##### Table of Contents



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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)



|[X] |  | Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
|--- |  | ----------------------------------------------------------------------------------------

For the quarterly period ended September 28, 2002

or



|[   ] |  | 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
incorporation or organization)              |  | 94-2340464
(I.R.S. Employer Identification No.)
|                                                                                       |  |                                                
|6035 Stoneridge Drive, Pleasanton, California
(Address of principal executive offices) |  | 94588
(Zip Code)                               

Registrants telephone number, including area code: (925) 847-8600

Indicate by check mark whether the registrant:(1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [   ]

As of
November 11, 2002, registrant had 55,029,573 shares of common stock
outstanding.



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TABLE OF CONTENTS



|                                         |                                                                                               |                                                                  |  |  |  |  |  | 
|---------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION           
|                                         | ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                          
|                                         |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                           
|                                         |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                 
|                                         |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                 
|                                         |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|                                         |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS            
|                                         | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                         | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK                               
|                                         | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II. OTHER INFORMATION              
|                                         | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS                             
|                                         | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                              
|CERTIFICATION OF CHIEF EXECUTIVE OFFICER
|CERTIFICATION OF CHIEF FINANCIAL OFFICER
|Exhibit 99.1                            



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##### Table of Contents



THORATEC CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS

|                                         |                                                                                               |                                                                                                                                       |    |   |  | 
|---------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------- | -- | - |  | 
|Part I. Financial Information            |                                                                                               | 3                                                                                                                                    
|                                         | Item 1. Condensed Consolidated Financial Statements (unaudited)                               |                                                                                                                                       |    |   | 
|                                         |                                                                                               | Condensed Consolidated Balance Sheets as of September 28, 2002 and December 29, 2001                                                  |    | 3
|                                         |                                                                                               | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 28, 2002 and
September 29, 2001         |    | 4
|                                         |                                                                                               | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 28, 2002 and
September 29, 2001                   |    | 5
|                                         |                                                                                               | Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 28,
2002 and September 29, 2001 |    | 6
|                                         |                                                                                               | Notes to Condensed Consolidated Financial Statements                                                                                  |    | 7
|                                         | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                                                       | 15
|                                         | Item 3. Quantitative and Qualitative Disclosure of Market Risk                                |                                                                                                                                       | 21
|                                         | Item 4. Controls and Procedures                                                               |                                                                                                                                       | 21
|Part II. Other Information               |                                                                                               | 22                                                                                                                                   
|                                         | Item 4. Submission of Matters to a Vote of Security Shareholders                              |                                                                                                                                       | 22
|                                         | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                                       | 22
|Signatures                               |                                                                                               | 23                                                                                                                                   
|Certification of Chief Executive Officer |                                                                                               | 24                                                                                                                                   
|Certification of Chief Financial Officer |                                                                                               | 25                                                                                                                                   
|Exhibits                                 |                                                                                               | 26                                                                                                                                   

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




THORATEC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)
(in thousands)

|                                                                                     |                                                                                                     |   |               |         |              |   |         |         |  
|------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------- | - | ------------- | ------- | ------------ | - | ------- | ------- | -
|                                                                                     |                                                                                                     |   | September 28, |         | December 29,
|                                                                                     |                                                                                                     |   | 2002          |         | 2001        
|                                                                                     |                                                                                                     |   |               |         |             
|Assets                                                                               |                                                                                                     |   |               |         |              |   |         |        
|Current Assets:                                                                      |                                                                                                     |   |               |         |              |   |         |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Cash and cash equivalents                                                                           |   | $             | 40,812  |              |   | $       | 91,726  |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Short-term available-for-sale investments at quoted market value
(amortized cost of $4,178 in 2002) |   |               | 4,173   |              |   |         |        |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Receivables, net of allowances of $306 in 2002 and $551 in 2001                                     |   |               | 20,950  |              |   |         | 26,628  |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Inventories                                                                                         |   |               | 39,088  |              |   |         | 25,673  |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Deferred tax asset                                                                                  |   |               | 13,090  |              |   |         | 11,789  |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Prepaid expenses and other assets                                                                   |   |               | 2,753   |              |   |         | 1,148   |  
|                                                                                     |                                                                                                     |   |               |         |              |   |         |        
|                                                                                    
|Total Current Assets                                                                 |                                                                                                     |   | 120,866       |         |              |   | 156,964 |        
|                                                                                     |                                                                                                     |   |               |         |              |   |         |        
|Property, plant and equipment, net                                                   |                                                                                                     |   | 24,148        |         |              |   | 22,645  |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Long-term available-for-sale investments                                             |                                                                                                     |   | 30,163        |         |              |   |        |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Restricted cash and cash equivalents                                                 |                                                                                                     |   |              |         |              |   | 45,884  |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Goodwill                                                                             |                                                                                                     |   | 96,492        |         |              |   | 95,209  |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Purchased intangible assets                                                          |                                                                                                     |   | 187,306       |         |              |   | 198,608 |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Long-term deferred tax asset                                                         |                                                                                                     |   | 9,276         |         |              |   | 9,313   |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Other assets                                                                         |                                                                                                     |   | 1,058         |         |              |   | 1,618   |        
|                                                                                     |                                                                                                     |   |               |         |              |   |         |        
|                                                                                    
|Total Assets                                                                         |                                                                                                     | $ | 469,309       |         |              | $ | 530,241 |        
|                                                                                     |                                                                                                     |   |               |         |              |   |         |        
|Liabilities
and Shareholders Equity                                                 |                                                                                                     |   |               |         |              |   |         |        
|Current Liabilities:                                                                 |                                                                                                     |   |               |         |              |   |         |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Accounts payable                                                                                    |   | $             | 8,478   |              |   | $       | 8,271   |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Accrued expenses                                                                                    |   |               | 11,577  |              |   |         | 11,434  |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Accrued
merger, restructuring and other                                                             |   |               | 734     |              |   |         | 1,335   |  
|                                                                                     |                                                                                                     |   |               |         |              |   |         |        
|                                                                                     | Total Current Liabilities                                                                           |   |               | 20,789  |              |   |         | 21,040  |  
|                                                                                     |                                                                                                     |   |               |         |              |   |         |        
|Subordinated convertible debentures (includes $1,500 due to Thermo Electron in 2001) |                                                                                                     |   |              |         |              |   | 54,838  |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Long-term deferred tax liability and other                                           |                                                                                                     |   | 77,547        |         |              |   | 81,020  |        
|                                                                                     |                                                                                                     |   |               |         |              |   |         |        
|                                                                                     | Total Liabilities                                                                                   |   |               | 98,336  |              |   |         | 156,898 |  
|                                                                                     |                                                                                                     |   |               |         |              |   |         |        
|Shareholders Equity:                                                                |                                                                                                     |   |               |         |              |   |         |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Common shares; 100,000 authorized;
issued and outstanding 55,010 in 2002 and 56,114 in 2001         |   |               | 409,894 |              |   |         | 409,081 |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Deferred compensation                                                                               |   |               | (4,035  | )            |   |         | (4,555  | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Accumulated deficit                                                                                 |   |               | (35,000 | )            |   |         | (31,166 | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Accumulated other comprehensive income (loss):                                                      |   |               |         |              |   |         |         |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Cumulative foreign currency translation adjustments                                                 |   |               | 58      |              |   |         | (17     | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Unrealized gain on investment                                                                       |   |               | 56      |              |   |         |        |  
|                                                                                     |                                                                                                     |   |               |         |              |   |         |        
|                                                                                     | Total accumulated other comprehensive income (loss)                                                 |   |               | 114     |              |   |         | (17     | )
|                                                                                     |                                                                                                     |   |               |         |              |   |         |        
|                                                                                     | Total Shareholders Equity                                                                          |   |               | 370,973 |              |   |         | 373,343 |  
|                                                                                     |                                                                                                     |   |               |         |              |   |         |        
|                                                                                     | Total Liabilities and Shareholders Equity                                                          |   | $             | 469,309 |              |   | $       | 530,241 |  
|                                                                                     |                                                                                                     |   |               |         |              |   |         |        

See notes to condensed consolidated financial statements.

3



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##### Table of Contents






THORATEC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)
(in thousands, except per share data)

|                                                                                          |                                             |                          |        |                    |        |                   |        |               |        |               |        |        |        |   |         |        |         | 
|----------------------------------------------------------------------------------------- | ------------------------------------------- | ------------------------ | ------ | ------------------ | ------ | ----------------- | ------ | ------------- | ------ | ------------- | ------ | ------ | ------ | - | ------- | ------ | ------- | 
|                                                                                          |                                             |                          |        | Three Months Ended |        | Nine Months Ended
|                                                                                          |                                             |                          |        |                    |        |                  
|                                                                                          |                                             |                          |        | September 28,      |        | September 29,     |        | September 28, |        | September 29,
|                                                                                          |                                             |                          |        | 2002               |        | 2001              |        | 2002          |        | 2001         
|                                                                                          |                                             |                          |        |                    |        |                   |        |               |        |              
|Product sales                                                                             |                                             | $                        | 31,105 |                    |        | $                 | 28,666 |               |        | $             | 91,779 |        |        | $ | 78,363  |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Cost of product sales                                                                     |                                             |                          | 13,055 |                    |        |                   | 13,604 |               |        |               | 39,500 |        |        |   | 36,288  |       
|                                                                                          |                                             |                          |        |                    |        |                   |        |               |        |               |        |        |        |   |         |       
|Gross profit                                                                              |                                             |                          | 18,050 |                    |        |                   | 15,062 |               |        |               | 52,279 |        |        |   | 42,075  |       
|                                                                                          |                                             |                          |        |                    |        |                   |        |               |        |               |        |        |        |   |         |       
|Operating expenses:                                                                       |                                             |                          |        |                    |        |                   |        |               |        |               |        |        |        |   |         |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Selling, general and administrative         |                          |        | 9,150              |        |                   |        | 8,345         |        |               |        | 27,716 |        |   |         | 23,986 |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Research and development                    |                          |        | 5,916              |        |                   |        | 5,304         |        |               |        | 18,902 |        |   |         | 16,964 |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Amortization of goodwill                    |                          |        |                   |        |                   |        | 1,249         |        |               |        |       |        |   |         | 3,123  |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Amortization of purchased intangible assets |                          |        | 3,096              |        |                   |        | 3,289         |        |               |        | 9,288  |        |   |         | 8,223  |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | In-process research and development         |                          |        |                   |        |                   |        |              |        |               |        |       |        |   |         | 76,858 |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Merger,
restructuring and other costs       |                          |        | 32                 |        |                   |        | 1,410         |        |               |        | 859    |        |   |         | 6,555  |        
|                                                                                          |                                             |                          |        |                    |        |                   |        |               |        |               |        |        |        |   |         |       
|                                                                                          |                                             | Total operating expenses |        |                    | 18,194 |                   |        |               | 19,597 |               |        |        | 56,765 |   |         |        | 135,709 | 
|                                                                                          |                                             |                          |        |                    |        |                   |        |               |        |               |        |        |        |   |         |       
|Loss from operations                                                                      |                                             |                          | (144   | )                  |        |                   | (4,535 | )             |        |               | (4,486 | )      |        |   | (93,634 | )     
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Interest and other income  net                                                           |                                             |                          | 536    |                    |        |                   | 547    |               |        |               | 1,537  |        |        |   | 2,282   |       
|                                                                                          |                                             |                          |        |                    |        |                   |        |               |        |               |        |        |        |   |         |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Income (loss) before income tax expense (benefit) and
extraordinary item                  |                                             |                          | 392    |                    |        |                   | (3,988 | )             |        |               | (2,949 | )      |        |   | (91,352 | )     
|Income tax expense (benefit)                                                              |                                             |                          | 155    |                    |        |                   | (1,020 | )             |        |               | (1,182 | )      |        |   | (3,100  | )     
|                                                                                          |                                             |                          |        |                    |        |                   |        |               |        |               |        |        |        |   |         |       
|Income (loss) before extraordinary item                                                   |                                             |                          | 237    |                    |        |                   | (2,968 | )             |        |               | (1,767 | )      |        |   | (88,252 | )     
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Extraordinary item  loss on early extinguishment of debt,
net of $206 income tax benefit |                                             |                          |       |                    |        |                   |       |               |        |               | (309   | )      |        |   |        |       
|                                                                                          |                                             |                          |        |                    |        |                   |        |               |        |               |        |        |        |   |         |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Net income (loss)                                                                         |                                             | $                        | 237    |                    |        | $                 | (2,968 | )             |        | $             | (2,076 | )      |        | $ | (88,252 | )     
|                                                                                          |                                             |                          |        |                    |        |                   |        |               |        |               |        |        |        |   |         |       
|Net income (loss) per share:                                                              |                                             |                          |        |                    |        |                   |        |               |        |               |        |        |        |   |         |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Basic and diluted                           |                          | $      | 0.00               |        |                   | $      | (0.05         | )      |               | $      | (0.04  | )      |   | $       | (1.72  | )      
|                                                                                          |                                             |                          |        |                    |        |                   |        |               |        |               |        |        |        |   |         |       
|Shares used to compute net income (loss) per share:                                       |                                             |                          |        |                    |        |                   |        |               |        |               |        |        |        |   |         |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Basic                                       |                          |        | 56,268             |        |                   |        | 55,078        |        |               |        | 56,572 |        |   |         | 51,169 |        
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                          | Diluted                                     |                          |        | 56,455             |        |                   |        | 55,078        |        |               |        | 56,572 |        |   |         | 51,169 |        

See notes to condensed consolidated financial statements.

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##### Table of Contents






THORATEC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)
(in thousands)

|                                                                       |                                                                                           |  |                   |         |               |  |   |          |  
|---------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- |  | ----------------- | ------- | ------------- |  | - | -------- | -
|                                                                       |                                                                                           |  | Nine
Months Ended
|                                                                       |                                                                                           |  |                  
|                                                                       |                                                                                           |  | September 28,     |         | September 29,
|                                                                       |                                                                                           |  | 2002              |         | 2001         
|                                                                       |                                                                                           |  |                   |         |              
|Cash flows from operating activities:                                  |                                                                                           |  |                   |         |               |  |   |         
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Net loss                                                                                  |  | $                 | (2,076  | )             |  | $ | (88,252  | )
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: |  |                   |         |               |  |   |          |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Depreciation and amortization                                                             |  |                   | 12,794  |               |  |   | 14,367   |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Write-off of in-process research and development costs                                    |  |                   |        |               |  |   | 76,858   |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Amortization of deferred compensation                                                     |  |                   | 848     |               |  |   | 506      |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Non-cash compensation                                                                     |  |                   | 152     |               |  |   |         |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Provision for losses on accounts receivable                                               |  |                   | (245    | )             |  |   | 331      |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Change in net deferred tax liability                                                      |  |                   | (3,552  | )             |  |   | (2,581   | )
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Extraordinary loss on debt extinguishment                                                 |  |                   | 515     |               |  |   |         |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Other non-cash items                                                                      |  |                   | (83     | )             |  |   | 49       |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Changes in assets and liabilities:                                                        |  |                   |         |               |  |   |          |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Receivables                                                                               |  |                   | 6,278   |               |  |   | 621      |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Inventories                                                                               |  |                   | (12,977 | )             |  |   | (2,122   | )
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Prepaid expenses and other assets                                                         |  |                   | (1,682  | )             |  |   | (442     | )
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Accounts payable and other liabilities                                                    |  |                   | 53      |               |  |   | (3,103   | )
|                                                                       |                                                                                           |  |                   |         |               |  |   |         
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Net cash provided by (used in) operating activities                                       |  |                   | 25      |               |  |   | (3,768   | )
|                                                                       |                                                                                           |  |                   |         |               |  |   |         
|Cash flows from investing activities:                                  |                                                                                           |  |                   |         |               |  |   |         
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Purchases of available-for-sale investments                                               |  |                   | (34,336 | )             |  |   | (318,970 | )
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Maturities of available-for-sale investments                                              |  |                   |        |               |  |   | 213,936  |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Sales of available-for-sale investments                                                   |  |                   |        |               |  |   | 131,056  |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Repayment of convertible debentures                                                       |  |                   | (54,838 | )             |  |   |         |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Capitalized transaction costs                                                             |  |                   |        |               |  |   | (5,838   | )
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Reclassification from (to) restricted cash and cash equivalents                           |  |                   | 45,884  |               |  |   | (45,794  | )
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Purchases of property, plant and equipment                                                |  |                   | (5,460  | )             |  |   | (4,676   | )
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Cash acquired in business acquisition                                                     |  |                   |        |               |  |   | 3,456    |  
|                                                                       |                                                                                           |  |                   |         |               |  |   |         
|                                                                       | Net
 cash used in investing activities                                                    |  |                   | (48,750 | )             |  |   | (26,830  | )
|                                                                       |                                                                                           |  |                   |         |               |  |   |         
|Cash flows from financing activities:                                  |                                                                                           |  |                   |         |               |  |   |         
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Proceeds
from stock option exercises                                                      |  |                   | 643     |               |  |   | 6,296    |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Proceeds
from common stock offering                                                       |  |                   | 15,356  |               |  |   |         |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Repurchase of common stock                                                                |  |                   | (18,336 | )             |  |   | (1,733   | )
|                                                                       |                                                                                           |  |                   |         |               |  |   |         
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Net
 cash provided by (used in) financing activities                                      |  |                   | (2,337  | )             |  |   | 4,563    |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Effect of exchange rate changes on cash                                                   |  |                   | 148     |               |  |   | 8        |  
|                                                                       |                                                                                           |  |                   |         |               |  |   |         
|                                                                       | Net decrease in cash and cash equivalents                                                 |  |                   | (50,914 | )             |  |   | (26,027  | )
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Cash and cash equivalents at beginning of period                                          |  |                   | 91,726  |               |  |   | 30,236   |  
|                                                                       |                                                                                           |  |                   |         |               |  |   |         
|                                                                       | Cash and cash equivalents at end of period                                                |  | $                 | 40,812  |               |  | $ | 4,209    |  
|                                                                       |                                                                                           |  |                   |         |               |  |   |         
|Supplemental Cash Flow Disclosure:                                     |                                                                                           |  |                   |         |               |  |   |         
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Cash paid for taxes                                                                       |  | $                 | 227     |               |  | $ | 470      |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Cash paid for interest                                                                    |  | $                 | 839     |               |  | $ | 1,302    |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Supplemental Disclosure of Noncash Investing and Financing Activities: |                                                                                           |  |                   |         |               |  |   |         
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Reclassification of assembled workforce, net of taxes                                     |  | $                 | 1,334   |               |  | $ |         |  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Tax benefit related to stock option exercises                                             |  | $                 | 147     |               |  | $ |         |  

See notes to condensed consolidated financial statements.

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##### Table of Contents






THORATEC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME (LOSS)

(unaudited)
(in thousands)

|                                       |                                          |   |                    |    |                   |   |               |    |               |   |        |    |  |   |         |    | 
|-------------------------------------- | ---------------------------------------- | - | ------------------ | -- | ----------------- | - | ------------- | -- | ------------- | - | ------ | -- |  | - | ------- | -- | 
|                                       |                                          |   | Three Months Ended |    | Nine Months Ended
|                                       |                                          |   |                    |    |                  
|                                       |                                          |   | September 28,      |    | September 29,     |   | September 28, |    | September 29,
|                                       |                                          |   | 2002               |    | 2001              |   | 2002          |    | 2001         
|                                       |                                          |   |                    |    |                   |   |               |    |              
|Net income (loss)                      |                                          | $ | 237                |    |                   | $ | (2,968        | )  |               | $ | (2,076 | )  |  | $ | (88,252 | ) 
|                                       |                                          |   |                    |    |                   |   |               |    |               |   |        |    |  |   |         |   
|Other net comprehensive income (loss): |                                          |   |                    |    |                   |   |               |    |               |   |        |    |  |   |         |   
|                                      
|                                      
|                                      
|                                      
|                                       | Unrealized gain on securities            |   |                    | 56 |                   |   |               |   |               |   |        | 56 |  |   |         | 39 | 
|                                      
|                                      
|                                      
|                                      
|                                       | Foreign currency translation adjustments |   |                    | 25 |                   |   |               | 53 |               |   |        | 75 |  |   |         | 3  | 
|                                       |                                          |   |                    |    |                   |   |               |    |               |   |        |    |  |   |         |   
|Comprehensive income (loss)            |                                          | $ | 318                |    |                   | $ | (2,915        | )  |               | $ | (1,945 | )  |  | $ | (88,210 | ) 
|                                       |                                          |   |                    |    |                   |   |               |    |               |   |        |    |  |   |         |   

See notes to condensed consolidated financial statements.

6



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##### Table of Contents






THORATEC CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

The interim condensed consolidated financial statements of Thoratec
Corporation, referred to as we, our,Thoratec, or our Company have been
prepared and presented in accordance with accounting principles generally
accepted in the United States of America and the rules and regulations of the
Securities and Exchange Commission, or the SEC, without audit and, in our
opinion, reflect all adjustments necessary (consisting only of normal recurring
adjustments) to present fairly our financial position at September 28, 2002 and
December 29, 2001, our results of operations for the three and nine-month
periods ended September 28, 2002 and September 29, 2001 and cash flows for the
nine-month periods ended September 28, 2002 and September 29, 2001. Certain
information and footnote disclosures normally included in our annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. The
accompanying financial statements should be read in conjunction with our fiscal
2001 consolidated financial statements filed with the SEC in our Annual Report
on Form 10-K.

Our merger with Thermo Cardiosystems Inc., or TCA, was completed on
February 14, 2001, which we refer to as the Merger. Because the Merger was
treated as a reverse acquisition, the 2001 condensed consolidated financial
information presented herein includes the financial results of TCA for the
entire three and nine-month periods ended September 29, 2001 and the financial
results of Thoratec for the post-merger period from February 14, 2001 through
September 29, 2001. The operating results for any interim period are not
necessarily indicative of the results that may be expected for any future
period.

The preparation of our condensed consolidated financial statements
included herein necessarily requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the consolidated balance sheet dates and
the reported amounts of revenues and expenses for the periods presented.

We have made certain reclassifications of 2001 amounts to conform to the
current presentation.

2. Merger of Thoratec and TCA

As a result of the Merger, $76.9 million relating to in-process research
and development, or IPR&D, was expensed in the first quarter of 2001. The
write-off of IPR&D related to projects that were in development, had not
reached technological feasibility, had no alternative future use and for which
successful development was uncertain. Current estimates and assumptions related
to the valuation of IPR&D remain materially consistent with our initial
estimates performed at the time of the Merger.

The fair value of Thoratecs net assets have been estimated for purposes
of allocating the purchase price. The purchase price and allocation of purchase
price as of September 28, 2002 are summarized as follows (in thousands):

|                              |                                                                                                                              |                                                             |                      |         |         |         | 
|----------------------------- | ---------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------- | -------------------- | ------- | ------- | ------- | 
|Purchase price:               |                                                                                                                             
|                             
|                             
|                             
|                             
|                              | Common stock                                                                                                                 |                                                             | $                    | 306,889 |        
|                             
|                             
|                             
|                             
|                              | Stock options                                                                                                                |                                                             |                      | 33,524  |        
|                              | Transaction costs                                                                                                            |                                                             |                      | 5,780   |        
|                              |                                                                                                                              |                                                             |                      |        
|                              |                                                                                                                              |                                                             | Total purchase price |         | $       | 346,193 | 
|                              |                                                                                                                              |                                                             |                      |        
|                             
|Allocation of purchase price: |                                                                                                                              |                                                             |                      |        
|                             
|                             
|                             
|                             
|                              | Tangible assets acquired (primarily cash and short-term investments,
receivables, inventory, and equipment and improvements) |                                                             | $                    | 41,018  |        
|                             
|                             
|                             
|                             
|                              | Fair market valuation of property lease                                                                                      |                                                             |                      | 2,285   |        
|                             
|                             
|                             
|                             
|                              | Deferred tax asset                                                                                                           |                                                             |                      | 4,332   |        
|                             
|                             
|                             
|                             
|                              | Deferred compensation                                                                                                        |                                                             |                      | 841     |        
|                             
|                             
|                             
|                             
|                              | Intangible net assets acquired:                                                                                              |                                                             |                      |         |        
|                             
|                             
|                             
|                             
|                              |                                                                                                                              | Patents, trademarks and tradenames and purchases technology |                      |         | 206,960 |        
|                             
|                             
|                             
|                             
|                              |                                                                                                                              | Goodwill (including assembled workforce)                    |                      |         | 101,226 |        
|                             
|                             
|                             
|                             
|                              | In-process research and development                                                                                          |                                                             |                      | 76,858  |        
|                             
|                             
|                             
|                             
|                              | Liabilities assumed                                                                                                          |                                                             |                      | (10,831 | )      
|                             
|                             
|                             
|                             
|                              | Deferred tax liability                                                                                                       |                                                             |                      | (76,496 | )      
|                              |                                                                                                                              |                                                             |                      |        
|                              |                                                                                                                              |                                                             | Total                |         | $       | 346,193 | 
|                              |                                                                                                                              |                                                             |                      |        

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3. New Accounting Pronouncements

As of the beginning of fiscal year 2002, we adopted Statement of Financial
Accounting Standards, or SFAS, No. 142, Goodwill and Other Intangible Assets,
which addresses the financial accounting and reporting standards for the
acquisition of intangible assets outside of a business combination and for
goodwill and other intangible assets subsequent to their acquisition. During
the second quarter of 2002, we completed our transitional goodwill impairment
test as of December 30, 2001 and determined that no adjustment to the carrying
value of goodwill was needed. On an ongoing basis, absent any impairment
indicators, we expect to perform a goodwill impairment test as of the end of
the third quarter during the fourth quarter of each year.

In accordance with SFAS No. 142, we discontinued the amortization of
goodwill effective as of the beginning of fiscal year 2002. In addition, we
reassessed the useful lives of our identifiable intangible assets and
determined that the lives were appropriate.

The following table presents the impact of adopting SFAS No. 142 on net
loss and net loss per share had the standard been in effect for the three and
nine months ended September 29, 2001:

|                                                 |  |               |        |               |  |   |         |  
|------------------------------------------------ |  | ------------- | ------ | ------------- |  | - | ------- | -
|                                                 |  | Three Months  |        | Nine Months  
|                                                 |  | Ended         |        | Ended        
|                                                 |  |               |        |              
|                                                 |  | September 28, |        | September 28,
|                                                 |  | 2001          |        | 2001         
|                                                 |  |               |        |              
|Net loss as reported                             |  | $             | (2,968 | )             |  | $ | (88,252 | )
|                                                
|                                                
|                                                
|                                                
|Adjustments:                                     |  |               |        |               |  |   |         |  
|                                                
|                                                
|                                                
|                                                
|Amortization of goodwill, net of tax             |  |               | 937    |               |  |   | 3,029   |  
|                                                 |  |               |        |               |  |   |         |  
|Adjusted net loss                                |  |               | (2,031 | )             |  |   | (85,223 | )
|                                                 |  |               |        |               |  |   |         |  
|As reported basic and diluted net loss per share |  | $             | (0.05  | )             |  | $ | (1.72   | )
|                                                
|                                                
|                                                
|                                                
|Impact of amortization of goodwill, net of tax   |  |               | 0.02   |               |  |   | 0.06    |  
|                                                 |  |               |        |               |  |   |         |  
|Adjusted basic and diluted net loss per share    |  | $             | (0.03  | )             |  | $ | (1.66   | )
|                                                 |  |               |        |               |  |   |         |  

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs, including legal obligations.
We are required to adopt SFAS No. 143 at the beginning of fiscal year 2003. We
are currently evaluating the impact of the adoption of SFAS No. 143.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which significantly changed the
criteria required for classifying an asset as held-for-sale. We adopted SFAS
No. 144 at the beginning of fiscal year 2002. The adoption of SFAS No. 144 did
not have any impact on our financial position, results of operations or cash
flows.

In April 2002, the
FASB issued SFAS No. 145, which, among other things, changed the presentation of gains and
losses on the extinguishment of debt. Any gain or loss on extinguishment of
debt that does not meet the criteria in APB Opinion 30, Reporting the Results
of Operations  Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
shall be included in operating earnings and not presented separately as an
extraordinary item. We will adopt SFAS No. 145 at the beginning of fiscal year
2003. Upon adoption, we will reclassify the extraordinary loss incurred this
year of $0.5 million to interest and other income-net as of the date of adoption.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which addresses accounting for
restructuring and similar costs. SFAS No. 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force Issue, or EITF, No. 94-3
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit on Activity (including Certain Costs Incurred in a
Restructuring). The Company will adopt the provisions of SFAS No. 146 for
restructuring activities initiated after December 31, 2002. SFAS No. 146 may
affect the timing of recognizing future restructuring costs as well as the
amounts recognized.

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##### Table of Contents



4. Inventories

Inventories consist of the following (in thousands):

|                |       |   |               |        |              |   |        |        | 
|--------------- | ----- | - | ------------- | ------ | ------------ | - | ------ | ------ | 
|                |       |   | As of        
|                |       |   |              
|                |       |   | September 28, |        | December 29,
|                |       |   | 2002          |        | 2001        
|                |       |   |               |        |             
|Finished goods  |       | $ | 23,104        |        |              | $ | 15,276 |       
|               
|               
|               
|               
|Work in process |       |   | 6,706         |        |              |   | 4,322  |       
|               
|               
|               
|               
|Raw materials   |       |   | 9,278         |        |              |   | 6,075  |       
|                |       |   |               |        |              |   |        |       
|                | Total |   | $             | 39,088 |              |   | $      | 25,673 | 
|                |       |   |               |        |              |   |        |       

5. Property, Plant and Equipment

Property, plant, and equipment consist of the following (in thousands):

|                                       |       |   |               |        |              |   |         |        | 
|-------------------------------------- | ----- | - | ------------- | ------ | ------------ | - | ------- | ------ | 
|                                       |       |   | As of        
|                                       |       |   |              
|                                       |       |   | September 28, |        | December 29,
|                                       |       |   | 2002          |        | 2001        
|                                       |       |   |               |        |             
|Property, plant and equipment, at cost |       | $ | 46,354        |        |              | $ | 41,550  |       
|                                      
|                                      
|                                      
|                                      
|Less accumulated depreciation          |       |   | (22,206       | )      |              |   | (18,905 | )     
|                                       |       |   |               |        |              |   |         |       
|                                       | Total |   | $             | 24,148 |              |   | $       | 22,645 | 
|                                       |       |   |               |        |              |   |         |       

6. Goodwill and Other Intangible Assets

The change in the carrying amount of goodwill, which is only attributable
to our Cardiovascular business segment, for the nine-month period ended
September 28, 2002 was as follows (in thousands):

|                                                           |  |   |        |  
|---------------------------------------------------------- |  | - | ------ | -
|Balance as of December 29, 2001                            |  | $ | 95,209 |  
|                                                          
|                                                          
|                                                          
|                                                          
|Reclassification of assembled workforce, net of taxes      |  |   | 1,334  |  
|                                                          
|                                                          
|                                                          
|                                                          
|Adjustment to reflect resolution of pre-merger contingency |  |   | (51    | )
|                                                           |  |   |        |  
|Balance as of September 28, 2002                           |  | $ | 96,492 |  
|                                                           |  |   |        |  

The components of identifiable intangible assets, consisting primarily of
patents and trademarks, developed technology and core technology, which are
included in purchased intangible assets on the consolidated balance sheets, are
as follows (in thousands):

|                         |  |               |         |              |  |   |         |  
|------------------------ |  | ------------- | ------- | ------------ |  | - | ------- | -
|                         |  | As of        
|                         |  |              
|                         |  | September 28, |         | December 29,
|                         |  | 2002          |         | 2001        
|                         |  |               |         |             
|Gross carrying amount    |  | $             | 206,960 |              |  | $ | 209,572 |  
|                        
|                        
|                        
|                        
|Accumulated amortization |  |               | (19,654 | )            |  |   | (10,964 | )
|                         |  |               |         |              |  |   |         |  
|Net carrying amount      |  | $             | 187,306 |              |  | $ | 198,608 |  
|                         |  |               |         |              |  |   |         |  

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As of the beginning of fiscal 2002, the purchased intangible asset
associated with the assembled workforce in the amount of
$1.3 million, net of accumulated amortization of
$0.4 million and taxes of $0.9 million, was reclassified to goodwill.

Amortization expense related to identifiable intangible assets for each of
the three and nine-month periods ended September 28, 2002 and September 29,
2001 was $3.1 million, $9.3 million, $3.3 million, and $8.2 million,
respectively. Estimated amortization expense for the remainder of fiscal 2002
is $3.1 million and $12.4 million for each of the five succeeding years. The
purchased intangible assets have estimated useful lives of eight to twenty
years.

7. Subordinated Convertible Debentures

On March 11, 2002 we completed the redemption of our outstanding
subordinated convertible debentures at par plus accrued interest using
restricted cash and cash equivalents of approximately $45.9 million and cash of
approximately $9.8 million. An extraordinary loss in the amount of $0.3 million
net of a tax benefit of $0.2 million was recorded on the date of the redemption
related to the write-off of the capitalized debt issuance costs. Upon the
closing of the Merger with TCA in February 2001, $45.0 million in cash and cash
equivalents was pledged as collateral for a letter of credit guarantee to
Thermo Electron related to Thermo Electrons guarantee of our subordinated
debentures. As a result of the redemption, the letter of credit guarantee to
Thermo Electron was extinguished.

8. Common and Preferred Stock

We filed a registration statement on Form S-3 with the SEC to register
1,055,000 newly issued shares of our common stock and to register for resale
5,945,000 shares of our common stock held by selling shareholders, of which
5,825,000 shares were held by Thermo Electron. This registration statement
became effective on February 12, 2002 and all shares registered were sold on
February 15, 2002. We received $15.4 million, net of underwriting fees and
discounts and other issuance costs, from the sale of the 1,055,000 newly issued
shares. In addition, the underwriters exercised a 30-day option to purchase
from Thermo Electron 1,050,000 additional shares of our common stock to cover
any over-allotments. We received no proceeds from the sale of shares by selling
shareholders or from the sale of the over-allotment shares.

We filed another registration statement on Form S-3 with the SEC to
register for resale 7,609,719 shares of our common stock held by Thermo
Electron. This registration statement became effective on August 14, 2002. We
will not receive any proceeds from the sale of any of these shares. As of
September 28, 2002 Thermo Electron owned approximately 14% of our total
outstanding common stock.

On April 12, 2001 we announced that our Board of Directors authorized a
stock repurchase program under which our common stock, with a market value up
to $20 million, may be acquired in the open market or in privately negotiated
transactions. During the third quarter of 2002, we completed our stock
repurchase program. The number of shares purchased and the timing of purchases
were based on several conditions, including the price of our common stock,
general market conditions and other factors. During the nine months ended
September 28, 2002, we repurchased 2,274,900 shares of our common stock on the
open market for $18.3 million. From the inception of the program through
September 28, 2002, we repurchased 2,467,600 shares of our common stock for
$20.0 million. All repurchased common stock has been retired.

On May 2, 2002, we adopted a shareholder rights plan, which we call the
Rights Plan. Under the Rights Plan, we distributed one purchase right for each
share of common stock outstanding at the close of business on May 17, 2002. If
a person or group acquires 15% or more of our common stock in a transaction not
pre-approved by our Board of Directors, each right will entitle its holder,
other than the acquirer, to buy our common stock at 50% of its market value for
the rights then current exercise price (initially $70.00). In addition, if an
unapproved party acquires more than 15% of our common stock, and our Company or
our business is later acquired by the unapproved party or in a transaction in
which all shareholders are not treated alike, shareholders with unexercised
rights, other than the unapproved party, will be entitled to purchase common
stock of the merger party or asset buyer with a value of twice the exercise
price of the rights. Each right also becomes exercisable for one one-thousandth
of a share of our Series RP preferred stock at the rights then current
exercise price ten days after an unapproved third party makes, or announces an
intention to make, a tender offer or exchange offer that, if completed, would
result in the unapproved party acquiring 15% or more of our common stock. Our
Board of Directors may redeem the rights for a nominal amount before an event
that causes the rights to become exercisable. The rights will expire on May 2,
2012.

10



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##### Table of Contents



In connection with the Rights Plan, we designated 100,000 no par shares of
Series RP preferred stock. These shares, if issued, will be entitled to receive
quarterly dividends and a liquidation preference. There are no shares of Series
RP preferred stock issued and outstanding and we do not anticipate issuing any
shares of Series RP preferred stock except as may be required under the Rights
Plan.

On May 31, 2002, our shareholders approved an Employee Stock Purchase
Plan, or the ESPP. The ESPP authorizes the issuance of up to 500,000 shares of
common stock to participating employees. In addition, the ESPP provides for an
annual increase of up to 250,000 shares in the total number of shares available
for issuance under the ESPP on March 1 of each year. As of September 28, 2002,
689 of our employees would have been eligible to participate in the ESPP.

The ESPP is being implemented through a series of six-month offering
periods, the first of which commenced on the first trading day of November
2002. A participating employee may have up to 15% of their compensation
withheld during an offering period. At the end of each offering period, the
accumulated payroll deductions of each employee will be used to purchase shares
at the purchase price for that offering period. The purchase price of the
shares will be 85% of the lower of the fair market value of the shares on the
first or the last day of that offering period.

Because participation by employees in the ESPP will be voluntary, and is
subject to certain eligibility requirements, we cannot determine the number of
shares of common stock that will be purchased in the future by our employees as
a group.

In August 2002, an award of 50,000 shares of restricted stock was made to
one of our executive officers under our 1997 Stock Option Plan. The stock award
was valued at $328,000 and was recorded as deferred compensation to be
amortized to expense over the restriction lapse period. As of September 28,
2002, none of the restrictions have lapsed for shares issued under this award.

9. Merger, Restructuring and Other Costs

Merger, restructuring
and other costs were recorded in the condensed consolidated
statements of operations as follows (in thousands):

|              |  |                    |     |                   |  |               |       |               |  |   |     |  |  |   |       | 
|------------- |  | ------------------ | --- | ----------------- |  | ------------- | ----- | ------------- |  | - | --- |  |  | - | ----- | 
|              |  | Three Months Ended |     | Nine Months Ended
|              |  |                    |     |                  
|              |  | September 28,      |     | September 29,     |  | September 28, |       | September 29,
|              |  | 2002               |     | 2001              |  | 2002          |       | 2001         
|              |  |                    |     |                   |  |               |       |              
|Merger        |  | $                  | 67  |                   |  | $             | 505   |               |  | $ | 356 |  |  | $ | 4,813 | 
|             
|             
|             
|             
|Restructuring |  |                    | (35 | )                 |  |               | 190   |               |  |   | 503 |  |  |   | 1,027 | 
|             
|             
|             
|             
|Other         |  |                    |    |                   |  |               | 715   |               |  |   |    |  |  |   | 715   | 
|              |  |                    |     |                   |  |               |       |               |  |   |     |  |  |   |       | 
|Total         |  | $                  | 32  |                   |  | $             | 1,410 |               |  | $ | 859 |  |  | $ | 6,555 | 
|              |  |                    |     |                   |  |               |       |               |  |   |     |  |  |   |       | 



Merger Costs

Merger costs recorded during the three and nine months ended September 28,
2002 consisted of executive waiver agreement expenses. Merger costs recorded
during the three and nine-month periods ended September 29, 2001 consisted
principally of employee severance, employee retention costs and outside
consulting, accounting and legal expenses associated with the Merger.

11



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##### Table of Contents



The following table reflects the activity in accrued merger costs for the
three and nine-month periods ended September 28, 2002 and September 29, 2001
(in thousands):

|                      |                                                                  |   |                    |    |                   |   |               |      |               |   |     |      |   |   |       |        |  
|--------------------- | ---------------------------------------------------------------- | - | ------------------ | -- | ----------------- | - | ------------- | ---- | ------------- | - | --- | ---- | - | - | ----- | ------ | -
|                      |                                                                  |   | Three Months Ended |    | Nine Months Ended
|                      |                                                                  |   |                    |    |                  
|                      |                                                                  |   | September 28,      |    | September 29,     |   | September 28, |      | September 29,
|                      |                                                                  |   | 2002               |    | 2001              |   | 2002          |      | 2001         
|                      |                                                                  |   |                    |    |                   |   |               |      |              
|Accrued Merger Costs: |                                                                  |   |                    |    |                   |   |               |      |               |   |     |      |   |   |       |       
|                     
|                     
|                     
|                     
|Beginning balance     |                                                                  | $ | (63                | )  |                   | $ | 1,062         |      |               | $ | 472 |      |   | $ | 1,708 |       
|                     
|                     
|                     
|                     
|Add:                  |                                                                  |   |                    |    |                   |   |               |      |               |   |     |      |   |   |       |       
|                     
|                     
|                     
|                     
|                      | Accruals pursuant to executive waiver agreement                  |   |                    | 67 |                   |   |               | 213  |               |   |     | 337  |   |   |       | 533    |  
|                     
|                     
|                     
|                     
|                      | Accruals
pursuant to employee retention and severance agreements |   |                    |   |                   |   |               | 228  |               |   |     |     |   |   |       | 2,825  |  
|                     
|                     
|                     
|                     
|                      | Accruals of other merger costs                                   |   |                    |   |                   |   |               | 64   |               |   |     | 19   |   |   |       | 1,455  |  
|                     
|                     
|                     
|                     
|Less:                 |                                                                  |   |                    |    |                   |   |               |      |               |   |     |      |   |   |       |       
|                     
|                     
|                     
|                     
|                      | Payments pursuant to executive waiver agreement                  |   |                    |   |                   |   |               |     |               |   |     | (810 | ) |   |       |       |  
|                     
|                     
|                     
|                     
|                      | Payments pursuant
to employee retention and severance agreements |   |                    |   |                   |   |               | (729 | )             |   |     |     |   |   |       | (4,533 | )
|                     
|                     
|                     
|                     
|                      | Payments of other merger costs                                   |   |                    | (7 | )                 |   |               | (817 | )             |   |     | (21  | ) |   |       | (1,967 | )
|                      |                                                                  |   |                    |    |                   |   |               |      |               |   |     |      |   |   |       |       
|Ending balance        |                                                                  | $ | (3                 | )  |                   | $ | 21            |      |               | $ | (3  | )    |   | $ | 21    |       
|                      |                                                                  |   |                    |    |                   |   |               |      |               |   |     |      |   |   |       |       

In accordance with the executive waiver agreements, payments to the
executives occurred at the one-year anniversary of the Merger, although the
executives continued to be restricted from exercising some of their options and
selling the related stock for an additional six months following the one-year
anniversary date. The total expense related to the waiver agreements of
$810,000 was amortized over the 18-month waiver period. As of September 28,
2002, the ending balance of accrued merger costs has been reclassified to
prepaid expenses and other in the accompanying condensed consolidated balance
sheet.

Restructuring Costs

From the inception of the Restructuring Plan in June 2001 through
September 28, 2002, we have recorded $1.6 million of restructuring charges in
accordance with EITF No. 94-3, and Staff Accounting Bulletin No. 100,
Restructuring and Impairment Charges. These charges represent estimated
employee severance costs and stock option acceleration charges. Since the
announcement of the Restructuring Plan in the second quarter of 2001, we have
paid approximately $0.7 million in severance payments to 39 employees. The
following is a summary of our accrued restructuring costs activity for the
three-month and nine-month periods ended September 28, 2002 and September 29,
2001 (in thousands):

|                             |                                |   |                    |      |                   |   |               |      |               |   |     |      |   |   |     |      |  
|---------------------------- | ------------------------------ | - | ------------------ | ---- | ----------------- | - | ------------- | ---- | ------------- | - | --- | ---- | - | - | --- | ---- | -
|                             |                                |   | Three Months Ended |      | Nine Months Ended
|                             |                                |   |                    |      |                  
|                             |                                |   | September 28,      |      | September 29,     |   | September 28, |      | September 29,
|                             |                                |   | 2002               |      | 2001              |   | 2002          |      | 2001         
|                             |                                |   |                    |      |                   |   |               |      |              
|Accrued Restructuring Costs: |                                |   |                    |      |                   |   |               |      |               |   |     |      |   |   |     |     
|                            
|                            
|                            
|                            
|Beginning balance            |                                | $ | 839                |      |                   | $ | 837           |      |               | $ | 863 |      |   | $ |    |     
|                            
|                            
|                            
|                            
|                             | Employee severance accrual     |   |                    | 18   |                   |   |               | 126  |               |   |     | 404  |   |   |     | 963  |  
|                            
|                            
|                            
|                            
|                             | Payments of employee severance |   |                    | (123 | )                 |   |               | (132 | )             |   |     | (533 | ) |   |     | (132 | )
|                             |                                |   |                    |      |                   |   |               |      |               |   |     |      |   |   |     |     
|Ending balance               |                                | $ | 734                |      |                   | $ | 831           |      |               | $ | 734 |      |   | $ | 831 |     
|                             |                                |   |                    |      |                   |   |               |      |               |   |     |      |   |   |     |     

In addition to the
employee severance costs, estimated restructuring costs includes
expense related to the acceleration of stock options granted to
employees who will be terminated under the Restructuring Plan. The
recording of such expense is subject to the timing of employee
terminations, which have remained materially consistent with our
initial estimates. In the three-month period ending September 28,
2002, the estimated expense was reduced by $53,000. In the nine-month
period ending September 28, 2002 and the three and nine-month periods
ending September 29, 2001, $99,000, $64,000 and $64,000,
respectively, of stock option acceleration expense was recorded.

Other Costs

Other costs of $0.7
million were incurred and paid in the third quarter of 2001 related
to the events of September 11, 2001.

12



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##### Table of Contents



10. Income Taxes

Our effective tax provision rate was 40% for both the three and nine-month
periods ended September 28, 2002. For the three and nine-month periods ended
September 29, 2001, our effective tax benefit rate was 25% and 3%,
respectively. The effective tax benefit rate for 2002 differed from the
statutory federal income tax rate primarily due to the impact of state income
taxes. The effective tax benefit rate for 2001 differed from the statutory
federal income tax rate primarily due to the nondeductible nature of expenses
related to our merger with TCA, including the write-off of in-process research
and development costs, the amortization of goodwill and other nondeductible
merger transaction expenses.

At September 28, 2002 and December 29, 2001, we reported a net deferred
tax liability of approximately $54.0 million and $58.6 million, respectively,
comprised principally of temporary differences between the financial statement
and income tax bases of intangible assets.

11. Net Loss Per Share

Basic and diluted  earnings (loss) per share were calculated as
follows:

|                                                       |  |                    |        |                   |  |           |        |           |  |   |        |   |  |   |         |  
|------------------------------------------------------ |  | ------------------ | ------ | ----------------- |  | --------- | ------ | --------- |  | - | ------ | - |  | - | ------- | -
|                                                       |  | Three Months Ended |        | Nine Months Ended
|                                                       |  |                    |        |                  
|                                                       |  | September          |        | September         |  | September |        | September
|                                                       |  | 2002               |        | 2001              |  | 2002      |        | 2001     
|                                                       |  |                    |        |                   |  |           |        |          
|Net
income (loss)                                      |  | $                  | 237    |                   |  | $         | (2,968 | )         |  | $ | (2,076 | ) |  | $ | (88,252 | )
|                                                       |  |                    |        |                   |  |           |        |          
|                                                      
|                                                      
|                                                      
|                                                      
|Weighted
average number of common shares-basic         |  |                    | 56,268 |                   |  |           | 55,078 |           |  |   | 56,572 |   |  |   | 51,169  |  
|                                                      
|                                                      
|                                                      
|                                                      
|Dilutive
effect of employee stock options              |  |                    | 187    |                   |  |           |       |           |  |   |       |   |  |   |        |  
|                                                       |  |                    |        |                   |  |           |        |          
|                                                      
|                                                      
|                                                      
|                                                      
|Weighted
average number of common shares-diluted       |  | $                  | 56,455 |                   |  | $         | 55,078 |           |  | $ | 56,572 |   |  | $ | 51,169  |  
|                                                       |  |                    |        |                   |  |           |        |          
|                                                      
|                                                      
|                                                      
|                                                      
|Net
earnings (loss) per common share-basic and diluted |  | $                  | 0.00   |                   |  | $         | (0.05  | )         |  | $ | (0.04  | ) |  | $ | (1.72   | )
|                                                       |  |                    |        |                   |  |           |        |          

Basic loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during the period. Diluted loss per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
As a result of our net losses for the nine months ended September 28, 2002 and
the three and nine months ended September 29, 2001, there is no difference
between basic and diluted net loss per share. Options to purchase 687,752
shares of common stock for the nine-month period ended September 28, 2002 were
not included in the computation of diluted net loss per share because the loss
position in the period would have rendered the additional shares antidilutive.
Options to purchase 5,817,961 shares of common stock for both of the three and
nine-month periods ended September 29, 2001 were not included in the
computations of diluted loss per share because the loss position in both
periods would have rendered the additional shares antidilutive. In addition,
the effect of assuming the conversion of our 4.75% subordinated convertible
debentures, convertible at $37.62 per share, was excluded from the calculation
of diluted net loss per share for the nine-month period ended September 28,
2002 and the nine-month period ended September 29, 2001 because the effects
would be antidilutive.

12. Business Segment and Geographical Data

We organize and manage our business by functional operating entities. Our
functional entities operate in two segments: (1) Cardiovascular and (2) Other
Medical Equipment. The 2001 condensed consolidated financial information
presented herein includes the financial results of TCAs Cardiovascular segment
and Other Medical Equipment segment for the entire three and nine-month periods
ended September 29, 2001 and the financial results of Thoratecs Cardiovascular
segment for only the post-merger period from February 14, 2001 through
September 29, 2001.

Business Segments (in thousands):

|                                                          |                                                    |                                                          |     |                    |      |                   |     |               |        |               |       |        |        |   |       |         |         |  
|--------------------------------------------------------- | -------------------------------------------------- | -------------------------------------------------------- | --- | ------------------ | ---- | ----------------- | --- | ------------- | ------ | ------------- | ----- | ------ | ------ | - | ----- | ------- | ------- | -
|                                                          |                                                    |                                                          |     | Three Months Ended |      | Nine Months Ended
|                                                          |                                                    |                                                          |     |                    |      |                  
|                                                          |                                                    |                                                          |     | September 28,      |      | September 29,     |     | September 28, |        | September 29,
|                                                          |                                                    |                                                          |     | 2002               |      | 2001              |     | 2002          |        | 2001         
|                                                          |                                                    |                                                          |     |                    |      |                   |     |               |        |              
|Product sales:                                            |                                                    |                                                          |     |                    |      |                   |     |               |        |               |       |        |        |   |       |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Cardiovascular                                     |                                                          | $   | 19,650             |      |                   | $   | 19,027        |        |               | $     | 58,171 |        |   | $     | 48,253  |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other Medical Equipment                            |                                                          |     | 11,455             |      |                   |     | 9,639         |        |               |       | 33,608 |        |   |       | 30,110  |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                    |                                                          |     |                    |      |                   |     |               |        |               |       |        |        |   |       |        
|                                                          | Total product sales                                |                                                          | $   | 31,105             |      |                   | $   | 28,666        |        |               | $     | 91,779 |        |   | $     | 78,363  |        
|                                                          |                                                    |                                                          |     |                    |      |                   |     |               |        |               |       |        |        |   |       |        
|Income (loss) before income taxes and extraordinary item: |                                                    |                                                          |     |                    |      |                   |     |               |        |               |       |        |        |   |       |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Cardiovascular                                     |                                                          | $   | 3,230              |      |                   | $   | 1,112         |        |               | $     | 6,839  |        |   | $     | (3,307  | )      
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other Medical Equipment                            |                                                          |     | 2,482              |      |                   |     | 1,695         |        |               |       | 6,761  |        |   |       | 5,826   |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Corporate (a)                                      |                                                          |     | (2,728             | )    |                   |     | (1,394        | )      |               |       | (7,939 | )      |   |       | (1,394  | )      
|                                                         
|                                                         
|                                                         
|                                                         
|Purchase accounting entries:(b)                           |                                                    |                                                          |     |                    |      |                   |     |               |        |               |       |        |        |   |       |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Amortization of goodwill and purchased intangibles |                                                          |     | (3,096             | )    |                   |     | (4,538        | )      |               |       | (9,288 | )      |   |       | (11,346 | )      
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | In-process research and development                |                                                          |     |                   |      |                   |     |              |        |               |       |       |        |   |       | (76,858 | )      
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Merger,
restructuring and other costs              |                                                          |     | (32                | )    |                   |     | (1,410        | )      |               |       | (859   | )      |   |       | (6,555  | )      
|                                                          |                                                    |                                                          |     |                    |      |                   |     |               |        |               |       |        |        |   |       |        
|                                                          |                                                    | Total operating loss                                     |     |                    | (144 | )                 |     |               | (4,535 | )             |       |        | (4,486 | ) |       |         | (93,634 | )
|                                                         
|                                                         
|                                                         
|                                                         
|Interest and other income, net                            |                                                    |                                                          | 536 |                    |      |                   | 547 |               |        |               | 1,537 |        |        |   | 2,282 |        
|                                                          |                                                    |                                                          |     |                    |      |                   |     |               |        |               |       |        |        |   |       |         |         |  
|                                                          |                                                    | Income (loss) before income taxes and extraordinary item |     | $                  | 392  |                   |     | $             | (3,988 | )             |       | $      | (2,949 | ) |       | $       | (91,352 | )
|                                                          |                                                    |                                                          |     |                    |      |                   |     |               |        |               |       |        |        |   |       |         |         |  



---

|(a) |  | Represents primarily general and administrative expenses not specifically
identified to any particular business segment.
|--- |  | ------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(b) |  | Related to the Cardiovascular segment.                                                                                  

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##### Table of Contents



Geographic Areas (in thousands):

|               |                         |       |   |                    |        |                   |   |               |        |               |   |        |        |  |   |        |        | 
|-------------- | ----------------------- | ----- | - | ------------------ | ------ | ----------------- | - | ------------- | ------ | ------------- | - | ------ | ------ |  | - | ------ | ------ | 
|               |                         |       |   | Three Months Ended |        | Nine Months Ended
|               |                         |       |   |                    |        |                  
|               |                         |       |   | September 28,      |        | September 29,     |   | September 28, |        | September 29,
|               |                         |       |   | 2002               |        | 2001              |   | 2002          |        | 2001         
|               |                         |       |   |                    |        |                   |   |               |        |              
|Product sales: |                         |       |   |                    |        |                   |   |               |        |               |   |        |        |  |   |       
|              
|              
|              
|              
|               | Domestic                |       | $ | 25,312             |        |                   | $ | 23,832        |        |               | $ | 75,196 |        |  | $ | 62,365 |       
|               |                         |       |   |                    |        |                   |   |               |        |               |   |        |        |  |   |        |       
|               | Europe                  |       |   | 3,992              |        |                   |   | 2,729         |        |               |   | 10,639 |        |  |   | 8,946  |       
|              
|              
|              
|              
|               | All other international |       |   | 1,801              |        |                   |   | 2,105         |        |               |   | 5,944  |        |  |   | 7,052  |       
|               |                         |       |   |                    |        |                   |   |               |        |               |   |        |        |  |   |        |        | 
|               | Total international     |       |   | 5,793              |        |                   |   | 4,834         |        |               |   | 16,583 |        |  |   | 15,998 |       
|               |                         |       |   |                    |        |                   |   |               |        |               |   |        |        |  |   |        |       
|              
|              
|              
|              
|               |                         | Total |   | $                  | 31,105 |                   |   | $             | 28,666 |               |   | $      | 91,779 |  |   | $      | 78,363 | 
|               |                         |       |   |                    |        |                   |   |               |        |               |   |        |        |  |   |        |        | 



14



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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 Form 10-Q may contain statements that we believe are, or may be
considered to be, 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 forward-looking statements generally can be identified by
use of statements that include phrases such as believe, expect,
anticipate, intend, plan, foresee, may, hope, will, estimates,
potential, continue or other similar words or phrases. Similarly,
statements that describe our objectives, plans or goals also are
forward-looking statements. All of these forward-looking statements are subject
to risks and uncertainties that could cause our actual results to differ
materially from those contemplated by the relevant forward-looking statement.
The principal risk factors that could cause actual performance and future
actions to differ materially from the forward-looking statements include, but
are not limited to the results of clinical trials, governmental regulatory
approval processes, plans to develop and market new products, market acceptance
of new products, announcements by our competitors, an intensely competitive
market, the ability to integrate acquired operations, the ability to improve
financial performance, and other factors identified in our Annual Report on
Form 10-K for 2001 which we filed with the Securities and Exchange Commission,
or the SEC. Readers are urged to consider these factors carefully in evaluating
the forward-looking statements. The forward-looking statements included in this
Form 10-Q are made only as of the date of this report and we undertake no
obligation to publicly update these forward-looking statements to reflect
subsequent events or circumstances.

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 2001 filed with the SEC.

Overview

We are a leading manufacturer of circulatory support products for use by
patients with congestive heart failure, or CHF. According to the American Heart
Association, 4.8 million patients in the United States suffer from CHF and an
additional 550,000 patients are diagnosed with this disease annually. We were
the first company to receive U.S. Food and Drug Administration, or FDA,
approval to commercially market a ventricular assist device, or VAD, to treat
patients with late-stage heart failure, which comprises approximately 5% of the
CHF patient population. Our VADs are used primarily by these CHF patients to
perform some or all of the pumping function of the heart and we currently offer
the widest range of products to serve this market. We believe that our
long-standing reputation for quality and innovation and our excellent
relationships with leading cardiovascular surgeons worldwide position us to
capture growth opportunities in the expanding congestive heart failure market.
We also develop and sell products that are used by physicians and hospitals for
vascular and diagnostic applications that include vascular grafts, blood
coagulation testing and skin incision devices. We conduct business both
domestically and internationally.

The Merger with Thermo Cardiosystems

On February 14, 2001, we completed our Merger with Thermo Cardiosystems
Inc., or TCA. Pursuant to the merger agreement between Thoratec and TCA dated
October 3, 2000, Thoratec issued 32,226,074 new shares of our common stock to
the shareholders of TCA in exchange for all the outstanding common stock of TCA
(38,594,281 shares outstanding as of February 14, 2001) at an exchange ratio of
0.835 shares of our common stock for each share of TCA stock. Immediately
following the transaction, TCAs shareholders owned 59% of our then outstanding
common stock and our former shareholders owned the remaining shares of our
common stock. Thermo Electron Corporation, or Thermo Electron, the majority
shareholder of TCA prior to the Merger, received 19,312,959 shares of the
32,226,074 newly issued shares. Immediately following the Merger, Thermo
Electron owned 35% of our then outstanding common stock. Pursuant to the terms
of a Registration Rights Agreement (Registration Rights Agreement) between us
and Thermo Electron dated October 3, 2000, we filed a registration statement on
Form S-3 with the SEC, which became effective on June 15, 2001, to register for
resale 4,828,240 shares of the our common stock held by Thermo Electron.
Subsequent to that filing, Thermo Electron sold substantially all of the
registered shares. We filed another registration statement on Form S-3 with the
SEC to register 1,055,000 newly issued shares of our common stock and to
register for resale 5,945,000 shares of our common stock held by selling
shareholders, of which 5,825,000 shares were held by Thermo Electron. This
registration statement became effective on February 12, 2002 and all shares
registered were sold on February 15, 2002. We received $15.4 million, net of
underwriting fees and discounts and other issuance costs, from the sale of the
1,055,000 newly issued shares. In addition, the underwriters exercised a 30-day
option to purchase from Thermo Electron 1,050,000 shares of our common stock to
cover any over-

15



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##### Table of Contents



allotments. We received no proceeds from the sale of shares by selling
shareholders or from the sale of the over-allotment shares. We filed another
registration statement on Form S-3 with the SEC to register for resale
7,609,719 shares of our common stock held by Thermo Electron. This registration
statement became effective on August 14, 2002. We will not receive any
proceeds from the sale of any of these shares. As of September 28, 2002,
Thermo Electron owned approximately 14% of our total outstanding common stock.

The Merger was accounted for under the purchase method of accounting and
was treated as a reverse acquisition because the shareholders of TCA owned the
majority of our common stock after the Merger. TCA was deemed the acquiror for
accounting and financial reporting purposes.

Due to the nature of the reverse acquisition, Thoratecs assets and
liabilities were recorded based upon their estimated fair values at the date of
acquisition. As of September 28, 2002, approximately $308.2 million of the
purchase price of $346.2 million has been allocated to goodwill and other
purchased intangible assets. As a result of the Merger, $76.9 million relating
to in-process research and development, or IPR&D, was expensed upon completion of the Merger. Current estimates and
assumptions related to the valuation of IPR&D remain materially consistent with
our initial estimates performed at the time of the Merger.

Through the end of 2001, goodwill and other intangibles were amortized
over their estimated useful lives of six to twenty years. Beginning in 2002, we
adopted Statement of Financial Accounting Standards, or SFAS, No. 142,
Goodwill and Other Intangible Assets. SFAS No. 142 requires companies to
cease amortizing goodwill and also establishes a
new method of testing goodwill for impairment on an annual basis or on an
interim basis if an event occurs or circumstances change that would reduce the
fair value of a reporting unit below its carrying value. As such, at the
beginning of 2002, we stopped amortizing goodwill and began testing goodwill
for impairment under the new standard. In the second quarter of 2002, we
completed our transitional goodwill impairment test as of December 30, 2001 and
determined that no adjustment to the carrying value of goodwill was needed. If
any future impairment occurs, such impairment could harm our future results of
operations. The adoption of SFAS No. 142 will result in a decrease in goodwill
amortization of approximately $5.0 million in 2002.

Restructuring Plan

From the inception of the Restructuring Plan in June 2001 through
September 28, 2002, we have recorded $1.6 million of restructuring charges in
accordance with EITF No. 94-3, and Staff Accounting Bulletin No. 100,
Restructuring and Impairment Charges. These charges represent estimated
employee severance costs and stock option acceleration charges. Since the
announcement of the Restructuring Plan in the second quarter of 2001, we have
paid approximately $0.7 million in severance payments to 39 employees.

Recent Events

On November 6, 2002,
we received FDA approval to market our HeartMate SNAP-VE left
ventricular assist system for Destination Therapy, or permanent
support for end-stage heart failure patients who are not eligible for
heart transplants.

Results of Operations

Three months ended September 2002 and 2001

Product Sales

Product sales in the third quarter of 2002 were $31.1 million compared to
$28.7 million in the third quarter of 2001, an increase of approximately $2.4
million or 8%. This increase is attributable to increases in the domestic
prices and the number of units sold both domestically and internationally of
VAD products of $0.2 million, higher sales of graft products of $0.4 million,
and higher sales of blood coagulation testing equipment and incision products
of $1.8 million.

Gross Profit

Gross profit was $18.1 million, representing approximately 58% of product
sales, for the third quarter of 2002 compared to $15.1 million, representing
approximately 53% of product sales, for the third quarter of 2001. The increase
in gross profit percentage was primarily a result of higher average selling prices for
VAD products, lower manufacturing variances as a percentage of total sales,
lower merger related employee retention costs and an inventory
write-off of the discontinued HeartMate pneumatic driver in the third quarter of
2001 of $0.4 million.

16



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Selling, General and Administrative

Selling, general and administrative expenses increased to $9.1 million, or
29% of product sales, in the third quarter of 2002, from $8.3 million, or 29%
of product sales, in the third quarter of 2001. Selling, general and
administrative expenses were consistent as a percentage of sales from
period to period due to higher costs associated with recently
installed computer systems, higher insurance costs and increased
promotional activities and costs to expand markets for our blood
coagulation testing equipment and VADs.

Research and Development

Research and development expenses increased to $5.9 million, or 19% of
product sales, in the third quarter of 2002, from $5.3 million, or 18% of
product sales, in the third quarter of 2001. This increase was attributable principally to higher spending on certain
VAD development programs, partially offset by lower spending related to the
REMATCH clinical trials.

Amortization of Goodwill and Purchased Intangible Assets

Amortization of
identified purchased intangible assets decreased to $3.1 million in
the third quarter of 2002 from $3.3
million in the third quarter of 2001 primarily due to the
reclassification of the intangible asset related to assembled workforce to
goodwill as of the beginning of 2002. Intangible assets are being amortized over their
estimated useful lives of eight to twenty years. We stopped amortizing goodwill
at the beginning of fiscal year 2002 in accordance with SFAS
No. 142. The adoption of SFAS No. 142 will result in a decrease in goodwill
amortization of approximately $5.0 million in 2002 compared to 2001.

Merger, Restructuring and Other Costs

Merger, restructuring and other costs in the third quarter of 2002 were
$32,000, compared to $1.4 million in the third quarter of 2001. This decrease
was due to a $0.5 million decrease in merger costs, principally related to
lower employee retention costs and outside consulting, accounting, and legal
expenses and a $0.7 million decrease
in other costs, representing costs associated with the events of September 11, 2001.

Interest and Other Income  Net

Interest and other
income-net was constant at $0.5 million in both the third quarter of
2002 and the third quarter of 2001. This was principally due to reduced interest expense
related to the subordinated convertible debentures as those debentures were
redeemed in the first quarter 2002 and favorable exchange rate transaction
gains, offset by a reduction in interest income caused by both lower cash and
investment balances and lower interest rates.

Income Taxes

Our effective tax provision rate was 40% for the three months ended
September 28, 2002. For the three months ended September 29, 2001, our
effective tax benefit rate was 25%. The effective tax rate for 2002 differed
from the statutory federal income tax rate primarily due to the impact of state
income taxes. The effective tax rate for 2001 differed from the
statutory federal income tax rate primarily due to the nondeductible
nature of expenses related to our Merger with TCA, including the
amortization of goodwill and other nondeductible merger transaction
expenses.

At September 28, 2002 and December 29, 2001, we reported a net deferred
tax liability of approximately $54.0 million and $58.6 million, respectively,
comprised principally of temporary differences between the financial statement
and income tax bases of intangible assets.

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Nine months ended September 2002 and 2001

Product Sales

Product sales in the first nine months of 2002 were $91.8 million compared
to $78.4 million in first nine months of 2001, an increase of approximately
$13.4 million or 17%. Product sales for the first nine months of 2001 included
TCAs sales for the full nine-month period of 2001 and Thoratecs sales for the
post-merger period from February 14, 2001 through September 29, 2001. Had
Thoratec sales been included for the full nine-month period of 2001, the
increase in sales would have been $9.9 million or 12%. The $13.4 million
increase is primarily attributable to higher domestic sales of VAD products of $8.6
million, higher sales of graft products of $1.5 million, and higher sales of
blood coagulation testing equipment and incision devices of
$3.5 million.

Gross Profit

Gross profit was $52.3 million, representing 57% of product sales for the
first nine months of 2002 compared to $42.1 million, representing 54% of
product sales for the first nine months of 2001. The increase in gross profit
percentage was a result of higher average selling prices, lower
merger-related
employee retention costs and restructuring-related costs, and favorable foreign exchange rates.

Selling, General and Administrative

Selling, general and administrative expenses increased to $27.7 million,
or 30%, of product sales in the first nine months of 2002 from $24.0 million,
or 31% of product sales, in the first nine months of 2001. Selling, general, and administrative expenses for the first
nine months of 2001 included TCAs expenses for the full nine-month period and
Thoratecs expenses only for the post-merger period from February 14, 2001
through September 29, 2001. Had Thoratecs selling, general and administrative
expenses been included for the full nine-month period, these expenses would
have increased by $2.1 million or 8%. Selling and marketing expenses increased
as a result of promotional activities, new product introductions and
costs to expand markets for our blood coagulation testing equipment and
VADs.

Research and Development

Research and development expenses increased to $18.9 million, or 21% of
product sales, in the first nine months of 2002, from $17.0 million, or 22% of
product sales, in the first nine months of 2001. Research and development expenses for the first nine months of 2001
included TCAs expenses for the full nine-month period, and Thoratec expenses
only for the post-merger period from February 14, 2001 through September 29,
2001. Had Thoratecs research and development expenses been included for the
full nine-month period, these expenses would have increased by $0.9 million, or
5%. This increase was attributable principally to higher spending on certain
VAD development programs partially offset by lower spending related to the
REMATCH clinical trials.

Amortization of Goodwill and Purchased Intangible Assets

Amortization of identified purchased intangible assets was $9.3 million in
the first nine months of 2002, as compared to $8.2
million in the first nine months of 2001. Amortization expense related to
purchased intangible assets was higher in the first nine
months of 2002 compared to the first nine months of 2001 due to 2002
having nine full
months of amortization expense included compared to only seven and a half months
of amortization in 2001. We have stopped amortizing goodwill at the
beginning of fiscal year 2002 in accordance with
SFAS No. 142. Amortization of goodwill was
$1.2 million and $3.1 million in the first three and nine
months of 2001, respectively.

In-process Research and Development Costs

In-process research and development, or IPR&D, expense in the first nine
months of 2001 was $76.9 million, and represents the one-time write-off of
nonrecurring charges associated with our Merger for technology that had not
reached technological feasibility, had no alternative future use and for which
successful development was uncertain.

18



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Merger, Restructuring and Other Costs

Merger, restructuring and other costs in the first nine months of 2002
were $0.9 million, compared to $6.6 million in the first nine months of 2001.
This decrease was due to a $4.5 million decrease in merger costs, principally
related to lower employee retention costs and outside consulting, accounting,
and legal expenses and a decrease of
$0.7 million in other costs, which consisted of costs related to
the events of September 11,
2001.

Interest and Other Income  Net

Interest and other income-net was $1.5 million in the first nine months of
2002 compared to $2.3 million in the first nine months of 2001. This decrease was principally due to a reduction in
interest income caused by both lower cash balances and lower interest rates,
partially offset by reduced interest expense on the subordinated convertible
debentures which were redeemed in the first quarter of 2002 and favorable
exchange rate transaction gains.

Income Taxes

Our effective tax provision rate was 40% for the nine months ended
September 28, 2002. For the nine months ended September 29, 2001, our effective
tax benefit rate was 3%. The effective tax rate for 2002 differed from the
statutory federal income tax rate primarily due to the impact of state income
taxes. The effective tax benefit rate for 2001 differed from the statutory
federal income tax rate primarily due to the nondeductible nature of expenses
related to our merger with TCA, including the write-off of in-process research
and development costs, the amortization of goodwill and other nondeductible
merger transaction expenses.

Extraordinary Item

We completed the redemption of our outstanding subordinated debentures on
March 11, 2002 using cash, restricted cash and cash equivalents. In the
first nine months of 2002, we recorded an extraordinary loss of $0.3 million,
net of a tax benefit of $0.2 million, related to the write-off of capitalized
debt issuance costs, which were being amortized over the life of the debentures.

Liquidity and Capital Resources

At September 28,
2002, we had working capital of $101.1 million compared
with $135.9 million at December 29, 2001. Cash and cash equivalents at
September 28, 2002 were $40.8 million compared to $91.7 million at December 29,
2001, a decrease of $50.9 million. This decrease was due principally to
purchases of long-term investments of $34.3 million, the payment
of $9.8 million towards the redemption of our
outstanding subordinated debentures, which includes $0.8 million
of accrued interest, and $18.3 million of stock
repurchases. Additionally,
capital expenditures of $5.5 million and increases in inventories of $13.0
million related primarily to the planned relocation of the Woburn manufacturing facility
to Pleasanton and preparation for increasing sales, decreased cash
balances during the period. These decreases were partially offset by
$15.4 million of net proceeds received from the issuance of our common stock, and higher
accounts receivable collections.

The Statement of Cash Flows for the nine months ended September 29, 2001
was prepared by combining TCAs balance sheet as of December 30, 2000 with
Thoratecs balance sheet as of the merger date of February 14, 2001, and
comparing it to the consolidated balance sheet as of September 29, 2001, which
included both entities.

During the first nine months of 2002, $25,000 was provided by operations
compared to $3.8 million of cash used in operations for the first nine months
of 2001. Cash provided by operations includes collections on receivables,
offset by $13.0 million of inventory purchases in anticipation of increasing
sales and preparation for the relocation of the Woburn manufacturing operations
to Pleasanton.

During the first nine months of 2002, $48.7 million of cash was used in
our investing activities compared to $26.8 million of cash used in the first
nine months of 2001. During the first nine months of 2002, we purchased $34.3
million in short-term and long-term investments, $9.0 million of cash was used
in the redemption of $54.8 million of convertible debentures, net of the
reclassification of $45.9 million of restricted cash, and $5.5 million of cash
was used for capital expenditures.

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During the first nine months of 2002, $2.3 million of cash was used in
financing activities compared to $4.6 million of cash provided by financing
activities in the first nine months of 2001. In the first nine months of 2002,
cash was used to repurchase our common stock in the amount of $18.3 million,
representing 2,275,000 shares, which were subsequently retired. This amount
was partially offset by the issuance of common stock in an underwritten public
stock offering of $15.4 million and $0.6 million received from exercises of
stock options.

We believe that our
cash on-hand, short-term available-for-sale
investments and expected cash flow from operations will be sufficient to fund
our operations and capital requirements for the foreseeable future. We expect
that our operating expenses will increase in future periods as we spend more on
product manufacturing, marketing and research and development of new product
lines as well as substantial costs associated with the consolidation of our VAD
manufacturing operations.

The impact of inflation on our financial position and results of
operations was not significant during the three and nine-month periods ended
September 2002 and September 2001.

Critical Accounting Policies

We have identified certain accounting policies as critical to our business
operations and the understanding of our results of operations. The impact and
associated risks related to those policies on our business operations is
discussed below and in our fiscal 2001 consolidated financial statements filed
with the SEC in our annual report on Form 10-K.

As of the beginning of fiscal year 2002, we adopted Statement of Financial
Accounting Standards, or SFAS, No. 142, Goodwill and Other Intangible Assets,
which addresses the financial accounting and reporting standards for the
acquisition of intangible assets outside of a business combination and for
goodwill and other intangible assets subsequent to their acquisition. This
accounting standard requires that goodwill be separately disclosed from other
intangible assets in the balance sheet, and no longer be
amortized but tested for impairment on a periodic basis. The provisions of this
accounting standard also require the completion of a transitional impairment
test within six months of adoption, with any impairments identified treated as
a cumulative effect of a change in accounting principle. We have completed our
transitional goodwill impairment test as of December 30, 2001 and determined
that no adjustment to the carrying value of the goodwill and purchased
intangible assets was needed. On an ongoing basis, absent any impairment
indicators, we expect to perform a goodwill impairment test as of the end of
the third quarter during the fourth quarter of each year. We discontinued the
amortization of goodwill effective as of the beginning of fiscal year 2002.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK

Short-Term Investments

Our exposure to market risk for changes in interest rates relates to our
investment portfolio. The investment portfolio is made up of cash equivalent
and marketable security investments in money market funds and debt instruments
of government agencies and high quality corporate issuers. All investments are
carried at market value and are treated as available-for-sale. All investments
mature within two years or less from the date of purchase and are A-rated or
higher. The holdings of any one issuer, except government agencies, do not
exceed 10% of the portfolio. If interest rates rise, the market value of our
investments may decline which could result in a loss if we are forced to sell
an investment before the scheduled maturity. The company does not utilize
derivative financial instruments to manage interest rate risks.

Foreign Currency Rate Fluctuations

We conduct business in foreign countries. Our international operations
consist primarily of sales and service personnel for our ventricular assist
products. The employees report into our U.S. sales and marketing group and are
internally reported as part of that group. All assets and liabilities of our
non-U.S. operations are translated into U.S. dollars at the period-end exchange
rates. The resulting translation adjustments are included in comprehensive
income. The period-end translation of the non-functional currency balances (the
result of foreign sales, foreign expenses, and intercompany transactions) in
our wholly owned subsidiary in the United Kingdom at the period-end exchange
rate into the functional currency of our subsidiary results in foreign currency
exchange gains and losses. These foreign currency exchange gains and losses are
included in interest and other income-net and were not material for the three
and nine-month periods ended September 28, 2002 and September 29, 2001.
Currently, we do not expect to be subject to material foreign currency risk
with respect to future costs or cash flows from our foreign operations. To
date, we have not entered into any significant foreign currency hedging
contracts or other derivative financial instruments to hedge the effects of
adverse fluctuations in foreign currency exchange, however, we are currently
evaluating possible future use of such contracts and instruments.




ITEM 4. CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the
participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures within 90 days before the filing date of
this quarterly report. Based on that evaluation, our management, including the
Chief Executive Officer and Chief Financial Officer, concluded that the
Companys disclosure controls and procedures were effective. There have been
no significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to their evaluation.

We intend to review and evaluate the design and effectiveness of our
disclosure controls and procedures on an ongoing basis and to improve our
controls and procedures over time and to correct any deficiencies that we may
discover in the future. Our goal is to ensure that our senior management has
timely access to all material financial and non-financial information
concerning our business. While we believe the present design of our disclosure
controls and procedures is effective to achieve our goal, future events
affecting our business may cause us to significantly modify our disclosure
controls and procedures.

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PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES

None.




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS

None.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



|(a) |  | Exhibits:
|--- |  | ---------



| | 99.1 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------



|(b) |  | Reports on Form 8-K:
|--- |  | --------------------
|   
|    |  | None.               

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SIGNATURES

In accordance with the requirements of the Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



|                        | THORATEC CORPORATION                                                                                                                                
|----------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------
|                       
|Date: November 12, 2002 | /s/   D. Keith GrossmanD. Keith Grossman,
Chief Executive Officer                                                                                   
|                       
|Date: November 12, 2002 | /s/   M. Wayne Boylston
M. Wayne Boylston,
Senior Vice President,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)

23



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CERTIFICATION
OF CHIEF EXECUTIVE OFFICER

I, D. Keith Grossman, Chief Executive Officer, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Thoratec
Corporation;                                                                                                                                                                                                                                                   
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the period presented in
this quarterly report;                    
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                                      



| | a. |  | Designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | Evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the Evaluation
Date); and                                                                                                  
|
| | c. |  | Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the
audit committee of registrants board of directors (or persons
performing the equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | All significant deficiencies in the design or operation
of internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Date: November 12, 2002 | /s/   D. Keith Grossman
D. Keith Grossman,
Chief Executive Officer
|----------------------- | ------------------------------------------------------------------

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CERTIFICATION
OF CHIEF FINANCIAL OFFICER

I, M. Wayne Boylston, Chief Financial Officer, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Thoratec
Corporation;                                                                                                                                                                                                                                                   
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the period presented in
this quarterly report;                    
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                                      



| | a. |  | Designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | Evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the Evaluation
Date); and                                                                                                  
|
| | c. |  | Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the
audit committee of registrants board of directors (or persons
performing the equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. |  | All significant deficiencies in the design or operation
of internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | c. |  | Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Date: November 12, 2002 | /s/   M. Wayne BoylstonM. Wayne Boylston,
Sr. Vice President, Chief Financial Officer
|----------------------- | -------------------------------------------------------------------------------------

25