##### Table of Contents



---

---

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


Amendment No. 1 to
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 29, 2001 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 9, 2001, registrant had 55,796,813 shares of common stock
outstanding.



---

---





---

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                               
|PART II. OTHER INFORMATION   
|                              | ITEM 2. CHANGES IN SECURITIES                                                                
|                              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   



---



##### Table of Contents



THORATEC CORPORATION AND SUBSIDIARIES

INDEX

|                              |                                                                                               |                                                                                                                                        |    |    |   | 
|----------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------- | -- | -- | - | 
|PART I. FINANCIAL INFORMATION |                                                                                               |                                                                                                                                        | 3  |   
|                              | ITEM 1. Condensed Consolidated Financial Statements                                           |                                                                                                                                        |    | 3  |  
|                              |                                                                                               | Condensed Consolidated Balance Sheets as of September 2001 and Year End 2000                                                           |    |    | 3 | 
|                              |                                                                                               | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 2001
and September 2000                  |    |    | 5 | 
|                              |                                                                                               | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 2001 and
September 2000                            |    |    | 6 | 
|                              |                                                                                               | Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months
Ended September 2001 and September 2000 |    |    | 7 | 
|                              |                                                                                               | Notes to Condensed Consolidated Financial Statements                                                                                   |    |    | 8 | 
|                              | ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                                                        |    | 15 |  
|                              | ITEM 3. Quantitative and Qualitative Disclosure of Market Risk                                |                                                                                                                                        |    | 20 |  
|PART II. OTHER INFORMATION    |                                                                                               |                                                                                                                                        | 21 |   
|                              | ITEM 2. Changes in Securities                                                                 |                                                                                                                                        |    | 21 |  
|                              | ITEM 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                                                        |    | 21 |  
|                              | ITEM 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                                        |    | 21 |  

2



---



##### Table of Contents






PART I. FINANCIAL INFORMATION




ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




THORATEC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

|                                |                                                                                                                          |                      |         |               |         |              |       |        |         | 
|------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | -------------------- | ------- | ------------- | ------- | ------------ | ----- | ------ | ------- | 
|                                |                                                                                                                          |                      |         | September 29, |         | December 30,
|                                |                                                                                                                          |                      |         | 2001          |         | 2000        
|                                |                                                                                                                          |                      |         |               |         |             
|Assets                          |                                                                                                                          |                      |         |               |         |              |       |       
|Current Assets:                 |                                                                                                                          |                      |         |               |         |              |       |       
|                                | Cash and cash equivalents                                                                                                |                      | $       | 4,209         |         |              | $     | 30,236 |        
|                                | Short-term available-for-sale investments at quoted market value
(amortized cost of $85,443 in 2001 and $98,743 in 2000) |                      |         | 85,443        |         |              |       | 98,682 |        
|                                | Receivables (net of allowances of $1,276 in 2001 and $939 in 2000)                                                       |                      |         | 19,962        |         |              |       | 15,358 |        
|                                | Inventories                                                                                                              |                      |         | 27,054        |         |              |       | 17,381 |        
|                                | Deferred tax asset                                                                                                       |                      |         | 10,370        |         |              |       | 3,454  |        
|                                | Prepaid expenses and other                                                                                               |                      |         | 1,247         |         |              |       | 74     |        
|                                |                                                                                                                          |                      |         |               |         |              |       |       
|                                |                                                                                                                          | Total Current Assets |         |               | 148,285 |              |       |        | 165,185 | 
|Equipment and improvements, net |                                                                                                                          |                      | 20,816  |               |         |              | 7,084 |       
|Restricted investments          |                                                                                                                          |                      | 45,794  |               |         |              |      |       
|Goodwill                        |                                                                                                                          |                      | 96,875  |               |         |              |      |       
|Purchased intangible assets     |                                                                                                                          |                      | 201,741 |               |         |              |      |       
|Other assets                    |                                                                                                                          |                      | 5,260   |               |         |              | 4,416 |       
|                                |                                                                                                                          |                      |         |               |         |              |       |       
|                                |                                                                                                                          | Total Assets         |         | $             | 518,771 |              |       | $      | 176,685 | 
|                                |                                                                                                                          |                      |         |               |         |              |       |       

See notes to condensed consolidated financial statements.

3



---



##### Table of Contents



THORATEC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(in thousands)
(unaudited)

|                                                                                              |                                                                                             |                                    |                                            |                                                     |    |               |         |              |     |         |         |  
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ---------------------------------- | ------------------------------------------ | --------------------------------------------------- | -- | ------------- | ------- | ------------ | --- | ------- | ------- | -
|                                                                                              |                                                                                             |                                    |                                            |                                                     |    | September 29, |         | December 30,
|                                                                                              |                                                                                             |                                    |                                            |                                                     |    | 2001          |         | 2000        
|                                                                                              |                                                                                             |                                    |                                            |                                                     |    |               |         |             
|Liabilities and Shareholders Equity                                                          |                                                                                             |                                    |                                            |                                                     |    |               |         |             
|Current Liabilities:                                                                          |                                                                                             |                                    |                                            |                                                     |    |               |         |             
|                                                                                              | Accounts payable                                                                            |                                    | $                                          | 6,918                                               |    |               | $       | 3,972        |    
|                                                                                              | Accrued compensation                                                                        |                                    |                                            | 5,428                                               |    |               |         | 4,976        |    
|                                                                                              | Accrued merger, restructuring and other                                                     |                                    |                                            | 3,763                                               |    |               |         | 1,708        |    
|                                                                                              | Estimated liabilities for warranty, legal and other                                         |                                    |                                            | 1,798                                               |    |               |         | 1,316        |    
|                                                                                              | Other accrued liabilities                                                                   |                                    |                                            | 4,797                                               |    |               |         | 4,006        |    
|                                                                                              |                                                                                             |                                    |                                            |                                                     |    |               |         |             
|                                                                                              |                                                                                             |                                    |                                            | Total Current Liabilities                           |    |               | 22,704  |              |     |         | 15,978  |  
|Subordinated convertible debentures (includes $1,500 due to
Thermo Electron in 2001 and 2000) |                                                                                             |                                    | 54,838                                     |                                                     |    |               | 54,838  |             
|Long-term deferred tax liability and other                                                    |                                                                                             |                                    | 78,762                                     |                                                     |    |               |        |             
|                                                                                              |                                                                                             |                                    |                                            |                                                     |    |               |         |             
|                                                                                              |                                                                                             |                                    |                                            | Total Liabilities                                   |    |               | 156,304 |              |     |         | 70,816  |  
|Shareholders Equity:                                                                         |                                                                                             |                                    |                                            |                                                     |    |               |         |             
|                                                                                              | Common shares; 100,000 authorized;
issued and outstanding 55,342 in 2001
and 33,938 in 2000 |                                    |                                            | 394,594                                             |    |               |         | 4,064        |    
|                                                                                              | Treasury stock at cost; 1,723 shares in 2000                                                |                                    |                                            |                                                    |    |               |         | (51,869      | )  
|                                                                                              | Additional capital                                                                          |                                    |                                            |                                                    |    |               |         | 96,930       |    
|                                                                                              | Deferred compensation                                                                       |                                    |                                            | (586                                                | )  |               |         | (251         | )  
|                                                                                              | Retained earnings (accumulated deficit)                                                     |                                    |                                            | (31,553                                             | )  |               |         | 57,025       |    
|                                                                                              | Accumulated other comprehensive income (loss):                                              |                                    |                                            |                                                     |    |               |         |              |    
|                                                                                              |                                                                                             | Unrealized loss on investments     |                                            |                                                     |   |               |         |              | (39 | )      
|                                                                                              |                                                                                             | Cumulative translation adjustments |                                            |                                                     | 12 |               |         |              | 9   |        
|                                                                                              |                                                                                             |                                    |                                            |                                                     |    |               |         |             
|                                                                                              |                                                                                             |                                    |                                            | Total accumulated other comprehensive income (loss) |    |               | 12      |              |     |         | (30     | )
|                                                                                              |                                                                                             |                                    |                                            |                                                     |    |               |         |             
|                                                                                              |                                                                                             |                                    |                                            | Total Shareholders Equity                          |    |               | 362,467 |              |     |         | 105,869 |  
|                                                                                              |                                                                                             |                                    |                                            |                                                     |    |               |         |             
|                                                                                              |                                                                                             |                                    | Total Liabilities and Shareholders Equity |                                                     | $  | 518,771       |         |              | $   | 176,685 |        
|                                                                                              |                                                                                             |                                    |                                            |                                                     |    |               |         |             

See notes to condensed consolidated financial statements.

4



---



##### Table of Contents






THORATEC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

|                                                  |                                                          |                          |        |                    |        |                   |        |           |        |           |         |        |         |   |        |        |        | 
|------------------------------------------------- | -------------------------------------------------------- | ------------------------ | ------ | ------------------ | ------ | ----------------- | ------ | --------- | ------ | --------- | ------- | ------ | ------- | - | ------ | ------ | ------ | 
|                                                  |                                                          |                          |        | Three Months Ended |        | Nine Months Ended
|                                                  |                                                          |                          |        |                    |        |                  
|                                                  |                                                          |                          |        | September          |        | September         |        | September |        | September
|                                                  |                                                          |                          |        | 2001               |        | 2000              |        | 2001      |        | 2000     
|                                                  |                                                          |                          |        |                    |        |                   |        |           |        |          
|Product sales                                     |                                                          | $                        | 28,666 |                    |        | $                 | 19,391 |           |        | $         | 78,363  |        |         | $ | 61,928 |       
|Cost of product sales                             |                                                          |                          | 13,604 |                    |        |                   | 8,299  |           |        |           | 36,288  |        |         |   | 25,858 |       
|                                                  |                                                          |                          |        |                    |        |                   |        |           |        |           |         |        |         |   |        |       
|Gross profit                                      |                                                          |                          | 15,062 |                    |        |                   | 11,092 |           |        |           | 42,075  |        |         |   | 36,070 |       
|                                                  |                                                          |                          |        |                    |        |                   |        |           |        |           |         |        |         |   |        |       
|Operating expenses:                               |                                                          |                          |        |                    |        |                   |        |           |        |           |         |        |         |   |        |       
|                                                  | Research and development                                 |                          |        | 5,304              |        |                   |        | 3,902     |        |           |         | 16,964 |         |   |        | 11,816 |       
|                                                  | Selling, general and administrative                      |                          |        | 8,345              |        |                   |        | 5,609     |        |           |         | 23,986 |         |   |        | 17,601 |       
|                                                  | Amortization of goodwill and purchased intangible assets |                          |        | 4,538              |        |                   |        |          |        |           |         | 11,346 |         |   |        |       |       
|                                                  | In-process research and development                      |                          |        |                   |        |                   |        |          |        |           |         | 76,858 |         |   |        |       |       
|                                                  | Merger, restructuring and other costs                    |                          |        | 1,410              |        |                   |        | 387       |        |           |         | 6,555  |         |   |        | 1,094  |       
|                                                  |                                                          |                          |        |                    |        |                   |        |           |        |           |         |        |         |   |        |       
|                                                  |                                                          | Total operating expenses |        |                    | 19,597 |                   |        |           | 9,898  |           |         |        | 135,709 |   |        |        | 30,511 | 
|                                                  |                                                          |                          |        |                    |        |                   |        |           |        |           |         |        |         |   |        |       
|Income (loss) from operations                     |                                                          |                          | (4,535 | )                  |        |                   | 1,194  |           |        |           | (93,634 | )      |         |   | 5,559  |       
|Interest and other income  net                   |                                                          |                          | 547    |                    |        |                   | 1,232  |           |        |           | 2,282   |        |         |   | 3,726  |       
|                                                  |                                                          |                          |        |                    |        |                   |        |           |        |           |         |        |         |   |        |       
|Income (loss) before taxes and extraordinary item |                                                          |                          | (3,988 | )                  |        |                   | 2,426  |           |        |           | (91,352 | )      |         |   | 9,285  |       
|Income tax expense (benefit)                      |                                                          |                          | (1,020 | )                  |        |                   | 932    |           |        |           | (3,100  | )      |         |   | 3,573  |       
|                                                  |                                                          |                          |        |                    |        |                   |        |           |        |           |         |        |         |   |        |       
|Income (loss) before extraordinary item           |                                                          |                          | (2,968 | )                  |        |                   | 1,494  |           |        |           | (88,252 | )      |         |   | 5,712  |       
|Extraordinary item  net of taxes                 |                                                          |                          |       |                    |        |                   |       |           |        |           |        |        |         |   | 191    |       
|                                                  |                                                          |                          |        |                    |        |                   |        |           |        |           |         |        |         |   |        |       
|Net income (loss)                                 |                                                          | $                        | (2,968 | )                  |        | $                 | 1,494  |           |        | $         | (88,252 | )      |         | $ | 5,903  |       
|                                                  |                                                          |                          |        |                    |        |                   |        |           |        |           |         |        |         |   |        |       
|Basic and diluted earnings (loss) per share       |                                                          | $                        | (0.05  | )                  |        | $                 | 0.05   |           |        | $         | (1.72   | )      |         | $ | 0.18   |       
|                                                 
|Shares used to compute earnings (loss) per share: |                                                          |                          |        |                    |        |                   |        |           |        |           |         |        |         |   |        |       
|                                                  |                                                          | Basic                    |        |                    | 55,078 |                   |        |           | 32,199 |           |         |        | 51,169  |   |        |        | 32,188 | 
|                                                  |                                                          | Diluted                  |        |                    | 55,078 |                   |        |           | 32,200 |           |         |        | 51,169  |   |        |        | 32,208 | 

See notes to condensed consolidated financial statements.

5



---



##### Table of Contents






THORATEC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

|                                                                                                   |                                                         |                                                     |         |                   |         |           |       |         |        |  
|-------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | --------------------------------------------------- | ------- | ----------------- | ------- | --------- | ----- | ------- | ------ | -
|                                                                                                   |                                                         |                                                     |         | Nine Months Ended
|                                                                                                   |                                                         |                                                     |         |                  
|                                                                                                   |                                                         |                                                     |         | September         |         | September
|                                                                                                   |                                                         |                                                     |         | 2001              |         | 2000     
|                                                                                                   |                                                         |                                                     |         |                   |         |          
|Cash flows from operating activities:                                                              |                                                         |                                                     |         |                   |         |           |       |        
|Net income (loss)                                                                                  |                                                         | $                                                   | (88,252 | )                 |         | $         | 5,903 |        
|Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |                                                         |                                                     |         |                   |         |           |       |        
|                                                                                                   | Depreciation and amortization                           |                                                     |         | 14,367            |         |           |       | 2,150   |       
|                                                                                                   | Write-off of in-process research and development costs  |                                                     |         | 76,858            |         |           |       |        |       
|                                                                                                   | Amortization of deferred compensation                   |                                                     |         | 506               |         |           |       | 225     |       
|                                                                                                   | Provision for losses on accounts receivable             |                                                     |         | 331               |         |           |       |        |       
|                                                                                                   | Change in net deferred tax liability                    |                                                     |         | (2,581            | )       |           |       |        |       
|                                                                                                   | Extraordinary item, net of taxes                        |                                                     |         |                  |         |           |       | (191    | )     
|                                                                                                   | Other noncash items                                     |                                                     |         | 49                |         |           |       |        |       
|Changes in assets and liabilities:                                                                 |                                                         |                                                     |         |                   |         |           |       |        
|                                                                                                   | Receivables                                             |                                                     |         | 621               |         |           |       | 771     |       
|                                                                                                   | Inventories                                             |                                                     |         | (2,122            | )       |           |       | (1,526  | )     
|                                                                                                   | Prepaid expenses and other assets                       |                                                     |         | (442              | )       |           |       | 34      |       
|                                                                                                   | Accounts payable and other liabilities                  |                                                     |         | (3,103            | )       |           |       | 622     |       
|                                                                                                   |                                                         |                                                     |         |                   |         |           |       |        
|                                                                                                   |                                                         | Net cash provided by (used in) operating activities |         |                   | (3,768  | )         |       |         | 7,988  |  
|                                                                                                   |                                                         |                                                     |         |                   |         |           |       |        
|Cash flows from investing activities:                                                              |                                                         |                                                     |         |                   |         |           |       |        
|                                                                                                   | Repayments from affiliate, net                          |                                                     |         |                  |         |           |       | 13,961  |       
|                                                                                                   | Purchases of short-term available-for-sale investments  |                                                     |         | (318,970          | )       |           |       | (78,469 | )     
|                                                                                                   | Maturities of short-term available-for-sale investments |                                                     |         | 213,936           |         |           |       | 70,674  |       
|                                                                                                   | Sales of short-term available-for-sale investments      |                                                     |         | 131,056           |         |           |       | 287     |       
|                                                                                                   | Capitalized transaction costs                           |                                                     |         | (5,838            | )       |           |       |        |       
|                                                                                                   | Purchases of equipment and improvements                 |                                                     |         | (4,676            | )       |           |       | (1,724  | )     
|                                                                                                   | Cash acquired in business acquisition                   |                                                     |         | 3,456             |         |           |       |        |       
|                                                                                                   | Reclassification to restricted investments              |                                                     |         | (45,794           | )       |           |       |        |       
|                                                                                                   |                                                         |                                                     |         |                   |         |           |       |        
|                                                                                                   |                                                         | Net cash provided by (used in) investing activities |         |                   | (26,830 | )         |       |         | 4,729  |  
|                                                                                                   |                                                         |                                                     |         |                   |         |           |       |        
|Cash flows from financing activities:                                                              |                                                         |                                                     |         |                   |         |           |       |        
|                                                                                                   | Common stock issued upon exercise of options            |                                                     |         | 6,296             |         |           |       | 453     |       
|                                                                                                   | Repurchase of common stock                              |                                                     |         | (1,733            | )       |           |       |        |       
|                                                                                                   | Purchase of convertible debentures                      |                                                     |         |                  |         |           |       | (2,825  | )     
|                                                                                                   |                                                         |                                                     |         |                   |         |           |       |        
|                                                                                                   |                                                         | Net cash provided by (used in) financing activities |         |                   | 4,563   |           |       |         | (2,372 | )
|                                                                                                   | Effect of exchange rate changes on cash                 |                                                     |         | 8                 |         |           |       | (39     | )     
|                                                                                                   |                                                         |                                                     |         |                   |         |           |       |        
|                                                                                                   | Net increase (decrease) in cash and cash equivalents    |                                                     |         | (26,027           | )       |           |       | 10,306  |       
|                                                                                                   | Cash and cash equivalents at beginning of period        |                                                     |         | 30,236            |         |           |       | 418     |       
|                                                                                                   |                                                         |                                                     |         |                   |         |           |       |        
|                                                                                                   | Cash and cash equivalents at end of period              |                                                     | $       | 4,209             |         |           | $     | 10,724  |       
|                                                                                                   |                                                         |                                                     |         |                   |         |           |       |        
|Supplemental Cash Flow Disclosure:                                                                 |                                                         |                                                     |         |                   |         |           |       |        
|                                                                                                   | Cash paid for taxes                                     |                                                     | $       | 470               |         |           | $     | 3,609   |       
|                                                                                                   | Cash paid for interest                                  |                                                     | $       | 1,302             |         |           | $     | 1,389   |       

See notes to condensed consolidated financial statements.

6



---



##### Table of Contents






THORATEC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)

|                  |                                        |                                          |        |                    |    |                   |       |           |     |           |         |         |    |   |       |       |     |  
|----------------- | -------------------------------------- | ---------------------------------------- | ------ | ------------------ | -- | ----------------- | ----- | --------- | --- | --------- | ------- | ------- | -- | - | ----- | ----- | --- | -
|                  |                                        |                                          |        | Three Months Ended |    | Nine Months Ended
|                  |                                        |                                          |        |                    |    |                  
|                  |                                        |                                          |        | September          |    | September         |       | September |     | September
|                  |                                        |                                          |        | 2001               |    | 2000              |       | 2001      |     | 2000     
|                  |                                        |                                          |        |                    |    |                   |       |           |     |          
|Net income (loss) |                                        | $                                        | (2,968 | )                  |    | $                 | 1,494 |           |     | $         | (88,252 | )       |    | $ | 5,903 |      
|                  |                                        |                                          |        |                    |    |                   |       |           |     |           |         |         |    |   |       |      
|                  | Other net comprehensive income (loss): |                                          |        |                    |    |                   |       |           |     |           |         |         |    |   |       |       |    
|                  |                                        | Unrealized gain on securities            |        |                    |   |                   |       |           | 250 |           |         |         | 39 |   |       |       | 173 |  
|                  |                                        | Foreign currency translation adjustments |        |                    | 53 |                   |       |           | 5   |           |         |         | 3  |   |       |       | (29 | )
|                  |                                        |                                          |        |                    |    |                   |       |           |     |           |         |         |    |   |       |      
|                  | Comprehensive income (loss)            |                                          | $      | (2,915             | )  |                   | $     | 1,749     |     |           | $       | (88,210 | )  |   | $     | 6,047 |    
|                  |                                        |                                          |        |                    |    |                   |       |           |     |           |         |         |    |   |       |      

See notes to condensed consolidated financial statements.

7



---



##### Table of Contents






THORATEC CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. BASIS OF PRESENTATION

The merger of Thoratec Corporation (Thoratec or the Company) with Thermo
Cardiosystems Inc. (which subsequently changed its name to Thoratec
Cardiosystems Inc. and referred to in this report as TCA) was completed on
February 14, 2001. The interim condensed consolidated financial statements
presented have been prepared in accordance with accounting principles generally
accepted in the United States of America without audit and, in our opinion,
reflect all adjustments necessary (consisting only of normal recurring
adjustments) to present fairly the financial position at September 29, 2001 and
December 30, 2000, the results of operations for the three and nine-month
periods ended September 29, 2001 and September 30, 2000 and cash flows for the
nine-month periods ended September 29, 2001 and September 30, 2000. The merger
of Thoratec with TCA was accounted for as a reverse acquisition because former
shareholders of TCA owned a majority of the outstanding stock of Thoratec
subsequent to the merger. For accounting purposes, TCA is deemed to have
acquired Thoratec. Effective July 2, 2001, Thoratec Cardiosystems Inc. and its
wholly-owned subsidiary, Nimbus, Inc., were merged into Thoratec Corporation
and no longer exist as separate legal entities.

All 2000 financial information presented herein represents the financial
position and results of operations and cash flows of TCA. 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 entire three-month period
ended September 29, 2001. For the nine-month period ended September 29, 2001,
the financial results of Thoratec are included only 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 condensed consolidated financial statements included here have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission (SEC). Certain information and
footnote disclosures normally included in 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 the fiscal 2000 consolidated
financial statements of Thoratec filed with the SEC in our Annual Report on
Form 10-K on March 29, 2001 and the fiscal 2000 consolidated financial
statements of TCA filed with the SEC on Form 8-K/A on March 30, 2001.

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 to the 2000 amounts to conform to the
2001 presentation.

2. MERGER OF THORATEC AND TCA

On February 14, 2001, Thoratec completed its merger with TCA. Pursuant to the
merger agreement between Thoratec and TCA dated October 3, 2000, Thoratec
issued 32,226,074 new shares of its 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
Thoratec stock for each share of TCA stock. Immediately following the
transaction, TCAs shareholders owned 59% of the then outstanding common stock
of Thoratec and the former Thoratec shareholders owned the remaining shares of
Thoratec common stock. Thermo Electron Corporation (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 the then outstanding common stock of Thoratec. Pursuant
to the terms of a Registration Rights Agreement (Registration Rights
Agreement) between the Company and Thermo Electron dated October 3, 2000, the
Company 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
Companys common stock held by Thermo Electron. Subsequent to that filing,
Thermo Electron sold substantially all of the registered shares. As of
September 29, 2001, Thermo Electron owned 14,560,544 shares of
Thoratec,
representing approximately 26% of Thoratecs total outstanding shares. The Company
filed another Registration Statement on Form S-3 with the SEC on October 24,
2001, to register for resale, 5,825,000 shares of the Companys common stock
held by Thermo Electron. This Registration Statement is not yet effective.

8



---



##### Table of Contents



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 Thoratec common stock after the merger. TCA was considered the
acquiror for accounting and financial reporting purposes. Due to the reverse
acquisition, Thoratecs assets and liabilities were recorded based upon their
estimated fair values at the date of acquisition. The operating results of
Thoratec have been included in the accompanying condensed consolidated
financial statements from the date of acquisition forward. As of September 29,
2001, approximately $309.5 million of the total purchase price of $346.2
million has been allocated to goodwill and other purchased intangible
assets. Until the Company
adopts Statement of Financial Accounting Standard (SFAS) No. 142, Business
Combinations, at the beginning of fiscal year 2002, further described in Note
5, goodwill and other intangibles will continue to be amortized over estimated useful
lives of six to twenty years beginning February 14, 2001.

As a result of the merger, $76.9 million relating to in-process research and
development has been expensed in the first quarter of 2001. There have been no significant developments
subsequent to the merger related to the current status of any of the
in-process research and development (IPR&D) projects that would
result in material changes to the assumptions or resulting valuation
performed at the time of the merger. Development of IPR&D
products continues and while the timing of completion of these
projects may vary due to the highly regulatory and technical nature
of the Company's products, current estimates remain materially
consistent with our initial estimates. The current status of each
IPR&D project follows:

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | PVAD
(Discharge and Therapeutic Recovery)                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
|
|
|
| | Thoratec continues to participate in various
studies designed to demonstrate the system's role as a support or
alternative to transplantation. Approval by the FDA is expected as
early as the fourth quarter of 2001 for therapeutic recovery and the
fourth quarter of 2002 for discharge. Although these approval dates
are later than initially estimated, the spending estimates have not
changed and such delays are not without precedent due
to the regulatory and technical nature of the Company's
products.
|
| | TLC-II
Driver                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
|
|
|
| | The TLC-II Driver was approved by the FDA in early
2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
|
|
|
|
|
|
|
|
| | IVAD
and MVAD                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
|
|
|
| | Conditional approval to start IVAD clinical trials
in the U.S. has been received from the FDA. Working prototypes of the
MVAD energy conversion system have been developed and animal testing
studies have been performed. Spending and regulatory approval
estimates have not changed materially.                                                                                                                                                                                                                    
|
|
|
|
|
|
| | Aria                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
|
|
|
| | Clinical trials for the Aria graft are ongoing and
cost projections are consistent with initial estimates. We continue to
expect product launch in the U.S. in 2003.                                                                                                                                                                                                                                                                                                                                                  
|
|
|
|
|
|
|
|

At the
time of the merger, the Company was involved in a dispute with a
distributor over the distributor's lack of performance under an
existing distribution arrangement. As part of the purchase price
allocation, the Company recorded an estimated liability for a
pre-acquisition contingency for potential payments to be made in
connection with terminating the distribution arrangement. The Company
estimated the potential contract termination liability was
$2.6 million and reflected this liability in the purchase price
allocation. Negotiations with the distributor have been ongoing and
adjustments to the estimated contract termination liability have been
reflected as adjustments to the purchase price allocation.
The dispute was settled in the fourth quarter of 2001.

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 29, 2001 are summarized as follows:

|                              |                                                                                                                              |                                                                                  |   |         |         | 
|----------------------------- | ---------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | - | ------- | ------- | 
|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, purchased technology and assembled workforce |   |         | 209,572 | 
|                              |                                                                                                                              | Goodwill                                                                         |   |         | 99,940  | 
|                              | In-process research and development                                                                                          |                                                                                  |   | 76,858  |        
|                              | Liabilities assumed                                                                                                          |                                                                                  |   | (11,260 | )      
|                              | Deferred tax liability                                                                                                       |                                                                                  |   | (77,393 | )      
|                              |                                                                                                                              |                                                                                  |   |        
|                              |                                                                                                                              | Total                                                                            |   | $       | 346,193 | 
|                              |                                                                                                                              |                                                                                  |   |        

The unaudited consolidated results of operations on a pro forma basis as if the
merger had occurred as of the beginning of the periods presented are as
follows:

|                                       |  |                    |        |                   |  |           |        |           |  |   |         |   |  |   |         |  
|-------------------------------------- |  | ------------------ | ------ | ----------------- |  | --------- | ------ | --------- |  | - | ------- | - |  | - | ------- | -
|                                       |  | Three Months Ended |        | Nine Months Ended
|                                       |  |                    |        |                  
|                                       |  | September          |        | September         |  | September |        | September
|                                       |  | 2001               |        | 2000              |  | 2001      |        | 2000     
|                                       |  |                    |        |                   |  |           |        |          
|Revenue                                |  | $                  | 28,666 |                   |  | $         | 25,585 |           |  | $ | 81,887  |   |  | $ | 82,990  |  
|Net loss*                              |  | $                  | (2,968 | )                 |  | $         | (4,914 | )         |  | $ | (91,288 | ) |  | $ | (85,371 | )
|Net loss per share  basic and diluted |  | $                  | (0.05  | )                 |  | $         | (0.09  | )         |  | $ | (1.67   | ) |  | $ | (1.59   | )



---

|* |  | The three and nine-month periods ended September 2001 include $0.7
million and $7.2 million, respectively, of merger and restructuring costs and
the three and nine-month periods ended September 2000 include $2.2 million and
$2.9 million, respectively, of merger and restructuring costs (see Note 3).
Each of the three-month periods ended September 2001 and September 2000
includes $4.5 million of amortization of goodwill and purchased intangibles.
Each of the nine-month periods ended September 2001 and September 2000 includes
$13.5 million of amortization of goodwill and purchased intangibles and $76.9
million of in-process research and development expenses.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The pro forma financial information is presented for informational purposes
only and is not indicative of the operating results that would have occurred
had the merger been consummated as of the above dates, nor are they necessarily
indicative of future operating results.

9



---



##### Table of Contents



3. MERGER, RESTRUCTURING AND OTHER COSTS

Merger, restructuring and other costs are comprised of the following:

|                          |  |                    |       |                   |  |           |     |           |  |   |       |  |  |   |       | 
|------------------------- |  | ------------------ | ----- | ----------------- |  | --------- | --- | --------- |  | - | ----- |  |  | - | ----- | 
|                          |  | Three Months Ended |       | Nine Months Ended
|                          |  |                    |       |                  
|                          |  | September          |       | September         |  | September |     | September
|                          |  | 2001               |       | 2000              |  | 2001      |     | 2000     
|                          |  |                    |       |                   |  |           |     |          
|Merger                    |  | $                  | 505   |                   |  | $         | 387 |           |  | $ | 4,813 |  |  | $ | 1,094 | 
|Restructuring:            |  |                    |       |                   |  |           |     |           |  |   |       |  |  |   |       | 
|Employee
severance        |  |                    | 126   |                   |  |           |    |           |  |   | 963   |  |  |   |      | 
|Stock
option acceleration |  |                    | 64    |                   |  |           |    |           |  |   | 64    |  |  |   |      | 
|                          |  |                    |       |                   |  |           |     |           |  |   |       |  |  |   |       | 
|Total
restructuring costs |  |                    | 190   |                   |  |           |    |           |  |   | 1,027 |  |  |   |      | 
|                          |  |                    |       |                   |  |           |     |           |  |   |       |  |  |   |       | 
|Other                     |  |                    | 715   |                   |  |           |    |           |  |   | 715   |  |  |   |      | 
|                          |  |                    |       |                   |  |           |     |           |  |   |       |  |  |   |       | 
|Total                     |  | $                  | 1,410 |                   |  | $         | 387 |           |  | $ | 6,555 |  |  | $ | 1,094 | 
|                          |  |                    |       |                   |  |           |     |           |  |   |       |  |  |   |       | 

Merger costs of $0.5 million and $4.8 million were incurred in the third
quarter and first nine months of 2001, respectively. These costs were
principally related to employee severance and pre-merger retention costs and
outside consulting, accounting, and legal expenses related to the merger
between Thoratec and TCA.

In June 2001, the Company approved a restructuring plan (the Plan) to
consolidate all of its ventricular assist device (VAD) manufacturing
operations to its manufacturing facilities and headquarters in Pleasanton,
California. The restructuring initiatives, which have already commenced, are
related to the Companys desire to provide maximum value to shareholders
through achievement of operating efficiencies. The Company estimates that
substantial savings will result upon completion of the Plan. The Plan
specifically provides for the reduction of approximately 90 of its
manufacturing and related workforce at its Woburn and Chelmsford, Massachusetts
facilities, both of which were acquired in the merger with TCA in February
2001. The Company notified the affected employees during the second quarter of
2001 both through direct personal contact and written notification. The
manufacturing of the Companys HeartMate® family of products, which are
currently manufactured at the two Massachusetts facilities, will be
transitioned to the Pleasanton facility. The Plan is estimated to take 18
months because of FDA certification requirements for the new manufacturing
activities in Pleasanton. Substantially all of the milestones related
to the relocation that are controllable by Thoratec will be completed
within 12 months of the date of announcement. Due to the fact
that Thoratecs products are regulated by the FDA, we estimate it
will take an additional six months to complete the FDA review and
certification process before the Woburn manufacturing operations can
be moved to Pleasanton. The Company believes it can make reasonable estimates
of the involuntary employee termination benefits as it has specifically
identified the employees that will be involuntarily terminated as well as the
benefits that each affected employee will receive Management does not believe
there are likely to be any developments during the intervening 18 months
required to relocate the manufacturing operations which would have a
significant impact on Thoratecs original restructuring cost
estimates. Although the relocation plan has been documented, in
detail,
small changes in the timing of specific activities are expected. The
impact on the estimate for these changes is not expected to be material. Through September 29, 2001, the Company has accrued
$1.0 million of restructuring charges. These charges represent
estimated severance costs and stock option acceleration charges. As of
September 29, 2001, the Company has paid approximately $0.1 million in
severance payments to 2 employees related to the restructuring. The
following is a reconciliation of the restructuring accrual for the
three and nine month periods ended September 30, 2001:

|                             |                            |                |   |                |   |  |   |      |  
|---------------------------- | -------------------------- | -------------- | - | -------------- | - |  | - | ---- | -
|                             |                            | Three months   |   | Nine months   
|                             |                            | ended          |   | ended         
|                             |                            | September 2001 |   | September 2001
|                             |                            |                |   |               
|Accrued Restructuring Costs: |                            |                |   |                |   |  |   |     
|                            
|                            
|                            
|                            
|                             | Beginning balance          |                | $ | 837            |   |  | $ |     |  
|                            
|                            
|                            
|                            
|                             | Employee severance accrued |                |   | 126            |   |  |   | 963  |  
|                            
|                            
|                            
|                            
|                             | Employee severance paid    |                |   | (132           | ) |  |   | (132 | )
|                             |                            |                |   |                |   |  |   |     
|                             | Ending balance             |                | $ | 831            |   |  | $ | 831  |  
|                             |                            |                |   |                |   |  |   |     

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

4. EARNINGS (LOSS) PER SHARE

Although Thoratec is the surviving legal entity after the merger, the merger is
treated as an acquisition of Thoratec by TCA for accounting and financial
reporting purposes. The weighted average number of common shares previously
reported by TCA has been adjusted for all periods to reflect the exchange ratio
of 0.835 to 1.

Basic earnings per share for 2001 are computed by dividing net loss by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share reflect the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. Options to purchase 5,817,961 shares of common stock for the
third quarter of 2001 and for the first nine months of 2001 were not included
in the computations of diluted earnings per share because the loss positions in
both periods would have rendered the additional shares antidilutive. Options to
purchase 1,021,205 and 702,235 shares of common stock for the third quarter of
2000 and for the first nine months of 2000 were not included in the
computations of diluted earnings per share because their effect would have been
antidilutive due to the options exercise prices exceeding the average market
price for the common stock. In addition, the computation of diluted earnings
per share for each period presented excluded the effect of assuming the
conversion of the Companys 4-3/4 % subordinated convertible debentures,
convertible at $37.62 per share, because their effect would have been
antidilutive. The principle amount of the debentures was $54.8 million as of
September 29, 2001 and September 30, 2000.

10



---



##### Table of Contents



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

|                                                       |  |                    |        |                   |  |           |        |           |  |   |         |   |  |   |        | 
|------------------------------------------------------ |  | ------------------ | ------ | ----------------- |  | --------- | ------ | --------- |  | - | ------- | - |  | - | ------ | 
|                                                       |  | Three Months Ended |        | Nine Months Ended
|                                                       |  |                    |        |                  
|                                                       |  | September          |        | September         |  | September |        | September
|                                                       |  | 2001               |        | 2000              |  | 2001      |        | 2000     
|                                                       |  |                    |        |                   |  |           |        |          
|Net income (loss)                                      |  | $                  | (2,968 | )                 |  | $         | 1,494  |           |  | $ | (88,252 | ) |  | $ | 5,903  | 
|                                                       |  |                    |        |                   |  |           |        |           |  |   |         |   |  |   |        | 
|Weighted average number of common shares-basic         |  |                    | 55,078 |                   |  |           | 32,199 |           |  |   | 51,169  |   |  |   | 32,188 | 
|Dilutive effect of employee stock options              |  |                    |       |                   |  |           | 1      |           |  |   |        |   |  |   | 20     | 
|                                                       |  |                    |        |                   |  |           |        |           |  |   |         |   |  |   |        | 
|Weighted average number of common shares-diluted       |  |                    | 55,078 |                   |  |           | 32,200 |           |  |   | 51,169  |   |  |   | 32,208 | 
|                                                       |  |                    |        |                   |  |           |        |           |  |   |         |   |  |   |        | 
|Net earnings (loss) per common share-basic and diluted |  | $                  | (0.05  | )                 |  | $         | 0.05   |           |  | $ | (1.72   | ) |  | $ | 0.18   | 

5. RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board (FASB) approved SFAS
No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 prohibits the pooling of
interests method of
accounting for business combinations initiated after June 30, 2001. SFAS No.
142, which is effective for fiscal years beginning after December 15, 2001,
requires companies to cease amortizing goodwill that existed at June 30, 2001
and establishes a new method of testing goodwill and intangibles for
impairment. Allocations made to certain intangible assets and
goodwill, as well as the useful lives assigned to intangible assets
in the TCA merger will be re-assessed. The Company will adopt SFAS
No. 142 at the beginning of fiscal year 2002 and will stop
amortizing goodwill and those identifiable intangibles which are
determined to have indefinite lives. As a result of the adoption of
SFAS No. 142, the Company expects to have a reduction in
amortization expense in fiscal 2002. Amortization of goodwill was
$1.2 million and $3.1 million, respectively, for the three and nine
months ended September 29, 2001. Amortization of purchased
intangibles was $3.3 million and $8.2 million, respectively, for the
three and nine months ended September 29, 2001.

To test goodwill for impairment under the new
standard, the Company will establish reporting units to which assets,
liabilities and goodwill will be allocated. Goodwill will be tested
for impairment on an annual basis or on an interim basis if an event
occurs or circumstances change that could reduce the fair value of
the reporting unit below its carrying amount. Impairment tests will
be performed using the lower of cost or market, purchase price
allocation two-step approach. The first step requires comparison of
the fair value of the reporting unit to its carrying amount. If the
fair value of a reporting unit is less than its carrying amount, the
second step is performed which requires allocation of the fair value of the
reporting unit to the assets, liabilities and goodwill of that unit
as if the unit had been acquired in a business combination and the
fair value of the reporting unit determined in step 1 was the price
paid to acquire the reporting unit. Goodwill is considered to be
impaired to the extent that the amount allocated to goodwill in the
hypothetical purchase price allocation is below the carrying amount
of the goodwill. If an impairment occurs it will be included in
income from operations and could have a negative impact on the
Company's future results of operations. The Company has not yet
evaluated the impact of adopting this Standard.

In October 2000, the FASB approved SFAS No. 144, Accounting for the Impairment
of Long-Lived Assets. This Statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and
reporting provisions of APB Opinion No. 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, for
the disposal of a segment of a business (as previously defined in that
Opinion). This Statement also amends ARB No. 51, Consolidated Financial
Statements, to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. The Company will adopt this Standard
at the beginning of fiscal year 2002. The Company has not yet evaluated the
impact of adopting this Standard.

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. The Company is required to adopt SFAS No. 143 at the beginning of
fiscal year 2003. The impact of the adoption of SFAS No. 143 is currently being
 evaluated by the Company.



6. INVENTORIES

Inventories consist of the following:

|                |       |   |               |        |              |   |        |        | 
|--------------- | ----- | - | ------------- | ------ | ------------ | - | ------ | ------ | 
|                |       |   | September 29, |        | December 30,
|                |       |   | 2001          |        | 2000        
|                |       |   |               |        |             
|Finished goods  |       | $ | 8,297         |        |              | $ | 3,177  |       
|Work in process |       |   | 13,390        |        |              |   | 10,261 |       
|Raw materials   |       |   | 5,367         |        |              |   | 3,943  |       
|                |       |   |               |        |              |   |        |       
|                | Total |   | $             | 27,054 |              |   | $      | 17,381 | 
|                |       |   |               |        |              |   |        |       

7. EQUIPMENT AND IMPROVEMENTS

Equipment and improvements consists of property, plant and equipment and rental
and support equipment. Rental and support equipment is comprised of drivers and
consoles that are rented or loaned to customers, and periodically may be sold
to them. Gross sales proceeds of rental and support equipment are included in
product sales with the net book value of the equipment at the date of

11



---



##### Table of Contents



sale removed from equipment and improvements and included in cost of product
sales. Drivers and consoles are manufactured by the Company and are used to
operate its ventricular assist heart pumps. This equipment is capitalized at
its historical cost to manufacture and is amortized over its estimated useful
life of two to three years.

Equipment and improvements consist of the following:

|                                      |                                       |   |               |        |              |   |         |       | 
|------------------------------------- | ------------------------------------- | - | ------------- | ------ | ------------ | - | ------- | ----- | 
|                                      |                                       |   | September 29, |        | December 30,
|                                      |                                       |   | 2001          |        | 2000        
|                                      |                                       |   |               |        |             
|Property, plant and equipment at cost |                                       | $ | 34,600        |        |              | $ | 22,005  |      
|Less accumulated depreciation         |                                       |   | (16,030       | )      |              |   | (15,324 | )    
|                                      |                                       |   |               |        |              |   |         |      
|                                      | Property, plant and equipment, net    |   |               | 18,570 |              |   |         | 6,681 | 
|                                      |                                       |   |               |        |              |   |         |      
|Rental and support equipment at cost  |                                       |   | 4,448         |        |              |   | 1,763   |      
|Less accumulated depreciation         |                                       |   | (2,202        | )      |              |   | (1,360  | )    
|                                      |                                       |   |               |        |              |   |         |      
|                                      | Rental and support equipment, net     |   |               | 2,246  |              |   |         | 403   | 
|                                      |                                       |   |               |        |              |   |         |      
|                                      | Total equipment and improvements, net |   | $             | 20,816 |              |   | $       | 7,084 | 
|                                      |                                       |   |               |        |              |   |         |      

8. BUSINESS SEGMENTS AND GEOGRAPHIC DATA

The Company organizes and manages its business by functional operating entity.
The Companys functional entities operate in two segments: (1) ventricular
assist products and grafts (VAD/graft) and (2) other medical equipment. The
Companys VAD/graft segment develops, manufactures, and markets proprietary
medical devices used for circulatory support and vascular graft applications.
The Companys other medical equipment segment develops, manufactures and
markets near-patient, whole-blood coagulation testing equipment and related
disposables, as well as premium-quality, single-use, skin-incision devices. All
2000 financial information presented herein represents the results of
operations of TCAs VAD/graft segment and other medical equipment segment. The
2001 condensed consolidated financial information presented herein includes the
financial results of TCAs segments for the entire three and nine-month periods
ended September 29, 2001 and the financial results of Thoratecs VAD/graft
segment for the entire three-month period ended September 29, 2001. For the
nine-month period ended September 29, 2001, the financial results of Thoratecs
VAD/graft segment are included only for the post-merger period from February
14, 2001 through September 29, 2001.

Business Segments:

|                                                          |                                                    |                               |                                                         |        |                    |        |                   |        |           |       |           |         |         |         |   |        |        |       | 
|--------------------------------------------------------- | -------------------------------------------------- | ----------------------------- | ------------------------------------------------------- | ------ | ------------------ | ------ | ----------------- | ------ | --------- | ----- | --------- | ------- | ------- | ------- | - | ------ | ------ | ----- | 
|                                                          |                                                    |                               |                                                         |        | Three Months Ended |        | Nine Months Ended
|                                                          |                                                    |                               |                                                         |        |                    |        |                  
|                                                          |                                                    |                               |                                                         |        | September          |        | September         |        | September |       | September
|                                                          |                                                    |                               |                                                         |        | 2001               |        | 2000              |        | 2001      |       | 2000     
|                                                          |                                                    |                               |                                                         |        |                    |        |                   |        |           |       |          
|Product sales:                                            |                                                    |                               |                                                         |        |                    |        |                   |        |           |       |           |         |         |         |   |       
|                                                          | Ventricular assist products and grafts             |                               | $                                                       | 19,027 |                    |        | $                 | 9,114  |           |       | $         | 48,253  |         |         | $ | 31,901 |       
|                                                          | Other medical equipment                            |                               |                                                         | 9,639  |                    |        |                   | 10,277 |           |       |           | 30,110  |         |         |   | 30,027 |       
|                                                          |                                                    |                               |                                                         |        |                    |        |                   |        |           |       |           |         |         |         |   |       
|                                                          |                                                    | Total product sales           |                                                         | $      | 28,666             |        |                   | $      | 19,391    |       |           | $       | 78,363  |         |   | $      | 61,928 |      
|                                                          |                                                    |                               |                                                         |        |                    |        |                   |        |           |       |           |         |         |         |   |       
|Income (loss) before income taxes and
extraordinary item: |                                                    |                               |                                                         |        |                    |        |                   |        |           |       |           |         |         |         |   |       
|                                                          | Ventricular assist products and grafts             |                               | $                                                       | 1,112  |                    |        | $                 | (492   | )         |       | $         | (3,307  | )       |         | $ | 1,238  |       
|                                                          | Other medical equipment                            |                               |                                                         | 1,695  |                    |        |                   | 2,267  |           |       |           | 5,826   |         |         |   | 6,144  |       
|                                                          | Corporate (a)                                      |                               |                                                         | (1,394 | )                  |        |                   | (194   | )         |       |           | (1,394  | )       |         |   | (729   | )     
|                                                          | Amortization of goodwill and purchased intangibles |                               |                                                         | (4,538 | )                  |        |                   |       |           |       |           | (11,346 | )       |         |   |       |       
|                                                          | In-process research and development                |                               |                                                         |       |                    |        |                   |       |           |       |           | (76,858 | )       |         |   |       |       
|                                                          | Merger, restructuring and other costs              |                               |                                                         | (1,410 | )                  |        |                   | (387   | )         |       |           | (6,555  | )       |         |   | (1,094 | )     
|                                                          |                                                    |                               |                                                         |        |                    |        |                   |        |           |       |           |         |         |         |   |       
|                                                          |                                                    | Total operating income (loss) |                                                         |        | (4,535             | )      |                   |        | 1,194     |       |           |         | (93,634 | )       |   |        | 5,559  |      
|                                                          | Interest and other income, net                     |                               |                                                         | 547    |                    |        |                   | 1,232  |           |       |           | 2,282   |         |         |   | 3,726  |       
|                                                          |                                                    |                               |                                                         |        |                    |        |                   |        |           |       |           |         |         |         |   |       
|                                                          |                                                    |                               | Total income (loss) before taxes and
extraordinary item |        | $                  | (3,988 | )                 |        | $         | 2,426 |           |         | $       | (91,352 | ) |        | $      | 9,285 | 
|                                                          |                                                    |                               |                                                         |        |                    |        |                   |        |           |       |           |         |         |         |   |       

12



---



##### Table of Contents





---

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

Geographic Areas:

|               |                         |                     |   |                    |        |                   |   |           |        |           |   |        |        |  |   |        |        | 
|-------------- | ----------------------- | ------------------- | - | ------------------ | ------ | ----------------- | - | --------- | ------ | --------- | - | ------ | ------ |  | - | ------ | ------ | 
|               |                         |                     |   | Three Months Ended |        | Nine Months Ended
|               |                         |                     |   |                    |        |                  
|               |                         |                     |   | September          |        | September         |   | September |        | September
|               |                         |                     |   | 2001               |        | 2000              |   | 2001      |        | 2000     
|               |                         |                     |   |                    |        |                   |   |           |        |          
|Product sales: |                         |                     |   |                    |        |                   |   |           |        |           |   |        |        |  |   |       
|               | Domestic                |                     | $ | 23,832             |        |                   | $ | 15,877    |        |           | $ | 62,365 |        |  | $ | 51,766 |       
|               |                         |                     |   |                    |        |                   |   |           |        |           |   |        |        |  |   |       
|               | Europe                  |                     |   | 2,729              |        |                   |   | 1,878     |        |           |   | 8,946  |        |  |   | 6,032  |       
|               | All other international |                     |   | 2,105              |        |                   |   | 1,636     |        |           |   | 7,052  |        |  |   | 4,130  |       
|               |                         |                     |   |                    |        |                   |   |           |        |           |   |        |        |  |   |       
|               |                         | Total international |   |                    | 4,834  |                   |   |           | 3,514  |           |   |        | 15,998 |  |   |        | 10,162 | 
|               |                         |                     |   |                    |        |                   |   |           |        |           |   |        |        |  |   |       
|               |                         | Total               |   | $                  | 28,666 |                   |   | $         | 19,391 |           |   | $      | 78,363 |  |   | $      | 61,928 | 
|               |                         |                     |   |                    |        |                   |   |           |        |           |   |        |        |  |   |       

As of February 14, 2001, total assets increased $41.8 million as a result of
the merger between Thoratec and TCA. This increase was attributed to
Thoratecs assets as of the date of the merger and was comprised of $25.6
million directly related to the VAD/graft segment and $16.2 million for assets
that the Company expects to report as corporate assets not specifically
attributed to any particular business segment.

9. RESTRICTED INVESTMENTS AND CONVERTIBLE DEBENTURES

In May 1997, the Company issued $70.0 million worth of 4-3/4% subordinated
convertible debentures due May 2004. These debentures were originally issued by
TCA, which was merged with Thoratec as described in Note 1. The current
outstanding balance of $54.8 million reflects repurchases in the open market
that have occurred from time to time. Interest is payable semi-annually in
November and May of each year. The outstanding debentures are convertible into
Company stock at a price of $37.62 per share. To date, no debentures have been
exchanged for shares.

Upon closing of the merger with TCA in February 2001, $45.0 million in
short-term investments was pledged as collateral for a letter of credit
guarantee to Thermo Electron Corporation related to Thermo Electrons guarantee
of these subordinated debentures. The balance of this investment as of
September 29, 2001 was $45.8 million, which includes interest earnings.

10. INCOME TAXES

The Companys effective tax benefit rate was 25% in the third quarter of 2001
and 3% in the first nine months of 2001 as compared to an effective tax
provision rate of 38% in the third quarter of 2000 and 38% in the first nine
months of 2000. 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 the Companys merger with TCA, including the write-off of
in-process research and development costs, the amortization of goodwill and
other nondeductible merger transaction expenses. For 2000, the effective tax
provision rate exceeded the federal statutory income tax rate primarily due to
the impact of state income taxes.

At September 29, 2001, the Company reported a net deferred tax liability of
approximately $64 million, comprised principally of temporary differences
between financial statement and income tax bases of intangible assets. At
December 30, 2000, the Company reported a net deferred tax asset of
approximately $6 million, comprised principally of temporary differences
between financial statement and income tax bases resulting from differences in
the timing of financial statement expense and income tax deductions.

11. EXTRAORDINARY ITEM

During the second quarter of 2000, the Company purchased $3,173,000 principal
amount of its 4-3/4% subordinated convertible debentures for $2,825,000 in
cash, resulting in an extraordinary gain of $191,000, net of taxes of $117,000.

13



---



##### Table of Contents



12. REPURCHASE OF COMMON STOCK

On April 12, 2001 the Company announced that its board of directors authorized
a stock repurchase program under which the Companys common stock with a market
value up to $20 million may be acquired in the open market or in privately
negotiated transactions. The number of shares to be purchased and the timing of
purchases will be based on several conditions, including the price of Thoratec
stock, general market conditions and other factors. Through September 29, 2001,
the Company paid approximately $1.7 million to repurchase 192,700 shares of its
common stock, which were retired.

14



---



##### Table of Contents






ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The statements in this report that relate to future plans, events or
performance are forward-looking statements, which involve risks and
uncertainties. These risks include the results of clinical trials, government
regulatory approval processes, delays in product development and new product
introductions, announcements by our competitors, an intensely competitive
market, the ability to integrate acquired operations and market acceptance of
new products.

These factors, and others, are discussed more fully in our annual report on
Form 10-K for 2000, our Registration Statement filed on Form S-3 with the
Securities and Exchange Commission (SEC) on October 24, 2001, and our other
filings with the Securities and Exchange Commission. Actual results, events or
performance may differ materially. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof.

We undertake no obligation to publicly release the result of any revisions to
these forward-looking statements that may be needed to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.

Overview

Thoratec is the leading manufacturer of circulatory support products for use by
patients with congestive heart failure, or CHF. According to the American Heart
Association, 4.7 million patients in the United States suffer from CHF and an
additional 550,000 patients are diagnosed with this disease annually. The
Company is the first company to receive 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.
Thoratecs VADs are used primarily by these CHF patients to perform some or all
of the pumping function of the heart and the Company currently offers the
widest range of products to serve this market. The Company believes that its
long-standing reputation for quality and innovation and its excellent
relationships with leading cardiovascular surgeons worldwide position it to
capture growth opportunities in the expanding congestive heart failure market.
Thoratec also develops and sells products that are used by physicians and
hospitals for vascular and diagnostic applications that include vascular
grafts, blood coagulation testing and skin incision devices. The Company
conducts business both domestically and internationally.

The Merger with Thermo Cardiosystems

On February 14, 2001, Thoratec completed its merger with Thermo Cardiosystems
(TCA). Pursuant to the merger agreement between Thoratec and TCA dated
October 3, 2000, Thoratec issued 32,226,074 new shares of its 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 Thoratec stock for each share of TCA stock. Immediately
following the transaction, TCAs shareholders owned 59% of the then outstanding
common stock of Thoratec and the former Thoratec shareholders owned the
remaining shares of Thoratec common stock. Thermo Electron Corporation (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 the then outstanding common stock of
Thoratec. Pursuant to the terms of a Registration Rights Agreement
(Registration Rights Agreement) between the Company and Thermo Electron dated
October 3, 2000, the Company 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 Companys common stock held by Thermo Electron.
Subsequent to that filing, Thermo Electron sold substantially all of the
registered shares. As of September 29, 2001, Thermo Electron owned 14,560,544
shares of Thoratec, representing approximately 26% of Thoratec's total outstanding shares.
The Company filed another Registration Statement on Form S-3 with the SEC on
October 24, 2001, to register for resale, 5,825,000 shares of the Companys
common stock held by Thermo Electron. This Registration Statement is not yet
effective.

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 Thoratec common stock after the merger. TCA was considered the
acquiror for accounting and financial reporting purposes.

Due to the reverse acquisition, Thoratecs assets and liabilities were recorded
based upon their estimated fair values at the date of acquisition. As of
September 29, 2001, approximately $309.5 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 was

15



---



##### Table of Contents



expensed upon completion of the merger. Until the Company adopts Statement of
Financial Accounting Standard (SFAS) No. 142, Business Combinations, at the
beginning of fiscal year 2002, further described in Note 5 to the condensed
consolidated financial statements, the goodwill and other intangibles will be
amortized over estimated useful lives of six to twenty years.

Restructuring Plan

In June 2001, the Company approved a restructuring plan (the Plan) to
consolidate all of its ventricular assist device (VAD) manufacturing
operations to its manufacturing facilities and headquarters in Pleasanton,
California. The restructuring initiatives, which have already commenced, are
related to the Companys desire to provide maximum value to customers through
achievement of operating efficiencies. The Company estimates that substantial
savings will result upon completion of the Plan. The Plan specifically provides
for the reduction of approximately 90 of its manufacturing and related
workforce at its Woburn and Chelmsford, Massachusetts facilities, both of which
were acquired in the merger with TCA in February 2001. The Company notified
the affected employees during the second quarter of 2001 both through direct
personal contact and written notification. The manufacturing of the Companys
HeartMate® family of products, which are currently manufactured at the two
Massachusetts facilities, will be transitioned to the Pleasanton facility. The
Plan is estimated to take 18 months because of FDA certification requirements
for the new manufacturing activities in Pleasanton. Through September 29, 2001,
the Company has accrued $1.0 million of restructuring charges in accordance
with Emerging Issues Task Force (EITF) 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity, and Staff
Accounting Bulletin (SAB) 100, Restructuring and Impairment Charges. These
charges represent estimated severance costs and stock option acceleration
charges. As of September 29, 2001, the Company has paid
approximately $0.1 million in severance payments to
2 employees related to the restructuring.

Results of Operations

Third quarter 2001 and 2000

Product Sales

Product sales in the third quarter of 2001 were $28.7 million compared to $19.4
million in the third quarter of 2000, an increase of approximately $9.3 million
or 48%. The increase is primarily attributable to the addition of Thoratec
product sales after the merger of $10.6 million for the quarter, partially
offset by $0.7 million lower sales of HeartMate products domestically and
internationally and $0.6 million lower sales of skin incision devices due
primarily to lower domestic volumes.

Gross Profit

Gross profit was $15.1 million, representing approximately 52% of product sales
for the third quarter of 2001 compared to $11.1 million, representing
approximately 57% of product sales for the third quarter of 2000. The decrease
in gross profit percentage was primarily due to a lower proportion of domestic
sales to total product sales. Ventricular assist devices that are sold in the
United States have higher gross profits than those sold in the rest of the
world. In addition, production costs for the HeartMate product line were higher
in the third quarter of 2001 due to $0.4 million of employee retention costs
related to manufacturing and $0.4 million of write-offs of product inventory
related to the discontinued HeartMate pneumatic driver.

Research and Development

Research and development expenses were approximately 19% of product sales in
the third quarter of 2001 and 20% of product sales in the third quarter of
2000. These expenses increased to $5.3 million in the third quarter of 2001
from $3.9 million in the third quarter of 2000, an increase of $1.4 million, or
36%. The increase was attributable principally to the addition of Thoratecs
research and development expenses after the merger of $2.0 million for the
third quarter of 2001, partially offset by reduced spending of $0.3 million
caused by ending the enrollment of the Companys REMATCH clinical trials.

Selling, General and Administrative

Selling, general and administrative expenses increased to $8.3 million in the
third quarter of 2001, from $5.6 million in the third quarter of 2000, an
increase of $2.7 million or 49%. As a percent of sales, these expenses remained
constant at 29% of product sales in both 2001 and 2000. The increase is
primarily due to the addition of $4.0 million in Thoratecs selling, general
and administrative expenses after the merger, partially offset by lower
employee related expenses resulting from the Companys restructuring activities
due to personnel reductions primarily in the sales and marketing areas since
the merger.

16



---



##### Table of Contents



Merger, Restructuring and Other Costs

Merger, restructuring and other costs in the third quarter of 2001 were $1.4
million compared to $0.4 million in the third quarter of 2000, an increase of
$1.0 million or 264%. This increase was caused by a $0.1 million increase in
merger costs in the third quarter, principally related to employee pre-merger
retention costs, and outside consulting, accounting, and legal expenses,
restructuring costs of $0.2 million, representing estimated severance costs
related to the consolidation of the VAD manufacturing operations, and of $0.7
million related to the events of September 11, 2001.

Amortization of Goodwill and Purchased Intangible Assets

Amortization of purchased intangible assets and goodwill was $4.5 million in
the third quarter of 2001. All purchased intangible assets and goodwill were
generated due to the merger between Thoratec and TCA. Until the Company adopts
Statement of Financial Accounting Standard (SFAS) No. 142, Business
Combinations, at the beginning of fiscal 2002, further described in Note 5 to
the condensed consolidated financial statements, these costs will
continue to be amortized
to expense on a straight-line basis over periods ranging from six to twenty
years beginning February 14, 2001.

Interest and Other Income  Net

Interest and other income-net, decreased $0.7 million, or 56%, in the third
quarter of 2001 from the third quarter of 2000. This decrease was due
principally to a $0.8 million reduction in interest income caused by both lower
cash balances and a reduction in interest rates.

Income Taxes

The Companys effective tax benefit rate was 26% in the third quarter of 2001
as compared to an effective tax provision rate of 38% in the third quarter of
2000. 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 the Companys merger with TCA, including the amortization of
goodwill and other nondeductible merger transaction expenses. For 2000, the
effective tax provision rate exceeded the federal statutory income tax rate
primarily due to the impact of state income taxes.

Nine months ended September 2001 and 2000

Product Sales

Product sales in the first nine months of 2001 were
$78.4 million compared to $61.9 million in the first nine months of 2000, an increase of $16.5 million or 27%. This increase was attributable primarily to
the addition of Thoratec product sales of $22.6 million, partially offset by a $6.2 million reduction in sales
of HeartMate products due principally to significant distractions and uncertainties among Thermo
Cardiosystems' sales force during the first and second quarters while the merger was being closed and the
companies were being integrated. The impact was principally in the
domestic market because we use employees to sell the HeartMate
products domestically compared to the international markets where distributors are
primarily used. Domestic sales of the HeartMate in 2001 were $7.3 million lower than the previous
year, partially offset by a $1.1 million increase in sales of the HeartMate internationally. The decrease in
domestic HeartMate sales were also attributable, in part, to normal fluctuations in the ventricular assist
device market as customers used existing inventories to address their implantation needs.

Gross Profit

Gross profit in the first nine months of 2001 was
$42.1 million, or 54% of product sales, compared to
gross profit of $36.1 million in the first nine months of 2000, or 58% of product sales. This decrease in gross profit as a percentage of sales was primarily due to a lower proportion of domestic sales to total
product sales. Ventricular assist devices that are sold in the United States have a higher gross margin than
those sold in the rest of the world. In addition, production costs for the HeartMate product line were
higher in the first nine months of 2001 due to $1.0 million of employee retention costs related to
manufacturing and $0.4 million of write-offs of product inventory related to the HeartMate pneumatic
driver which was discontinued in the second half of 2001. In
addition, we incurred $0.3 million of manufacturing costs associated primarily with the introduction of new products. Without these charges,
gross profit for the first nine months of 2001 would have been $43.8 million, or 56% of product sales. In
addition, approximately 1% of the decrease in gross profit as a percentage of sales was attributable to lower
gross profit on our other medical equipment product line. This decrease was attributable principally to
lower average selling prices of our skin incision products due to increased market competition.

Research and Development

Research and development expenses in the first nine months of 2001 were $17.0
million, or 22% of product sales, compared to $11.8 million, or 19% of product
sales in the first nine months of 2000, an increase of $5.2 million or 44%.
This increase resulted from combining Thoratecs research and development
expenses of $5.4 million after the merger with TCAs expenses for the first
nine months of 2001.

17



---



##### Table of Contents



Selling, General and Administrative

Selling, general and administrative expenses in the first nine months of 2001
were $24.0 million, or 31% of product sales, compared to $17.6 million, or 28%
of product sales, in the first nine months of 2000, an increase of $6.4 million
or 36%. This increase resulted from combining Thoratecs selling, general and
administrative expenses after the merger with TCAs selling, general and
administrative expenses for the first nine months of 2001, partially offset by
lower employee related expenses due to personnel reductions primarily in the
sales and marketing areas since the merger.

Amortization of Goodwill and Purchased Intangible Assets

Amortization of purchased intangibles and goodwill in the first nine months of
2001 was $11.3 million. There was no such amortization in the first nine months
of 2000. All purchased intangibles and goodwill resulted from the merger with
TCA. Goodwill and other intangibles are being amortized over their estimated
useful lives of six to twenty years until SFAS No. 142 is adopted at the
beginning of fiscal year 2002. Thereafter, the Company will stop amortizing
goodwill and will begin testing goodwill for impairment under the new standard
contained in SFAS No. 142.

Merger, Restructuring and Other Costs

Merger, restructuring and other costs in the first nine months of 2001 were
$6.6 million compared to $1.1 million in the first nine months of 2000, an
increase of $5.5 million or 500%. This increase was caused by employee
severance and pre-merger retention costs of $2.4 million, consulting,
accounting and legal expenses of $1.4 million, restructuring costs of $1.0
million, which represented estimated severance costs related to the
consolidation of ventricular assist device manufacturing operations, and costs
of $0.7 million related to the events of September 11, 2001.

In-process Research and Development

In-process research and development expense in the first nine months of 2001
was $76.9 million. There was no such expense in the first nine months of 2000.
All in-process research and development expense was related to the merger with
TCA, representing a one-time charge related to acquired in-process research and
development that had not yet reached technological feasibility and had no
alternative future uses.

Interest and Other Income  Net

Interest and other income  net in the first nine months of 2001 was $2.3
million compared to $3.7 million in the first nine months of 2000, a decrease
of $1.4 million or 39%. This decrease was due to a $1.3 million reduction in
interest income caused by both lower cash balances and a reduction in interest
rates.

Income Taxes

The Companys effective tax benefit rate was 3% in the first nine months of
2001 as compared to an effective tax provision rate of 38% in the first nine
months of 2000. 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 the Companys merger with TCA, including the write-off of
in-process research and development costs, the amortization of goodwill and
other nondeductible merger transaction expenses. For 2000, the effective tax
provision rate exceeded the federal statutory income tax rate primarily due to
the impact of state income taxes.

18



---



##### Table of Contents



Liquidity and Capital Resources

At the end of September 2001, we had working capital of $125.6 million compared
with $149.2 million at the end of December 2000. Cash, cash equivalents and
short-term investments at the end of September 2001 were $89.7 million compared
to $128.9 million at the end of December 2000, a decrease of $39.2 million.
This decrease was due principally to pledging $45.0 million in short-term
investments as collateral for a letter of credit guarantee to Thermo Electron
related to Thermo Electrons guarantee of our outstanding subordinated
debentures which are due in 2004. These investments are classified as
restricted investments on the September 29, 2001 balance sheet. As of
September 29, 2001, the outstanding principal amount of our subordinated
debentures was $54.8 million and our restricted investments
increased to $45.8 million due to interest earned. For the nine-month period ended September 29, 2001, we
received interest payments of $3.8 million on our cash and short-term and
restricted investments and made interest payments of $1.3 million on our
subordinated debentures.

The 2001 Statement of Cash Flows was prepared by combining TCAs balance sheet
as of December 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 2001, which included both entities. During the first nine months of
2001, $3.8 million was used in operations. Uses of cash included $2.1 million
for higher inventory levels in anticipation of increasing sales and preparation
for the relocation of the Woburn manufacturing operations to Pleasanton and
$5.0 million for merger, restructuring and other costs. Net collections of
accounts receivable provided cash of $0.6 million.

During the first nine months of 2001, $26.8 million of cash was used in the
investing activities of our Company. Uses of cash included $45.8 million to
collateralize a letter of credit guarantee to Thermo Electron related to Thermo
Electrons guarantee of the Companys outstanding subordinated debentures which
are due in 2004, $5.8 million for capitalized merger transaction costs and $4.7
million for capital equipment, including rental and support equipment used by
customers to operate ventricular assist devices. The capitalized merger
transaction costs consisted of banking, legal and accounting costs incurred by
TCA and were capitalized in the purchase consideration (now a component of
goodwill). The uses of cash for the first nine months of 2001 were partially
offset by $26.0 million provided from net maturities, sales and purchases of
available-for-sale investments and $3.5 million from Thoratecs beginning cash
balance as of the date of the merger.

During the first nine months of 2001, $4.6 million of cash was provided from
financing activities. Cash in the amount of $6.3 million was received from
employee purchases of stock under the Companys stock option plans. This
amount was partially offset by $1.7 million used to repurchase the Companys
common stock, representing 192,700 shares, which were subsequently retired. On
April 12, 2001, the Company announced a stock repurchase program under which
its common stock with a market value up to $20 million may be acquired in the
open market or in privately negotiated transactions. The number of shares to be
purchased and the timing of purchases is based on several conditions, including
the price of Thoratec stock, general market conditions and other factors.

We believe that 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.

We filed a Registration Statement on Form S-3 with the SEC on October 24, 2001
to register for sale 2,055,000 shares of the Companys common stock. These
shares will be newly issued upon completion of the registration process. This
Registration Statement is not yet effective.

The impact of inflation on our financial position and results of operations was
not significant during the nine-month periods ended September 2001 and
September 2000.

19



---



##### Table of Contents






ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK

We do not currently use derivative financial instruments in our operations or
investment portfolio. We do not have material exposure to market risk
associated with changes in interest rates. Our subordinated
debentures  are due May 2004, carry a
fixed rate of interest of4-3/4% and are currently callable at par value. As a result,
increases in market interest rates will not impact our interest expense with
regards to these debentures. Our investment portfolio at the end of the third
quarter 2001 consisted of short-term state and municipal government bonds and
money market funds that are classified as available-for-sale and have
maturities of less than 90 days. As of September 29, 2001, we had
$131.2 million in short-term available-for-sale investments and
restricted investments invested at an average interest rate of 2.93%.
For each 1% decrease in the average interest rate earned by these
investments, we would recognize approximately $1.3 million in lower
interest income over a twelve-month period. We do not
believe we have any other material exposure to market risk associated with
interest rates.

We conduct business in foreign countries. Our international operations consist
primarily of sales and service personnel for our ventricular assist products.
These 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 fiscal 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 fiscal 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. We had a net foreign currency exchange gain of approximately
$28,000 in the third quarter of 2001 and a net foreign currency exchange loss
of approximately $74,000 in the first nine months of 2001. There were no such
gains or losses in the third quarter and first nine months of 2000 as the
United Kingdom subsidiary became a part of our operations upon the completion
of our merger with TCA on February 14, 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 and, to
date, we have not entered into any significant foreign currency forward
exchange contracts or other derivative financial instruments to hedge the
effects of adverse fluctuations in foreign currency exchange.

20



---



##### Table of Contents






PART II. OTHER INFORMATION




ITEM 2. CHANGES IN SECURITIES

None




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

The annual meeting of Shareholders was held on August 24, 2001. The following
item was voted upon and approved at the meeting:

To elect directors to serve for the ensuing year until their successors are
elected

|                       |  |                 |            |          |  |  |         | 
|---------------------- |  | --------------- | ---------- | -------- |  |  | ------- | 
|                       |  | Number of Votes
|                       |  |                
|                       |  | For             |            | Withheld
|                       |  |                 |            |         
|Howard E. Chase        |  |                 | 52,169,529 |          |  |  | 91,131  | 
|J. Daniel Cole         |  |                 | 52,169,529 |          |  |  | 91,131  | 
|D. Keith Grossman      |  |                 | 52,100,238 |          |  |  | 160,422 | 
|J. Donald Hill         |  |                 | 52,169,529 |          |  |  | 91,131  | 
|William M. Hitchcock   |  |                 | 52,169,529 |          |  |  | 91,131  | 
|George W. Holbrook Jr. |  |                 | 52,169,529 |          |  |  | 91,131  | 
|Theo Melas-Kyriazi     |  |                 | 52,158,308 |          |  |  | 102,352 | 
|Daniel M. Mulvena      |  |                 | 52,169,452 |          |  |  | 91,208  | 




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | 1. |  | Current Report on Form 8-K filed with the SEC on October 24, 2001
(File No. 033-72502) reporting the following items:
| | -- |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | Item 5: Other Events                       
| | - |  | -------------------------------------------
|
| |  |  | Item 7 (b): Pro Forma Financial Information

21



---



##### Table of Contents






SIGNATURES

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

|                       |                                            |                      
|---------------------- | ------------------------------------------ | ---------------------
|                       |                                            | THORATEC CORPORATION 
|                      
|Date: January 23, 2002 |                                            | /s/ D. Keith Grossman
|                       |                                           
|                       | D. Keith Grossman,
Chief Executive Officer

|                       |  |                                                                                                                             
|---------------------- |  | ----------------------------------------------------------------------------------------------------------------------------
|Date: January 23, 2002 |  | /s/ M. Wayne Boylston                                                                                                       
|                       |  |                                                                                                                             
|                       |  | M. Wayne Boylston,
Senior Vice President,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)

22