $50 and
$122 for the six months
ended July 2, 2005 and July
3, 2004, respectively)
    
    
    97
    
    
    
    (160
    )
    
    
    40
    
    
    
    (191
    )Foreign currency translation
adjustments (net of taxes of
$122 and $0 for the three
months ended and $155 and $0
for the six months ended
July 2, 2005 and July 3,
2004, respectively)
    
    
    (479
    )
    
    
    (11
    )
    
    
    (612
    )
    
    
    60Comprehensive income
    
    $
    2,039
    
    
    $
    36
    
    
    $
    4,984
    
    
    $
    1,369
  6




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THORATEC CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (in thousands, unless otherwise stated)
 1. Basis of Presentation
     2. Stock Based Compensation
  Three Months Ended
    
    Six Months EndedJuly 2,
    
    July 3,
    
    July 2,
    
    July 3,2005
    
    2004
    
    2005
    
    2004(in thousands, except per share data)(Restated)
    
    
    
    
    
    (Restated)Net income:As reported
    
    $
    2,421
    
    
    $
    207
    
    
    $
    5,556
    
    
    $
    1,500Add: Stock-based compensation expense
included in reported net income, net of
related tax effects
    
    
    164
    
    
    
    148
    
    
    
    318
    
    
    
    287Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards, net of
related tax effects
    
    
    (1,475
    )
    
    
    (3,981
    )
    
    
    (3,499
    )
    
    
    (5,877
    )Pro forma net income (loss)
    
    $
    1,110
    
    
    $
    (3,626
    )
    
    $
    2,375
    
    
    $
    (4,090
    )Basic and Diluted earnings (loss) per share:As reported
    
    $
    0.05
    
    
    $
    0.00
    
    
    $
    0.11
    
    
    $
    0.03Pro forma income (loss)
    
    $
    0.02
    
    
    $
    (0.07
    )
    
    $
    0.05
    
    
    $
    (0.07
    )
 7




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3. New Accounting Pronouncements
  4. Cash and cash equivalents
  5. Investments
    6. Financial Instruments
  8




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##### Table of Contents



7. Inventories
  As ofJuly 2,
    
    January 1,2005
    
    2005(in thousands)Finished goods
    
    $
    17,785
    
    
    $
    18,562Work in process
    
    
    8,286
    
    
    
    4,582Raw materials
    
    
    13,882
    
    
    
    15,997Total
    
    $
    39,953
    
    
    $
    39,141
 8. Property, Plant and Equipment
  As ofJuly 2,
    
    January 1,2005
    
    2005(in thousands)Property, plant and equipment, at cost
    
    $
    64,241
    
    
    $
    61,670Less accumulated depreciation
    
    
    (37,137
    )
    
    
    (34,086
    )Total
    
    $
    27,104
    
    
    $
    27,584
  9. Goodwill and Purchased Intangible Assets
  As ofJuly 2,
    
    January 1,2005
    
    2005(in thousands)Beginning balance
    
    $
    94,097
    
    
    $
    96,065Realization of acquired deferred tax asset
    
    
    
    
    
    
    (1,153
    )Reversal of accrual for securities registration costs
    
    
    
    
    
    
    (815
    )Ending balance
    
    $
    94,097
    
    
    $
    94,097
   9




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As of July 2, 2005Gross Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Net Carrying Amount(in thousands)Patents and Trademarks
    
    $
    37,815
    
    
    $
    (15,873
    )
    
    $
    21,942Core Technology
    
    
    37,485
    
    
    
    (8,002
    )
    
    
    29,483Developed Technology
    
    
    122,782
    
    
    
    (26,736
    )
    
    
    96,046Non-compete Agreement
    
    
    90
    
    
    
    (24
    )
    
    
    66Total Purchased Intangible Assets, net
    
    $
    198,172
    
    
    $
    (50,635
    )
    
    $
    147,537
 As of January 1, 2005Gross Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Net Carrying Amount(in thousands)Patents and Trademarks
    
    $
    37,815
    
    
    $
    (14,051
    )
    
    $
    23,764Core Technology
    
    
    37,485
    
    
    
    (7,242
    )
    
    
    30,243Developed Technology
    
    
    122,782
    
    
    
    (23,721
    )
    
    
    99,061Non-compete Agreement
    
    
    90
    
    
    
    (17
    )
    
    
    73Total Purchased Intangible Assets, net
    
    $
    198,172
    
    
    $
    (45,031
    )
    
    $
    153,141
  10. Long-Term Debt
    10




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Long Term Debt Offering Proceeds (in millions):Principal amount of convertible notes at maturity
    
    $
    247.4Original issue discount
    
    
    (103.7
    )Debt issuance costs
    
    
    (4.3
    )Net proceeds
    
    $
    139.4
     11. Common Stock
  12. Litigation and Other Costs
  Three Months Ended
    
    Six Months EndedJuly 2,
    
    July 3,
    
    July 2,
    
    July 3,2005
    
    2004
    
    2005
    
    2004(in thousands)Litigation
    
    $
    (1
    )
    
    $
    
    
    
    $
    177
    
    
    $
    133
 11




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Litigation
   Johnson v. Thoratec
Corporation, et al.
 Wong v. Grossman
   13. Income Taxes
    12




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14. Net Income Per Share
  Three Months Ended
    
    Six Months EndedJuly 2,
    
    July 3,
    
    July 2,
    
    July 3,2005
    
    2004
    
    2005
    
    2004(in thousands, except per share data)Net income
    
    $
    2,421
    
    
    $
    207
    
    
    $
    5,556
    
    
    $
    1,500Weighted average number of common shares-basic
    
    
    48,735
    
    
    
    53,722
    
    
    
    48,470
    
    
    
    54,907Dilutive effect of stock options & ESPP shares
    
    
    1,411
    
    
    
    1,453
    
    
    
    1,060
    
    
    
    1,408Weighted average number of common shares-diluted
    
    
    50,146
    
    
    
    55,175
    
    
    
    49,530
    
    
    
    56,315Net income per common share-basic and diluted
    
    $
    0.05
    
    
    $
    0.00
    
    
    $
    0.11
    
    
    $
    0.03
  15. Business Segment and Geographical Data
   Three Months Ended
    
    Six Months EndedJuly 2,
    
    July 3
    
    July 2,
    
    July 3,2005
    
    2004
    
    2005
    
    2004(in thousands)Product sales:Cardiovascular
    
    $
    28,776
    
    
    $
    23,072
    
    
    $
    60,842
    
    
    $
    49,625ITC
    
    
    18,812
    
    
    
    17,531
    
    
    
    37,234
    
    
    
    33,770Total product sales
    
    $
    47,588
    
    
    $
    40,603
    
    
    $
    98,076
    
    
    $
    83,395Income before income taxes:Cardiovascular(a)
    
    $
    4,262
    
    
    $
    1,420
    
    
    $
    10,391
    
    
    $
    4,314ITC(a)
    
    
    3,467
    
    
    
    2,348
    
    
    
    6,618
    
    
    
    4,641Corporate (b)
    
    
    (4,059
    )
    
    
    (3,564
    )
    
    
    (8,239
    )
    
    
    (6,961
    )Litigation and other costs (c)
    
    
    1
    
    
    
    
    
    
    
    (177
    )
    
    
    (133
    )Income from operations
    
    
    3,671
    
    
    
    204
    
    
    
    8,593
    
    
    
    1,860Other income and (expense):Interest expense
    
    
    (1,037
    )
    
    
    (418
    )
    
    
    (2,045
    )
    
    
    (418
    )Interest income and other
    
    
    1,034
    
    
    
    475
    
    
    
    1,870
    
    
    
    939Income before income tax expense
    
    $
    3,668
    
    
    $
    261
    
    
    $
    8,418
    
    
    $
    2,381
 
 (a)
    
    Amortization expense of $2.8 million and $5.6 million for the three and six months ended July
2, 2005 and $2.9 million and $5.9 million for the three and six months ended July 3, 2004,
respectively, related to the Cardiovascular segment. The ITC segment had amortization expense
of $40,000 for the three months ended and $79,000 for each of the six months ended July 2,
2005 and July 3, 2004, respectively.(b)
    
    Represents primarily general and administrative items not specifically identified to a
particular business segment. 13




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(c)
    
    Relates to expenses not specifically identified to a particular business segment.   Three Months Ended
    
    Six Months EndedJuly 2,
    
    July 3,
    
    July 2,
    
    July 3,2005
    
    2004
    
    2005
    
    2004(in thousands)Domestic
    
    $
    35,948
    
    
    $
    31,392
    
    
    $
    75,151
    
    
    $
    65,173International
    
    
    11,640
    
    
    
    9,211
    
    
    
    22,925
    
    
    
    18,222Total
    
    $
    47,588
    
    
    $
    40,603
    
    
    $
    98,076
    
    
    $
    83,395
 14




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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 and Section 21E of the Securities Exchange Act of 1934.
These statements can be identified by the words expects, projects, hopes, believes,
intends, should, estimate, will, would, may, anticipates, plans, could, and words
of similar import and the negatives thereof. Actual results 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. Investors are
cautioned that all such statements involve risks and uncertainties, including risks related to the
development of new markets such as Destination Therapy, the growth of existing markets for our
products, customer and physician acceptance of our products, changes in the mix of our product
sales and the related gross margin for such product sales, the results of clinical trials including
the HeartMate II, the ability to improve financial performance, regulatory approval processes, the
effect of healthcare reimbursement and coverage policies, the effects of seasonality in our product
sales, the effects of price competition from any of our competitors and the effects of any merger
and acquisition related activities. 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 Factors That May Affect Future Results section below and in other documents we
file with the Securities and Exchange Commission, or SEC. Actual results, events or performance may
differ materially. These forward-looking statements speak only as of the date hereof. We undertake
no 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 consolidated financial statements
included in this Form 10-Q , and our Annual Report on Form 10-K for 2004 filed with the SEC.
 Overview
  Our Business Model
   
    
    Circulatory Support Products.Our circulatory support products include VADs for the
short-term and long-term treatment of congestive heart failure.
    
    Vascular Graft Products.We have developed small diameter grafts using our proprietary
materials to address the vascular access market. Our grafts are sold in the United States
and internationally for use in hemodialysis.
  
    
    Point-of-Care Diagnostics. Our point-of-care products include coagulation diagnostic test
systems that monitor a patient while being administered certain anticoagulants, blood
gas/electrolyte and chemistry status, or anemia.
    
    Incision. Our incision products include devices used to obtain a patients blood sample
for diagnostic testing and screening for platelet function.
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##### Table of Contents



Cardiovascular segment
  
    
    The Thoratec Ventricular Assist Device System is an external device for short to mid-term
cardiac support, which is sold worldwide. The device is approved to assist the left and the
right ventricle and is worn outside of the body. The Thoratec VAD is approved for use in
bridge-to-transplant, or BTT.
    
    The Thoratec Implantable Ventricular Assist Device, or IVAD, is the only bi-ventricular
implantable blood pump approved for BTT and post-cardiotomy recovery. It can be used for
left, right, or biventricular support. The IVAD utilizes the same internal working
components as the Thoratec VAD System blood pump, but has an outer housing made of a
titanium alloy that makes it more suitable for implantation.
    
    The HeartMate Left Ventricular Assist System, also called the HeartMate XVE, is an
implantable device for mid to long-term cardiac support and the only device approved in the
United States, Europe and Canada for permanent support of those patients ineligible for
heart transplantation. The HeartMate XVE is approved for use in both BTT and Destination
Therapy, which is for permanent support for patients suffering from end-stage heart failure
who are not eligible for heart transplantation.
    
    The HeartMate II, which is currently in clinical trials for BTT and Destination Therapy,
is an implantable LVAS consisting of a miniature rotary blood pump that is designed to
provide long-term support. Its design is intended to be not only smaller, but also simpler,
quieter, and longer lasting than current generation assist devices.
    
    The Vectravascular access graft is designed for use as a shunt between an artery and a
vein, primarily to provide access to the bloodstream for renal hemodialysis patients
requiring frequent needle punctures during treatment.
    ITC Segment
  
    
    The Hemochron Point of Care, or POC, coagulation system is used to monitor a patients
coagulation while being administered anticoagulants in various settings, including in the
cardiovascular operating room to monitor the drug Heparin and in an anticoagulation clinic
to monitor the drug Coumadin. Hemochron is considered a moderately complex device and must
be used by professionally trained personnel. The system consists of a small, portable
analytical instrument and disposable test cuvettes.
    
    The Immediate Response Mobile Analysis, or IRMA, POC blood gas/electrolyte and chemistry
system is used to monitor a patients blood gas/electrolyte and chemistry status. It is
considered moderately complex and its use requires supervision by professionally trained
personnel. The system consists of a small, portable analytical instrument and disposable
test cartridges.
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##### Table of Contents




    
    The ProTime coagulation monitoring system is used to monitor a patients coagulation
while they are taking oral anticoagulants such as Coumadin, 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 System, or Hgb 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, hand held test meter and disposable test strips.
    
    Tenderfoot, Tenderlett and 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, Tenderlett is used for finger incisions and the Surgicutt is used
to perform screening tests to determine platelet function. All products feature permanently
retracting blades for safe, virtually pain-free incision.
   Critical Accounting Policies and Estimates
  Evaluation of Purchased Intangibles and Goodwill for Impairment
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Revenue Recognition
     Reserves
   Accounting Pronouncements
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Results of Operations
  Three Months Ended
    
    Six Months EndedJuly 2,
    
    July 3,
    
    July 2,
    
    July 3,2005
    
    2004
    
    2005
    
    2004Product sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of product sales
    
    
    39
    
    
    
    40
    
    
    
    39
    
    
    
    41Gross profit
    
    
    61
    
    
    
    60
    
    
    
    61
    
    
    
    59Operating expenses:Selling, general and administrative
    
    
    31
    
    
    
    34
    
    
    
    30
    
    
    
    32Research and development
    
    
    16
    
    
    
    18
    
    
    
    16
    
    
    
    18Amortization of purchased intangible assets
    
    
    6
    
    
    
    7
    
    
    
    6
    
    
    
    7Litigation and other costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    53
    
    
    
    59
    
    
    
    52
    
    
    
    57Income from operations
    
    
    8
    
    
    
    1
    
    
    
    9
    
    
    
    2Other income and (expense):Interest expense
    
    
    (2
    )
    
    
    (1
    )
    
    
    (2
    )
    
    
    Interest income and other
    
    
    2
    
    
    
    1
    
    
    
    2
    
    
    
    1Income before income tax expense
    
    
    8
    
    
    
    1
    
    
    
    9
    
    
    
    3Income tax expense
    
    
    3
    
    
    
    0
    
    
    
    3
    
    
    
    1Net income
    
    
    5
    %
    
    
    1
    %
    
    
    6
    %
    
    
    2
    %
  Three months ended July 2, 2005 and July 3, 2004
 Product Sales
  
    
    VAD product sales increased $4.1 million. The majority of this increase came from higher
sales of our HeartMate II and IVAD products of $3.0 million and $2.8 million, respectively.
This was partially offset by a reduction in sales of our PVAD product line of $2.3 million.
    
    Other ancillary product sales (drivers, cannulae, service, rentals and spares) increased
$1.0 million, including an increase in Destination Therapy ancillary products as well as
modest increases in TLC II driver revenue principally from Home Discharge.
    
    Graft product sales increased by $0.6 million due to a higher average selling price
combined with increased volume.
    
    Point-of-care diagnostic product sales increased $1.3 million, due primarily to a $0.8
million increase in sales of our Hemochron and $0.6 million increase in sales of our Protime
products coupled with modest decreases in sales of our Hgb Pro products quarter over
quarter.
    
    Incision product sales were flat because of what we believe to be lower volume offset by
higher average selling prices.
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Gross Profit
  
    
    The Cardiovascular segment increased gross profit by 1% due to higher incremental revenue
in conjunction with higher margin VAD product sales offset in part by an increase in
manufacturing costs; and
    
    The ITC segment increased gross profit by 2%, due to higher incremental revenue in higher
margin products and increased margins in the point-of-care market related to the shift in
mix from distributor to direct channels sales.
 Selling, General and Administrative
  
    
    Increased personnel costs associated with higher product sales and overall headcount
increases in the Cardiovascular segment of $0.9 million offset in part by reduced personnel
costs related to alternate site sales for the ITC segment of $0.3 million.
    
    Higher spending on marketing and related activities, primarily associated with our
HeartHope Center Program, Destination Therapy, and costs associated with training efforts in
the Cardiovascular segment totaling $0.3 million.
    
    Higher professional fees, including legal, audit and financial consulting services
relating to our compliance with the Sarbanes-Oxley Act of 2002 and enterprise resource
planning software system (ERP system) implementation expenses of an additional $0.1
million.
 Research and Development
  Amortization of Purchased Intangible Assets
  Interest Expense
  Interest Income and Other
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Income Taxes
   Six months ended July 2, 2005 and July 3, 2004
 Product Sales
  
    
    VAD product sales increased $8.5 million. The majority of this increase came from higher
sales of our HeartMate II and IVAD products of $4.0 million and $6.9 million, respectively.
This was partially offset by a reduction in sales of our PVAD products of $3.3 million.
    
    Other ancillary product sales (drivers, cannulae, service, rentals and spares) increased
$1.9 million, including an increase in Destination Therapy ancillary products and TLC II
driver revenue principally from Home Discharge.
    
    Graft product sales increased by $0.8 million due to a higher average selling price.
    
    Point-of-care diagnostic product sales increased $3.8 million, due primarily to a $3.4
million increase in sales of our Hemochron and $0.7 million increase in our ProTime
products. This was partially offset by decreased sales of our Hgb Pro products year over
year.
    
    Incision product sales decreased by $0.5 million due in part to lower volume partially
offset by higher average selling prices.
  Gross Profit
  
    
    The Cardiovascular segment increased gross profit by 1% due to higher incremental revenue
in conjunction with higher margin VAD product sales offset in part by an increase in
manufacturing costs; and
    
    The ITC segment increased gross profit by 2%, due to higher incremental revenue in higher
margin products and increased margins in the point-of-care market related to the shift in
mix from distributor to direct channels sales.
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Selling, General and Administrative
  
    
    Increased personnel costs associated with higher product sales and overall headcount
increases in both the Cardiovascular and ITC segments of $1.6 million, partially offset by
reduced recruiting and consulting fees for the ITC segment of $0.3 million.
    
    Higher spending on marketing and related activities, primarily associated with our
HeartHope Center Program and Destination Therapy in the Cardiovascular segment and costs
associated with IRMA and international marketing efforts in the ITC segment totaling $0.6
million.
    
    Higher professional fees, including legal, audit and financial consulting services
relating to our compliance with the Sarbanes-Oxley Act of 2002, project related business
development activities and ERP system implementation expenses, of an additional $0.9
million.
 Research and Development
  Amortization of Purchased Intangible Assets
  Interest Expense
  Interest Income and Other
  Income Taxes
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Liquidity and Capital Resources
     FACTORS THAT MAY AFFECT FUTURE RESULTS
 Our business faces many risks. These risks include those related to the development of new
products and markets including Destination Therapy, the growth of existing markets for our
products, customer and physician acceptance of our products, changes in the mix of our product
sales, and the related gross margins for such product sales, the results of clinical trials,
including those for the HeartMate II, the ability to improve financial performance, regulatory
approval processes, the effect of healthcare reimbursement and coverage policies, our product
sales, the effects of price competition from any of our competitors and the effects of any merger
and acquisition related activities. The risks described below are what we believe to be the
material risks facing our company. However, the risks described below may not be the only risks we
face. Additional risks that we do not yet know of or that we currently believe are immaterial may
also impair our business operations. If any of the events or circumstances described in the
following risk factors actually occurs, our business, financial condition or results of operations
could suffer, and the trading price of our common stock could decline significantly. Investors
should consider the following risks, as well as the other information included in this Quarterly
Report and our Annual Report on Form 10-K , and other documents we file from time to time with the
SEC, such as our current reports on Form 8-K and any public announcements we make from time to
time.
 We have a history of net losses.
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Since our physician and hospital customers depend on third party reimbursement, if third party
payors fail to provide appropriate levels of reimbursement for our products, our results of
operations will be harmed.
   If we fail to obtain approval from the FDA and from foreign regulatory authorities, we cannot
market and sell our products under development in the United States and in other countries, and if
we fail to adhere to ongoing FDA Quality System Regulations, the FDA may withdraw our market
clearance or take other action.
      Certain lawsuits have been filed against us.
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Wong v. Grossman
     Our debt obligations expose us to risks that could adversely affect our business, operating results
and financial condition.
  
    
    make it difficult for us to make payments on our debt;
    
    make it difficult for us to obtain any necessary financing in the future for working
capital, capital expenditures, debt service, acquisitions or general corporate purposes;
    
    limit our flexibility in planning for or reacting to changes in our business;
    
    reduce funds available for use in our operations;
    
    impair our ability to incur additional debt because of financial and other restrictive
covenants proposed for any such additional debt;
    
    make us more vulnerable in the event of a downturn in our business or an increase in
interest rates; or
    
    place us at a possible competitive disadvantage relative to less leveraged competitors
and competitors that have better access to capital resources.
  If hospitals do not conduct Destination Therapy procedures using our VADs, our product sales will
be diminished.
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##### Table of Contents




    
    the number of CMS sites approved for Destination Therapy;
    
    the clinical outcomes of Destination Therapy procedures;
    
    cardiologists and referring physicians education, and their commitment to Destination Therapy;
    
    the economics of the Destination Therapy procedure for individual hospitals, which
include the costs of the VAD and related pre- and post-operative procedures and their
reimbursement;
    
    the impact of changes in reimbursement rates on the timing of purchases of VADs for
Destination Therapy; and
    
    the economics for individual hospitals of not conducting a Destination Therapy procedure,
including the costs and related reimbursements of long-term hospitalization.
  The long and variable sales and deployment cycles for our VAD systems may cause our product sales
and operating results to vary significantly, which increases the risk of an operating loss for any
given fiscal period.
  Physicians may not accept or continue to accept our current products and products under
development.
  Our future product sales will be affected by the number of heart transplants conducted.
  We have experienced rapid growth and changes in our business, and our failure to manage this and
any future growth could harm our business.
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If we fail to successfully introduce new products, our future growth may suffer.
  Amortization of our intangible assets, which represent a significant portion of our total assets,
will adversely affect our net income and we may never realize the full value of our intangible
assets.
  We may encounter problems manufacturing our products.
  We rely on specialized suppliers for certain components and materials in our products and
alternative suppliers may not be available.
     
    
    pay premium prices to our suppliers to keep their production lines open or to obtain
alternative suppliers;
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##### Table of Contents




    
    buy substantial inventory to last through the scheduled end of life of our product, or
through such time that we will have a replacement product developed and approved by the FDA;
or
    
    stop shipping the product in which the legacy component is used once our inventory of the
discontinued component is exhausted.
  If we fail to compete successfully against our existing or potential competitors, our product sales
or operating results may be harmed.
 Vectra
  
    
    develop products;
    
    complete clinical testing;
    
    receive regulatory approvals; and
    
    manufacture and sell commercial quantities of products.
  
    
    New drug therapies under development may not require the intense monitoring of a
patients coagulation that the current anti-coagulation drug of choice (Heparin) requires.
    
    New competitors might enter the market with broader test menus.
  The price of our common stock may fluctuate significantly.
  
    
    future announcements concerning us or our competitors;
    
    timing and reaction to the publication of clinical trial results;
    
    quarterly variations in operating results, which we have experienced in the past
and expect to experience in the future;
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##### Table of Contents




    
    charges, amortization and other financial effects relating to our merger with TCA;
    
    introduction of new products or changes in product pricing policies by us or our competitors;
    
    acquisition or loss of significant customers, distributors or suppliers;
    
    business acquisitions or divestitures;
    
    changes in earnings estimates by analysts;
    
    changes in third party reimbursement practices;
    
    regulatory developments, enforcement actions bearing on advertising, marketing or sales,
and disclosure regarding completed ongoing or future clinical trials; and
    
    fluctuations in the economy, world political events or general market conditions.
   Since we depend upon distributors, if we lose a distributor or a distributor fails to perform, our
operations may be harmed.
   Changes we make to our method of distributing and selling our products could hurt our relationship
with distributors and their customers.
   
    
    the promotion by our former distributors of products from competitors rather than our products;
    
    the potential loss of customers who prefer to deal with a particular distributor; and
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
    
    the challenges and costs associated with building an effective direct sales force.
  Our inability to protect our proprietary technologies or an infringement of others patents could
harm our competitive position.
      Product liability claims could damage our reputation and hurt our financial results.
  Identified quality problems can result in substantial costs and write-downs.
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If we make acquisitions or divestitures, we could encounter difficulties that harm our business.
  Our non-U.S. sales present special risks.
  
    
    we generally sell many of our products at a lower price outside the United States;
    
    sales agreements may be difficult to enforce;
    
    receivables may be difficult to collect through a foreign countrys legal system;
    
    foreign customers may have longer payment cycles;
    
    foreign countries may impose additional withholding taxes or otherwise tax our foreign
income, impose tariffs or adopt other restrictions on foreign trade;
    
    U.S. export licenses may be difficult to obtain;
    
    intellectual property rights may be (and often are) more difficult to enforce in foreign countries;
    
    terrorist activity or war may interrupt distribution channels or adversely impact our
customers or employees; and
    
    fluctuations in exchange rates may affect product demand and adversely affect the
profitability, in U.S. dollars, of products sold in foreign markets where payments are made
in local currencies.
  Any claims relating to improper handling, storage or disposal of hazardous chemicals and
biomaterials could be time consuming and costly.
   The occurrence of a catastrophic disaster or other similar events could cause damage to our
facilities and equipment, which would require us to cease or curtail operations.
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If we are unable to favorably assess the effectiveness of our internal control over financial
reporting, or if our independent auditors are unable to provide an unqualified attestation report
on our assessment, our stock price could be adversely affected.
  Fluctuations in foreign currency exchange rates could result in declines in our reported sales and
earnings.
  The competition for qualified personnel is particularly intense in our industry. If we are unable
to retain or hire key personnel, we may not be able to sustain or grow our business.
  We may be unable to repay or repurchase our convertible notes or our other indebtedness.
  Conversion of the convertible notes or other future issuances of our stock will dilute the
ownership interests of existing shareholders.
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Anti-takeover defenses in our governing documents could prevent an acquisition of our company or
limit the price that investors might be willing to pay for our common stock.
 Our governing documents could make it difficult for another company to acquire control of our
company. For example:
 
    
    Our Articles of Incorporation allow our Board of Directors to issue, at any time and
without shareholder approval, preferred stock with such terms as it may determine. No shares
of preferred stock are currently outstanding. However, the rights of holders of any of our
preferred stock that may be issued in the future may be superior to the rights of holders of
our common stock.
    
    We have a rights plan, commonly known as a poison pill, which would make it difficult
for someone to acquire our company without the approval of our Board of Directors.
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
 Interest Rate Risk
   Foreign Currency Rate Fluctuations
   33




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
  Disclosure Controls and Procedures
   Changes to Internal Controls
  Inherent Limitations on Controls and Procedures
  34




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   Number of VotesFor
    
    WithheldHoward E. Chase
    
    
    45,003,630
    
    
    
    223,114J. Daniel Cole
    
    
    45,091,586
    
    
    
    135,158Neil F. Dimick
    
    
    45,089,202
    
    
    
    137,542D. Keith Grossman
    
    
    44,972,510
    
    
    
    254,234J. Donald Hill
    
    
    40,623,188
    
    
    
    4,603,556William M. Hitchcock
    
    
    45,092,500
    
    
    
    134,244George W. Holbrook, Jr.
    
    
    40,658,199
    
    
    
    4,568,545Daniel M. Mulvena
    
    
    40,665,990
    
    
    
    4,560,754
  Number of VotesFor
    
    Against
    
    AbstainBeneficial Common
    
    
    39,128,146
    
    
    
    131,223
    
    
    
    10,172Registered Common
    
    
    5,9525,588
    
    
    
    3,315
    
    
    
    1,300
 
 ITEM 6. EXHIBITS
  31.1
    
    Section 302 Certification of Chief Executive Officer31.2
    
    Section 302 Certification of principal financial officer.32.1
    
    Section 906 Certification of Chief Executive Officer32.2
    
    Section 906 of principal financial officer.
 35




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SIGNATURES
  THORATEC CORPORATIONDate: August 9, 2005
    /s/ D. Keith GrossmanD. Keith Grossman,Chief Executive Officer Date: August 9, 2005
    /s/ Jeffrey M. McCormickJeffrey M. McCormick,Corporate Controller,
(principal financial and accounting officer) 36