##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q


(Mark one)

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

for the quarterly period ended June 30, 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 August 10,
2001, registrant had 55,140,400 shares of common stock
outstanding.





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TABLE OF CONTENTS



|                              |                                                                                                |                                                                  |  |  |  |  |  | 
|----------------------------- | ---------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                           
|                              |                                                                                                | CONDENSED CONSOLIDATED BALANCE SHEETS                           
|                              |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                 
|                              |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                 
|                              |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|                              |                                                                                                | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS            
|                              | ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK                              
|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                   



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##### 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 June 2001 and Year End 2000                                                     |    |    | 3 | 
|                             
|                             
|                             
|                             
|                              |                                                                                               | Condensed Consolidated Statements of Operations for the Three and Six Months Ended June
2001 and
June 2000                  |    |    | 5 | 
|                             
|                             
|                             
|                             
|                              |                                                                                               | Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 2001 and
June 2000                            |    |    | 6 | 
|                             
|                             
|                             
|                             
|                              |                                                                                               | Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six
Months
Ended June 2001 and June 2000 |    |    | 7 | 
|                             
|                             
|                             
|                             
|                              |                                                                                               | Notes to Condensed Consolidated Financial Statements                                                                        |    |    | 8 | 
|                             
|                             
|                             
|                             
|                              | ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                                             |    | 14 |  
|                             
|                             
|                             
|                             
|                              | ITEM 3. Quantitative and Qualitative Disclosure of Market Risk                                |                                                                                                                             |    | 17 |  
|                             
|                             
|                             
|                             
|PART II. OTHER INFORMATION    |                                                                                               |                                                                                                                             | 19 |   
|                             
|                             
|                             
|                             
|                              | ITEM 2. Changes in Securities                                                                 |                                                                                                                             |    | 19 |  
|                             
|                             
|                             
|                             
|                              | ITEM
4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                                             |    | 19 |  
|                             
|                             
|                             
|                             
|                              | ITEM
6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                             |    | 19 |  

2



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##### Table of Contents






PART I.  FINANCIAL INFORMATION




ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




THORATEC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except common shares data)
(Unaudited)

|                                |                                                                                                                          |                      |         |        |         |          |       |        |         | 
|------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | -------------------- | ------- | ------ | ------- | -------- | ----- | ------ | ------- | 
|                                |                                                                                                                          |                      |         | June   |         | December
|                                |                                                                                                                          |                      |         | 2001   |         | 2000    
|                                |                                                                                                                          |                      |         |        |         |         
|ASSETS
Current assets:          |                                                                                                                          |                      |         |        |         |          |       |       
|                               
|                               
|                               
|                               
|                                | Cash and cash equivalents                                                                                                |                      | $       | 3,513  |         |          | $     | 30,236 |        
|                               
|                               
|                               
|                               
|                                | Short-term available-for-sale investments at quoted market value
(amortized cost of $77,725 in 2001 and $98,743 in 2000) |                      |         | 77,725 |         |          |       | 98,682 |        
|                               
|                               
|                               
|                               
|                                | Receivables (net of allowances of $1,262 in 2001 and $939 in 2000)                                                       |                      |         | 20,074 |         |          |       | 15,358 |        
|                               
|                               
|                               
|                               
|                                | Inventories                                                                                                              |                      |         | 27,643 |         |          |       | 17,381 |        
|                               
|                               
|                               
|                               
|                                | Deferred tax asset                                                                                                       |                      |         | 10,365 |         |          |       | 3,454  |        
|                               
|                               
|                               
|                               
|                                | Prepaid expenses and other                                                                                               |                      |         | 1,055  |         |          |       | 74     |        
|                                |                                                                                                                          |                      |         |        |         |          |       |       
|                                |                                                                                                                          | Total current assets |         |        | 140,375 |          |       |        | 165,185 | 
|                               
|Equipment and improvements, net |                                                                                                                          |                      | 18,957  |        |         |          | 7,084 |       
|                               
|                               
|                               
|                               
|Restricted cash                 |                                                                                                                          |                      | 45,723  |        |         |          |      |       
|                               
|                               
|                               
|                               
|Goodwill                        |                                                                                                                          |                      | 98,124  |        |         |          |      |       
|                               
|                               
|                               
|                               
|Purchased intangible assets     |                                                                                                                          |                      | 204,873 |        |         |          |      |       
|                               
|                               
|                               
|                               
|Other assets                    |                                                                                                                          |                      | 4,943   |        |         |          | 4,416 |       
|                                |                                                                                                                          |                      |         |        |         |          |       |       
|                                |                                                                                                                          | TOTAL ASSETS         |         | $      | 512,995 |          |       | $      | 176,685 | 
|                                |                                                                                                                          |                      |         |        |         |          |       |       

See notes to condensed consolidated financial statements.

3



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##### Table of Contents



THORATEC CORPORATION AND
SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(in thousands, except common shares data)
(Unaudited)

|                                                                                              |                                                                                                         |                                    |                                            |         |      |         |          |         |     |         |  
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ---------------------------------- | ------------------------------------------ | ------- | ---- | ------- | -------- | ------- | --- | ------- | -
|                                                                                              |                                                                                                         |                                    |                                            |         | June |         | December
|                                                                                              |                                                                                                         |                                    |                                            |         | 2001 |         | 2000    
|                                                                                              |                                                                                                         |                                    |                                            |         |      |         |         
|LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:                                     |                                                                                                         |                                    |                                            |         |      |         |          |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Accounts payable                                                                                        |                                    | $                                          | 6,092   |      |         | $        | 3,972   |    
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Accrued compensation                                                                                    |                                    |                                            | 5,124   |      |         |          | 4,976   |    
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Accrued merger and restructuring                                                                        |                                    |                                            | 2,900   |      |         |          | 1,708   |    
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Estimated liabilities for warranty, legal and other                                                     |                                    |                                            | 1,954   |      |         |          | 1,316   |    
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Other accrued liabilities                                                                               |                                    |                                            | 4,730   |      |         |          | 4,006   |    
|                                                                                              |                                                                                                         |                                    |                                            |         |      |         |          |        
|                                                                                              |                                                                                                         |                                    | Total current liabilities                  |         |      | 20,800  |          |         |     | 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                                                    |                                                                                                         |                                    | 77,993                                     |         |      |         |         |        
|                                                                                              |                                                                                                         |                                    |                                            |         |      |         |          |        
|                                                                                              |                                                                                                         |                                    | Total liabilities                          |         |      | 153,631 |          |         |     | 70,816  |  
|                                                                                             
|Shareholders equity:                                                                         |                                                                                                         |                                    |                                            |         |      |         |          |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Common shares, 100,000,000 authorized;
issued and outstanding 54,609,734 in 2001
and 33,937,643 in 2000 |                                    |                                            | 388,352 |      |         |          | 4,064   |    
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Treasury stock at cost, 1,723,150 shares in 2000                                                        |                                    |                                            |        |      |         |          | (51,869 | )  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Capital in excess of par value                                                                          |                                    |                                            |        |      |         |          | 96,930  |    
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Deferred compensation                                                                                   |                                    |                                            | (688    | )    |         |          | (251    | )  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Retained earnings (accumulated deficit)                                                                 |                                    |                                            | (28,258 | )    |         |          | 57,025  |    
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Accumulated other comprehensive income (loss):                                                          |                                    |                                            |         |      |         |          |         |    
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |                                                                                                         | Unrealized loss on investments     |                                            |         |     |         |          |         | (39 | )      
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |                                                                                                         | Cumulative translation adjustments |                                            |         | (42  | )       |          |         | 9   |        
|                                                                                              |                                                                                                         |                                    |                                            |         |      |         |          |        
|                                                                                              |                                                                                                         |                                    | Total accumulated other comprehensive loss |         |      | (42     | )        |         |     | (30     | )
|                                                                                              |                                                                                                         |                                    |                                            |         |      |         |          |        
|                                                                                              |                                                                                                         |                                    | Total shareholders equity                 |         |      | 359,364 |          |         |     | 105,869 |  
|                                                                                              |                                                                                                         |                                    |                                            |         |      |         |          |        
|                                                                                              |                                                                                                         |                                    | TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |         | $    | 512,995 |          |         | $   | 176,685 |  
|                                                                                              |                                                                                                         |                                    |                                            |         |      |         |          |        

See notes to condensed consolidated financial statements.

4



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##### Table of Contents






THORATEC CORPORATION AND SUBSIDIARIES

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

|                                                  |                                                          |         |                          |       |                    |        |                  |       |        |        |         |        |        |         |        |        |        |        | 
|------------------------------------------------- | -------------------------------------------------------- | ------- | ------------------------ | ----- | ------------------ | ------ | ---------------- | ----- | ------ | ------ | ------- | ------ | ------ | ------- | ------ | ------ | ------ | ------ | 
|                                                  |                                                          |         |                          |       | Three Months Ended |        | Six Months Ended
|                                                  |                                                          |         |                          |       |                    |        |                 
|                                                  |                                                          |         |                          |       | June               |        | June             |       | June   |        | June   
|                                                  |                                                          |         |                          |       | 2001               |        | 2000             |       | 2001   |        | 2000   
|                                                  |                                                          |         |                          |       |                    |        |                  |       |        |        |        
|Product sales                                     |                                                          | $       | 28,218                   |       |                    | $      | 22,609           |       |        | $      | 49,697  |        |        | $       | 42,538 |       
|                                                 
|                                                 
|                                                 
|                                                 
|Cost of product sales                             |                                                          |         | 12,645                   |       |                    |        | 9,400            |       |        |        | 22,684  |        |        |         | 17,560 |       
|                                                  |                                                          |         |                          |       |                    |        |                  |       |        |        |         |        |        |         |        |       
|Gross margin                                      |                                                          |         | 15,573                   |       |                    |        | 13,209           |       |        |        | 27,013  |        |        |         | 24,978 |       
|                                                  |                                                          |         |                          |       |                    |        |                  |       |        |        |         |        |        |         |        |       
|Operating expenses:                               |                                                          |         |                          |       |                    |        |                  |       |        |        |         |        |        |         |        |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Research and development                                 |         |                          | 6,430 |                    |        |                  | 3,808 |        |        |         | 11,660 |        |         |        | 7,914  |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Selling, general and administrative                      |         |                          | 8,311 |                    |        |                  | 6,137 |        |        |         | 15,642 |        |         |        | 11,992 |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Amortization of goodwill and purchased intangible assets |         |                          | 4,526 |                    |        |                  |      |        |        |         | 6,807  |        |         |        |       |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | In-process research and development                      |         |                          |      |                    |        |                  |      |        |        |         | 76,858 |        |         |        |       |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Merger and restructuring costs                           |         |                          | 1,605 |                    |        |                  | 566   |        |        |         | 5,145  |        |         |        | 707    |       
|                                                  |                                                          |         |                          |       |                    |        |                  |       |        |        |         |        |        |         |        |       
|                                                  |                                                          |         | Total operating expenses |       |                    | 20,872 |                  |       |        | 10,511 |         |        |        | 116,112 |        |        |        | 20,613 | 
|                                                  |                                                          |         |                          |       |                    |        |                  |       |        |        |         |        |        |         |        |       
|Income (loss) from operations                     |                                                          |         | (5,299                   | )     |                    |        | 2,698            |       |        |        | (89,099 | )      |        |         | 4,365  |       
|                                                 
|                                                 
|                                                 
|                                                 
|Interest and other income  net                   |                                                          |         | 591                      |       |                    |        | 1,283            |       |        |        | 1,735   |        |        |         | 2,494  |       
|                                                  |                                                          |         |                          |       |                    |        |                  |       |        |        |         |        |        |         |        |       
|Income (loss) before taxes and extraordinary item |                                                          |         | (4,708                   | )     |                    |        | 3,981            |       |        |        | (87,364 | )      |        |         | 6,859  |       
|                                                 
|                                                 
|                                                 
|                                                 
|Income tax expense (benefit)                      |                                                          |         | (1,605                   | )     |                    |        | 1,533            |       |        |        | (2,080  | )      |        |         | 2,641  |       
|                                                  |                                                          |         |                          |       |                    |        |                  |       |        |        |         |        |        |         |        |       
|Income (loss) before extraordinary item           |                                                          |         | (3,103                   | )     |                    |        | 2,448            |       |        |        | (85,284 | )      |        |         | 4,218  |       
|                                                 
|                                                 
|                                                 
|                                                 
|Extraordinary item (Note 11)                      |                                                          |         |                         |       |                    |        | 191              |       |        |        |        |        |        |         | 191    |       
|                                                  |                                                          |         |                          |       |                    |        |                  |       |        |        |         |        |        |         |        |       
|Net income (loss)                                 |                                                          | $       | (3,103                   | )     |                    | $      | 2,639            |       |        | $      | (85,284 | )      |        | $       | 4,409  |       
|                                                  |                                                          |         |                          |       |                    |        |                  |       |        |        |         |        |        |         |        |       
|Earnings (loss) per share:                        |                                                          |         |                          |       |                    |        |                  |       |        |        |         |        |        |         |        |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                          | Basic   |                          | $     | (0.06              | )      |                  | $     | 0.08   |        |         | $      | (1.73  | )       |        | $      | 0.14   |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                          | Diluted |                          | $     | (0.06              | )      |                  | $     | 0.08   |        |         | $      | (1.73  | )       |        | $      | 0.14   |       
|                                                 
|                                                 
|                                                 
|                                                 
|Shares used to compute earnings (loss) per share: |                                                          |         |                          |       |                    |        |                  |       |        |        |         |        |        |         |        |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                          | Basic   |                          |       | 54,629             |        |                  |       | 32,203 |        |         |        | 49,204 |         |        |        | 32,183 |       
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                          | Diluted |                          |       | 54,629             |        |                  |       | 32,212 |        |         |        | 49,204 |         |        |        | 32,213 |       

See notes to condensed consolidated financial statements.

5



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##### Table of Contents






THORATEC CORPORATION AND SUBSIDIARIES

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

|                                                                                                   |                                                              |   |                                                     |          |                  |         |       |         |   |        |  
|-------------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | - | --------------------------------------------------- | -------- | ---------------- | ------- | ----- | ------- | - | ------ | -
|                                                                                                   |                                                              |   |                                                     |          | Six Months Ended
|                                                                                                   |                                                              |   |                                                     |          |                 
|                                                                                                   |                                                              |   |                                                     |          | June             |         | June 
|                                                                                                   |                                                              |   |                                                     |          | 2001             |         | 2000 
|                                                                                                   |                                                              |   |                                                     |          |                  |         |      
|Cash flows from operating activities:                                                              |                                                              |   |                                                     |          |                  |         |       |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Net income (loss)                                                                                  |                                                              | $ | (85,284                                             | )        |                  | $       | 4,409 |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |                                                              |   |                                                     |          |                  |         |       |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Depreciation and amortization                                |   |                                                     | 8,728    |                  |         |       | 1,443   |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Write-off of in-process research and development costs       |   |                                                     | 76,858   |                  |         |       |        |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Amortization of deferred compensation                        |   |                                                     | 404      |                  |         |       | 104     |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Provision for losses on accounts receivable                  |   |                                                     | 323      |                  |         |       |        |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Change
in net deferred tax liability                         |   |                                                     | (2,481   | )                |         |       |        |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Extraordinary item, net of income taxes (Note 11)            |   |                                                     |         |                  |         |       | (191    | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Other noncash items                                          |   |                                                     | 93       |                  |         |       |        |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Changes in assets and liabilities:                                                                 |                                                              |   |                                                     |          |                  |         |       |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Receivables                                                  |   |                                                     | 823      |                  |         |       | (873    | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Inventories                                                  |   |                                                     | (2,928   | )                |         |       | (275    | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Prepaid expenses and other assets                            |   |                                                     | (246     | )                |         |       | 47      |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Accounts payable and other liabilities                       |   |                                                     | (5,898   | )                |         |       | (322    | )
|                                                                                                   |                                                              |   |                                                     |          |                  |         |       |        
|                                                                                                   |                                                              |   | Net cash provided by (used in) operating activities |          |                  | (9,608  | )     |         |   | 4,342  |  
|                                                                                                   |                                                              |   |                                                     |          |                  |         |       |        
|Cash flows from investing activities:                                                              |                                                              |   |                                                     |          |                  |         |       |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Advances to affiliate, net                                   |   |                                                     |         |                  |         |       | (9,130  | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Purchases of short-term available-for-sale investments       |   |                                                     | (112,069 | )                |         |       | (28,295 | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Maturities of short-term available-for-sale investments      |   |                                                     | 87,192   |                  |         |       | 36,663  |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Sales of short-term available-for-sale investments           |   |                                                     | 58,617   |                  |         |       |        |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Capitalized transaction costs                                |   |                                                     | (5,838   | )                |         |       |        |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Expenditures for equipment and improvements                  |   |                                                     | (1,459   | )                |         |       | (1,232  | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Cash acquired in business acquisition                        |   |                                                     | 3,456    |                  |         |       |        |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Reclassification to restricted cash                          |   |                                                     | (45,723  | )                |         |       |        |  
|                                                                                                   |                                                              |   |                                                     |          |                  |         |       |        
|                                                                                                   |                                                              |   | Net cash used in investing activities               |          |                  | (15,824 | )     |         |   | (1,994 | )
|                                                                                                   |                                                              |   |                                                     |          |                  |         |       |        
|Cash flows from financing activities:                                                              |                                                              |   |                                                     |          |                  |         |       |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Net proceeds from issuance of common stock                   |   |                                                     |         |                  |         |       | 582     |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Common stock issued upon exercise of options                 |   |                                                     | 415      |                  |         |       |        |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Payment of withholding taxes related to employee stock plans |   |                                                     |         |                  |         |       | (47     | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Repurchase of common stock (Note 12)                         |   |                                                     | (1,733   | )                |         |       |        |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Purchase of convertible debentures (Note 11)                 |   |                                                     |         |                  |         |       | (2,825  | )
|                                                                                                   |                                                              |   |                                                     |          |                  |         |       |        
|                                                                                                   |                                                              |   | Net cash used in financing activities               |          |                  | (1,318  | )     |         |   | (2,290 | )
|                                                                                                  
|                                                                                                   | Effect of exchange rate changes on cash                      |   |                                                     | 27       |                  |         |       | (41     | )
|                                                                                                   |                                                              |   |                                                     |          |                  |         |       |        
|                                                                                                   | Net increase (decrease) in cash and cash equivalents         |   |                                                     | (26,723  | )                |         |       | 17      |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Cash and cash equivalents at beginning of period             |   |                                                     | 30,236   |                  |         |       | 418     |  
|                                                                                                   |                                                              |   |                                                     |          |                  |         |       |        
|                                                                                                   | Cash and cash equivalents at end of period                   |   | $                                                   | 3,513    |                  |         | $     | 435     |  
|                                                                                                   |                                                              |   |                                                     |          |                  |         |       |        
|Supplemental Cash Flow Disclosure:                                                                 |                                                              |   |                                                     |          |                  |         |       |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Cash paid for taxes                                          |   | $                                                   | 452      |                  |         | $     | 2,861   |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Cash paid for interest                                       |   | $                                                   | 1,302    |                  |         | $     | 1,389   |  

See notes to condensed consolidated financial statements.

6



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##### Table of Contents






THORATEC CORPORATION AND SUBSIDIARIES

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

|                  |                                        |                                          |        |                    |    |                  |       |       |     |      |         |         |     |   |       |       |     |  
|----------------- | -------------------------------------- | ---------------------------------------- | ------ | ------------------ | -- | ---------------- | ----- | ----- | --- | ---- | ------- | ------- | --- | - | ----- | ----- | --- | -
|                  |                                        |                                          |        | Three Months Ended |    | Six Months Ended
|                  |                                        |                                          |        |                    |    |                 
|                  |                                        |                                          |        | June               |    | June             |       | June  |     | June
|                  |                                        |                                          |        | 2001               |    | 2000             |       | 2001  |     | 2000
|                  |                                        |                                          |        |                    |    |                  |       |       |     |     
|Net income (loss) |                                        | $                                        | (3,103 | )                  |    | $                | 2,639 |       |     | $    | (85,284 | )       |     | $ | 4,409 |      
|                 
|                 
|                 
|                 
|                  | Other net comprehensive income (loss): |                                          |        |                    |    |                  |       |       |     |      |         |         |     |   |       |       |    
|                 
|                 
|                 
|                 
|                  |                                        | Unrealized gain (loss) on securities     |        |                    |   |                  |       |       | (31 | )    |         |         | 39  |   |       |       | (77 | )
|                 
|                 
|                 
|                 
|                  |                                        | Foreign currency translation adjustments |        |                    | (1 | )                |       |       | (5  | )    |         |         | (50 | ) |       |       | (34 | )
|                  |                                        |                                          |        |                    |    |                  |       |       |     |      |         |         |     |   |       |      
|                  | Comprehensive income (loss)            |                                          | $      | (3,104             | )  |                  | $     | 2,603 |     |      | $       | (85,295 | )   |   | $     | 4,298 |    
|                  |                                        |                                          |        |                    |    |                  |       |       |     |      |         |         |     |   |       |      

See notes to condensed consolidated financial statements.

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##### 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 Cardiosystems) 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 June
30, 2001 and July 1, 2000, the results of operations for the three and
six-month periods ended June 30, 2001 (second quarter and first half 2001) and
July 1, 2000 (second quarter and first half 2000) and cash flows for the
six-month periods ended June 30, 2001 and July 1, 2000. The merger of Thoratec
with Cardiosystems was accounted for as a reverse acquisition because former
shareholders of Cardiosystems owned a majority of the outstanding stock of
Thoratec subsequent to the merger. For accounting purposes, Cardiosystems 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 Cardiosystems. The 2001
consolidated financial information presented herein includes the financial
results of Cardiosystems for the full three and six-month periods ended June
30, 2001 and the financial results of Thoratec for the full three-month period
ended June 30, 2001 and for the six-month post-merger period from February 14,
2001 through June 30, 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 Cardiosystems 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
CARDIOSYSTEMS

On February 14, 2001, Thoratec completed its merger with Cardiosystems.
Pursuant to the merger agreement between Thoratec and Cardiosystems dated
October 3, 2000, Thoratec issued 32,226,074 new shares of its common stock to
the shareholders of Cardiosystems in exchange for all the outstanding common
stock of Cardiosystems (38,594,281 shares outstanding as of February 14, 2001)
at an exchange ratio of 0.835 to 1. Immediately following the transaction, Cardiosystems
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, the majority shareholder of Cardiosystems
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 between the Company
and Thermo Electron dated October 3, 2000, the Company filed a Registration
Statement on Form S-3 with the SEC on June 15, 2001 to register for resale
4,828,240 shares of the Companys common stock held by Thermo Electron.
According to Thermo Electrons filings made with the SEC, Thermo Electron owned
18,312,959 shares of Thoratec as of June 30, 2001 and 15,892,959 shares as of
July 5, 2001, representing approximately 34% of the total outstanding shares of
Thoratec as of June 30, 2001 and 29% of the outstanding shares as of July 5,
2001.

The merger was accounted for under the purchase method of accounting and was
treated as a reverse acquisition because the shareholders of Cardiosystems
owned the majority of Thoratec common stock after the merger. Cardiosystems 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. As of June 30,
2001, approximately $309.5 million of the total 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 has been expensed
in the first half of 2001. Until the Company adopts

8



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Statement of Financial Accounting Standard (SFAS) No. 142, Business
Combinations, further described in Note 5, goodwill and other intangibles will
be amortized over estimated useful lives of six to twenty years beginning
February 14, 2001. The Company has recorded a liability for the estimated costs
associated with evaluating and restructuring its product distribution networks.
Due to uncertainty associated with negotiations related to the cancellation of
contracts with third parties, an adjustment to the estimated liability recorded
in purchase accounting is possible.

The purchase price and allocation of purchase price as of June 30, 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 |        | Six Months Ended
|                                       |  |                    |        |                 
|                                       |  | June               |        | June             |  | June |        | June
|                                       |  | 2001               |        | 2000             |  | 2001 |        | 2000
|                                       |  |                    |        |                  |  |      |        |     
|Revenue                                |  | $                  | 28,218 |                  |  | $    | 29,869 |      |  | $ | 53,222  |   |  | $ | 57,404  |  
|                                      
|                                      
|                                      
|                                      
|Net loss *                             |  | $                  | (3,103 | )                |  | $    | (1,533 | )    |  | $ | (89,253 | ) |  | $ | (80,536 | )
|                                      
|                                      
|                                      
|                                      
|Net loss per share  basic and diluted |  | $                  | (0.06  | )                |  | $    | (0.03  | )    |  | $ | (1.63   | ) |  | $ | (1.51   | )

*     The three and six-month periods ended June 2001 include $1.6 and $6.5
million, respectively, of merger and restructuring costs and the three and
six-month periods ended ended June 2000 include $566,000 and $707,000,
respectively, of merger and restructuring costs. Each of the three-month
periods ended June 2001 and June 2000 includes $4.5 million of amortization of goodwill
and purchased intangibles. Each of the six-month periods ended June 2001 and
June 2000 includes a $76.9 million write-off of in-process research and
development costs and $9.1 million of amortization of goodwill and purchased
intangibles.

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.

3.  MERGER AND RESTRUCTURING
EXPENSES

Merger costs of $768,000 and $4.3 million, respectively, in the second quarter
and first half of 2001 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 Cardiosystems.

9



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In June 2001, the Company approved a restructuring plan (the Plan) to
consolidate all of its 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 annual savings of at least $2 million 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 Thermo Cardiosystems in February 2001. Employees affected were
notified during the quarter both through direct personal contact and written
notification. 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. During the three months ended June 30, 2001, the
Company accrued $837,000 of restructuring charges during the period, 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.

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 Cardiosystems for accounting and
financial reporting purposes. The weighted average number of common shares
previously reported by Cardiosystems has been adjusted for all periods to
reflect the exchange ratio of 0.835.

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 6,283,714 shares of common stock for the
second quarter of 2001 and for the first six 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 804,940 shares of common stock for the second quarter of 2000 and
541,915 shares of common stock for the first six 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 our 4-3/4 % subordinated convertible debentures,
convertible at $37.623 per share, because their effect would have been
antidilutive. The principle amount of the debentures was $54.8 million as of
the second quarter of 2001 and 2000, respectively.

During the second quarter of 2000, the Company recorded an extraordinary gain
of $191,000 in connection with the repurchase of its 4-3/4% subordinated
convertible debentures, which increased basic and diluted earnings per share by
$.01 per share in the first half of 2000. The extraordinary gain had no effect
on earnings per share in the second quarter of 2000.

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

|                                                 |  |                    |        |                  |  |      |        |      |  |   |         |   |  |   |        | 
|------------------------------------------------ |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------ | 
|                                                 |  | Three Months Ended |        | Six Months Ended
|                                                 |  |                    |        |                 
|                                                 |  | June               |        | June             |  | June |        | June
|                                                 |  | 2001               |        | 2000             |  | 2001 |        | 2000
|                                                 |  |                    |        |                  |  |      |        |     
|Net income (loss)                                |  | $                  | (3,103 | )                |  | $    | 2,639  |      |  | $ | (85,284 | ) |  | $ | 4,409  | 
|                                                 |  |                    |        |                  |  |      |        |      |  |   |         |   |  |   |        | 
|Weighted average number of common shares-basic   |  |                    | 54,629 |                  |  |      | 32,203 |      |  |   | 49,204  |   |  |   | 32,183 | 
|                                                
|                                                
|                                                
|                                                
|Dilutive effect of employee stock options        |  |                    |       |                  |  |      | 9      |      |  |   |        |   |  |   | 30     | 
|                                                 |  |                    |        |                  |  |      |        |      |  |   |         |   |  |   |        | 
|Weighted average number of common shares-diluted |  |                    | 54,629 |                  |  |      | 32,212 |      |  |   | 49,204  |   |  |   | 32,213 | 
|                                                 |  |                    |        |                  |  |      |        |      |  |   |         |   |  |   |        | 
|Net earnings (loss) per common share-basic       |  | $                  | (0.06  | )                |  | $    | 0.08   |      |  | $ | (1.73   | ) |  | $ | 0.14   | 
|                                                
|                                                
|                                                
|                                                
|Net earnings (loss) per common share-diluted     |  | $                  | (0.06  | )                |  | $    | 0.08   |      |  | $ | (1.73   | ) |  | $ | 0.14   | 

10



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5.  RECENTLY ISSUED ACCOUNTING
STANDARDS

In June 2001, the Financial Accounting Standards Board approved SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 prospectively prohibits the pooling of interest method
of accounting for business combinations initiated after June 30, 2001. SFAS No.
142 requires companies to cease amortizing goodwill that existed at June 30,
2001. The Companys amortization of existing goodwill will cease on December
31, 2001. Any goodwill resulting from acquisitions completed after June 30,
2001 will not be amortized. SFAS No. 142 also establishes a new method of
testing goodwill for impairment on an annual basis or on an interim basis if an
event occurs or circumstances change that would reduce the fair value of a
reporting unit below its carrying value. The adoption of SFAS No. 142 will
result in the Companys discontinuation of amortization of its goodwill on
December 30, 2001 and the requirement to test its goodwill for impairment under
the new standard beginning in the first quarter of fiscal year 2002, which
could have an adverse effect on the Companys future results of operations if
an impairment occurs.

6.  INVENTORIES

Inventories consist of the following:

|                |       |   |        |        |          |   |        |        | 
|--------------- | ----- | - | ------ | ------ | -------- | - | ------ | ------ | 
|                |       |   | June   |        | December
|                |       |   | 2001   |        | 2000    
|                |       |   |        |        |         
|Finished goods  |       | $ | 8,207  |        |          | $ | 3,177  |       
|               
|               
|               
|               
|Work in process |       |   | 5,138  |        |          |   | 10,261 |       
|               
|               
|               
|               
|Raw materials   |       |   | 14,298 |        |          |   | 3,943  |       
|                |       |   |        |        |          |   |        |       
|                | Total |   | $      | 27,643 |          |   | $      | 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 our 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 sale
removed from equipment and improvements and included in cost of product sales.
Drivers and consoles are manufactured by us and are used to operate our
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:

|                                      |                                       |   |         |        |          |   |         |       | 
|------------------------------------- | ------------------------------------- | - | ------- | ------ | -------- | - | ------- | ----- | 
|                                      |                                       |   | June    |        | December
|                                      |                                       |   | 2001    |        | 2000    
|                                      |                                       |   |         |        |         
|Property, plant and equipment at cost |                                       | $ | 33,594  |        |          | $ | 22,005  |      
|                                     
|                                     
|                                     
|                                     
|Less accumulated depreciation         |                                       |   | (16,755 | )      |          |   | (15,324 | )    
|                                      |                                       |   |         |        |          |   |         |      
|                                      | Property, plant and equipment, net    |   |         | 16,839 |          |   |         | 6,681 | 
|                                      |                                       |   |         |        |          |   |         |      
|Rental and support equipment at cost  |                                       |   | 4,931   |        |          |   | 1,763   |      
|                                     
|                                     
|                                     
|                                     
|Less accumulated depreciation         |                                       |   | (2,813  | )      |          |   | (1,360  | )    
|                                      |                                       |   |         |        |          |   |         |      
|                                      | Rental and support equipment, net     |   |         | 2,118  |          |   |         | 403   | 
|                                      |                                       |   |         |        |          |   |         |      
|                                      | Total equipment and improvements, net |   | $       | 18,957 |          |   | $       | 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 and (2) other medical equipment. The Companys
ventricular assist products and

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grafts 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 and testing equipment and related
disposables, as well as premium-quality, single-use, skin-incision devices. The
three and six-month periods ended June 2000 include Cardiosystems ventricular
assist products segment and other medical equipment segment. The three and
six-month periods ended June 2001 include Cardiosystems ventricular assist
products segment and other medical equipment segment for the full three and
six-month periods and Thoratecs ventricular assist products and graft segment
for the full three-month period ended June 30, 2001 and for the six-month
post-merger period from February 14, 2001 through June 30, 2001.

Business Segments:

|                                                 |                                        |                               |                                                         |        |                    |        |                  |        |        |       |      |         |         |         |   |        |        |       | 
|------------------------------------------------ | -------------------------------------- | ----------------------------- | ------------------------------------------------------- | ------ | ------------------ | ------ | ---------------- | ------ | ------ | ----- | ---- | ------- | ------- | ------- | - | ------ | ------ | ----- | 
|                                                 |                                        |                               |                                                         |        | Three Months Ended |        | Six Months Ended
|                                                 |                                        |                               |                                                         |        |                    |        |                 
|                                                 |                                        |                               |                                                         |        | June               |        | June             |        | June   |       | June
|                                                 |                                        |                               |                                                         |        | 2001               |        | 2000             |        | 2001   |       | 2000
|                                                 |                                        |                               |                                                         |        |                    |        |                  |        |        |       |     
|Product sales:                                   |                                        |                               |                                                         |        |                    |        |                  |        |        |       |      |         |         |         |   |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Ventricular assist products and grafts |                               | $                                                       | 18,038 |                    |        | $                | 12,615 |        |       | $    | 29,225  |         |         | $ | 22,788 |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Other medical equipment                |                               |                                                         | 10,180 |                    |        |                  | 9,994  |        |       |      | 20,472  |         |         |   | 19,750 |       
|                                                 |                                        |                               |                                                         |        |                    |        |                  |        |        |       |      |         |         |         |   |       
|                                                 |                                        | Total product sales           |                                                         | $      | 28,218             |        |                  | $      | 22,609 |       |      | $       | 49,697  |         |   | $      | 42,538 |      
|                                                 |                                        |                               |                                                         |        |                    |        |                  |        |        |       |      |         |         |         |   |       
|Income (loss) before provision for income taxes: |                                        |                               |                                                         |        |                    |        |                  |        |        |       |      |         |         |         |   |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Ventricular assist products and grafts |                               | $                                                       | (745   | )                  |        | $                | 1,692  |        |       | $    | (3,073  | )       |         | $ | 1,731  |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Other medical equipment                |                               |                                                         | 2,231  |                    |        |                  | 1,867  |        |       |      | 4,131   |         |         |   | 3,876  |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Corporate (a)                          |                               |                                                         | (654   | )                  |        |                  | (295   | )      |       |      | (1,347  | )       |         |   | (535   | )     
|                                                
|                                                
|                                                
|                                                
|                                                 | Purchase accounting entries            |                               |                                                         | (4,526 | )                  |        |                  |       |        |       |      | (83,665 | )       |         |   |       |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Merger and restructuring costs         |                               |                                                         | (1,605 | )                  |        |                  | (566   | )      |       |      | (5,145  | )       |         |   | (707   | )     
|                                                 |                                        |                               |                                                         |        |                    |        |                  |        |        |       |      |         |         |         |   |       
|                                                 |                                        | Total operating income (loss) |                                                         |        | (5,299             | )      |                  |        | 2,698  |       |      |         | (89,099 | )       |   |        | 4,365  |      
|                                                
|                                                
|                                                
|                                                
|                                                 | Interest and other income, net         |                               |                                                         | 591    |                    |        |                  | 1,283  |        |       |      | 1,735   |         |         |   | 2,494  |       
|                                                 |                                        |                               |                                                         |        |                    |        |                  |        |        |       |      |         |         |         |   |       
|                                                 |                                        |                               | Total income (loss) before taxes and
extraordinary gain |        | $                  | (4,708 | )                |        | $      | 3,981 |      |         | $       | (87,364 | ) |        | $      | 6,859 | 
|                                                 |                                        |                               |                                                         |        |                    |        |                  |        |        |       |      |         |         |         |   |       

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

Geographic Areas:

|               |                         |                     |   |                    |        |                  |   |        |        |      |   |        |        |  |   |        |        | 
|-------------- | ----------------------- | ------------------- | - | ------------------ | ------ | ---------------- | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|               |                         |                     |   | Three Months Ended |        | Six Months Ended
|               |                         |                     |   |                    |        |                 
|               |                         |                     |   | June               |        | June             |   | June   |        | June
|               |                         |                     |   | 2001               |        | 2000             |   | 2001   |        | 2000
|               |                         |                     |   |                    |        |                  |   |        |        |     
|Product sales: |                         |                     |   |                    |        |                  |   |        |        |      |   |        |        |  |   |       
|              
|              
|              
|              
|               | Domestic                |                     | $ | 21,590             |        |                  | $ | 18,924 |        |      | $ | 38,533 |        |  | $ | 35,890 |       
|               |                         |                     |   |                    |        |                  |   |        |        |      |   |        |        |  |   |       
|               | Europe                  |                     |   | 3,231              |        |                  |   | 2,039  |        |      |   | 6,217  |        |  |   | 4,154  |       
|              
|              
|              
|              
|               | All other international |                     |   | 3,397              |        |                  |   | 1,646  |        |      |   | 4,947  |        |  |   | 2,494  |       
|               |                         |                     |   |                    |        |                  |   |        |        |      |   |        |        |  |   |       
|               |                         | Total international |   |                    | 6,628  |                  |   |        | 3,685  |      |   |        | 11,164 |  |   |        | 6,648  | 
|               |                         |                     |   |                    |        |                  |   |        |        |      |   |        |        |  |   |       
|               |                         | Total               |   | $                  | 28,218 |                  |   | $      | 22,609 |      |   | $      | 49,697 |  |   | $      | 42,538 | 
|               |                         |                     |   |                    |        |                  |   |        |        |      |   |        |        |  |   |       

9.  RESTRICTED CASH AND
CONVERTIBLE DEBENTURES

In May 1997, the Company issued $70.0 million worth of 4 3/4% Convertible
Subordinated Debentures due May 2004. These debentures were originally issued
by Cardiosystems, which was merged into Thoratec and dissolved effective July
2, 2001. The

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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 $37.623 per share. To date, no debentures have
been exchanged for shares.

Upon closing of the merger with Cardiosystems in February 2001, $45.0 million
was reclassified to long-term assets from cash and short-term investments to
reflect the pledge of collateral as support for a letter of credit guarantee to
Thermo Electron Corporation related to Thermo Electrons guarantee of the
Companys outstanding subordinated debentures which are due in 2004. The
balance of this investment as of June 30, 2001, $45.7 million, includes
interest accumulations.

10.  INCOME TAXES

The Companys effective tax benefit rate was 34.1% and 2.4%, respectively, in
the second quarter of 2001 and first half of 2001 as compared to an effective
tax provision rate of 38.5% in the second quarter of 2000 and first half 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 Cardiosystems, 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 June 30, 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.

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. During the second
quarter of 2001, the Company paid approximately $1.7 million to repurchase
192,700 shares of its common stock, which were retired.

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

Overview

We develop, manufacture and market proprietary medical devices used for
circulatory support, vascular graft, blood coagulation and skin incision
applications. We currently market the Thoratec® Ventricular Assist System
(Thoratec VAD System or the VAD System) and the HeartMate® Left Ventricular
Assist System (HeartMate LVAS) in the United States and internationally for use
as a bridge to heart transplantation. Additionally the Thoratec VAD System is
marketed for use in the recovery of the heart after open-heart surgery. We have
also developed small diameter vascular grafts for use in hemodialysis access
and coronary artery bypass surgery. The components of the VAD System and graft
products that come into contact with human tissue or blood incorporate
Thoralon®, our proprietary biomaterial. Thoralon is a unique biomaterial that
provides strength and flexibility to our products with surface properties
designed to minimize patient blood clotting and inflammatory response. The
HeartMate products incorporate an exclusive textured surface intended to reduce
the incidence of thromboembolic complications and the need for systemic
anticoagulation.

International Technidyne Corporation (ITC), a wholly-owned subsidiary of
Thoratec after the merger with Cardiosystems on February 14, 2001, is a leading
manufacturer of near-patient, whole-blood coagulation testing equipment and
related disposables, and also manufactures premium-quality, single-use, skin
incision devices. ITC operates in a business segment that we call Other Medical
Equipment.

Acquisition Event

On February 14, 2001, Thoratec completed its merger with Cardiosystems.
Pursuant to the merger agreement between Thoratec and Cardiosystems dated
October 3, 2000, Thoratec issued 32,226,074 newly issued shares of its common
stock to the shareholders of Cardiosystems in exchange for all the outstanding
common stock of Cardiosystems (38,594,281 shares outstanding as of February 14,
2001) at an exchange ratio of 0.835 to 1. Immediately following the transaction, Cardiosystems
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, the majority shareholder of Cardiosystems
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 between the Company
and Thermo Electron dated October 3, 2000, the Company filed a Registration
Statement on Form S-3 with the SEC on June 15, 2001 to register for resale
4,828,240 shares of the Companys common stock held by Thermo Electron.
According to Thermo Electrons filings made with the SEC, Thermo Electron owned
18,312,959 shares of Thoratec as of June 30, 2001 and 15,892,959 shares as of
July 5, 2001, representing approximately 34% of the total outstanding shares of
Thoratec as of June 30, 2001 and 29% of the outstanding shares as of July 5,
2001.

The merger was accounted for under the purchase method of accounting and was
treated as a reverse acquisition because the shareholders of Cardiosystems
owned the majority of Thoratec common stock after the merger. Cardiosystems 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. As of June 30, 2001, approximately
$309.5 million of the purchase price of $346.2 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 has been expensed in the first
half of 2001. Until the Company adopts Statement of Financial Accounting
Standard (SFAS) No. 142, Business Combinations,
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 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 annual savings of at least $2 million 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 Thermo Cardiosystems in February 2001. Employees affected were
notified during the quarter both through direct personal contact and written
notification. 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. During the three months ended June 30, 2001, the
Company accrued $837,000 of restructuring charges during the period, 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.

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Liquidity and Capital Resources

At the end of June 2001, we had working capital of
$119.6 million compared with
$149.2 million at the end of December 2000. Cash, cash equivalents and
short-term investments available-for-sale decreased $47.7 million to $81.2
million principally due to $45.0 million in cash and short-term investments
being reclassified to restricted cash to reflect the pledge of collateral as
support for 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. Additionally, the decrease is due to the payment of merger and
restructuring costs and for stock repurchases, offset by the addition of
Thoratecs cash at the date of the merger and interest earned on corporate cash
investments.

The 2001 Statement of Cash Flows was prepared by combining Cardiosystems
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 June 2001, which included both entities. During the first six
months of 2001, $9.6 million of cash was used in operations. A net decrease in
accounts receivable provided $823,000, primarily from lower sales in the first
half of 2001 compared to the fourth quarter of 2000. Uses of cash included $2.9 million for
increased inventory levels following lower than expected sales in the first
half of 2001 and anticipated higher sales in future periods and $5.9 million
related to decreased accounts payable and other current liabilities. The decrease in accounts
payable and other current liabilities is due largely to payments related to employee severance
and pre-merger retention and other merger-related costs.

During the first half of 2001, $15.8 million of cash was used in investing
activities of our Company. Cash in the amount of $33.7 million was 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. Uses of cash included $45.7 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 $1.5 million for capital
equipment purchases. The capitalized merger transaction costs consisted of
banking, legal and accounting costs incurred by Cardiosystems and were
capitalized in the purchase consideration (now a component of goodwill).

During the first half of 2001, $1.3 million of cash was used in financing
activities of our Company. Uses of cash included $1.7 million in common stock
repurchases, representing 192,700 shares, which were subsequently retired. On
April 12, 2001, we announced a stock repurchase program under which our common
stock with a market value up to $20 million may be acquired in the open market
or in privately negotiated transactions. 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. Uses were
partially offset by $415,000 cash received from employee purchases of stock under the Companys
stock option plans.

We believe that on-hand cash, short term available-for-sale investments and
expected cash flow from operations will be sufficient to fund our operations
for at least the next twelve months. 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 assimilation of Cardiosystems with Thoratec and
the consolidation of our VAD manufacturing operations.

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

Results of Operations

Second quarter 2001 and 2000

Product sales in the second quarter of 2001 were $28.2 million compared to
$22.6 million in the second quarter of 2000, an increase of approximately $5.6
million or 25%. The increase is primarily attributable to the addition of
Thoratec product sales of $8.5 million during the quarter, partially offset by
$3.0 million lower sales of HeartMate products due to normal fluctuations in
the ventricular assist device market and stronger international sales where
average selling prices are lower.

Gross margin was $15.6 million, representing approximately 55% of product sales
for the second quarter of 2001 compared to a gross margin of $13.2 million
representing approximately 58% of product sales for the second quarter of 2000.
The decrease in gross margin percentage was primarily due to a lower proportion
of domestic sales to total product sales. Ventricular assist disposable
products, primarily blood pumps that are sold in the United States, generally
have higher gross margins than those sold in the rest of the world. Additional
contributors to the decrease in gross margin included higher unit production
costs due to the manufacturing of fewer HeartMate units than originally planned
and employee post-close merger retention costs.

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Research and development expenses were approximately 23% of product sales in
the second quarter of 2001 and 17% of product sales in the second quarter of 2000. These
expenses increased to $6.4 million in the second quarter of 2001 from $3.8
million in the second quarter of 2000, an increase of
$2.6 million, or 69%. The increase was attributable principally
to Thoratecs research and development expenses of $2.0 million
for the second quarter of 2001. In addition, product development and
clinical study expenses for the HeartMate LVAD products were $563,000
higher in the second quarter of 2001 compared to the second quarter
of 2000.

Selling, general and administrative expenses increased to $8.3 million in the
second quarter of 2001, from $6.1 million in the second quarter of 2000, an
increase of $2.2 million or 35%. As a percent of sales, these expenses
increased from 27% of product sales in 2000 to 29% of product sales in 2001.
The increase is primarily due to the addition of $4.1 million in Thoratec
selling, general and administrative expenses, partially offset by lower
employee related expenses resulting from the Companys restructuring activities
and reduction of $182,000 in administrative costs paid to Thermo Electron in
the second quarter of 2000.

Merger costs were $768,000 in the second quarter of 2001 and were principally
related to employee severance and pre-merger retention costs, and outside consulting,
accounting, and legal expenses related to the merger. Restructuring costs of
$837,000 were incurred in the second quarter of 2001, and represent estimated severance
costs related to the consolidation of the VAD manufacturing
operations.

Amortization of purchased intangibles and goodwill was $4.5 million in the
second quarter of 2001. All purchased intangibles and goodwill were generated
due to the merger between Thoratec and Cardiosystems. Until the Company adopts
Statement of Financial Accounting Standard (SFAS) No. 142, Business
Combinations, further described in Note 5 to the Condensed
Consolidated Financial Statements, these costs will 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, decreased $692,000, or 54%, in the second
quarter of 2001 from the second quarter of 2000. This decrease is due
principally to $523,000 lower interest income caused by both lower cash balances and reduced
interest rates as well as $156,000 lower research and development contract revenues.

The Companys effective tax benefit rate was
34.1% in the second quarter of
2001 as compared to an effective tax provision rate of 38.5% in the second 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 Cardiosystems, 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.

Six months ended June 2001 and
2000

Product sales in the first half of 2001 were $49.7 million compared to $42.5
million in the first half of 2000, an increase of approximately $7.2 million or
17%. The increase is primarily attributable to the addition of Thoratec product
sales of $12.0 million, partially offset by $5.5 million in lower sales of
HeartMate products due to significant distractions and uncertainties among the
Cardiosystems sales force during the first quarter of the year while the merger
was being closed.

Gross margin was $27.0 million, representing approximately 54% of product sales
in the first half of 2001 compared to a gross margin of $25.0 million,
representing approximately 59% of product sales, in the first half of 2000. The
decrease in gross margin percentage was due primarily to a lower proportion of
domestic sales to total product sales.Ventricular assist disposable products,
primarily blood pumps that are sold in the United States, generally 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 half
of 2001 due to increased inventory reserves for inventory expected to be used
in clinical and research and development activities, employee
post-close merger retention
costs, the manufacturing of fewer HeartMate units than originally planned and
higher scrap levels.

Research and development expenses were approximately 23% of product sales in
the first half of 2001 and 19% of product sales in the first half of 2000. These expenses
increased to $11.7 million in the first half of 2001 from $7.9 million in the
first half of 2000, an increase of $3.7 million, or 47%. The
increase was attributable principally to Thoratecs research and
development expenses of $3.3 million for the first half of 2001.
In addition, product development and clinical study expenses for the
HeartMate LVAD products were $593,000 higher in the first half of
2001 compared to the first half of 2000.

Selling, general and administrative expenses increased to $15.6 million in the
first half of 2001, from $12.0 million in the first half of 2000, an increase
of $3.6 million or 30%. As a percent of sales, these expenses increased from
28% of product sales in 2000 to 31% of product sales in 2001. The increase is
primarily related to the addition of Thoratecs selling, general and
administrative expenses, which amounted to $5.9 million, partially offset by
lower overall employee related expenses caused by the Companys restructuring
activities and reduction of $279,000 in administrative costs paid to Thermo
Electron in the first half of 2000.

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Merger costs were $4.3 million in the first half of 2001 and were principally
related to employee severance and pre-merger retention costs, and outside consulting,
accounting, and legal expenses related to the merger. Restructuring costs of
$837,000 were incurred in the first half of 2001, and represent
estimated severance
costs related to the consolidation of the VAD manufacturing operations.

Amortization of purchased intangibles and goodwill was $6.8 million in the
first half of 2001. All purchased intangibles and goodwill were generated due
to the merger between Thoratec and Cardiosystems. Until the Company adopts
Statement of Financial Accounting Standard (SFAS) No. 142, Business
Combinations, further described in Note 5 to the Condensed
Consolidated Financial Statements, these costs will be amortized to
expense on a straight-line basis over periods ranging from six to twenty years
beginning February 14, 2001.

In-process research and development expense was $76.9 million in the first half
of 2001, 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. The value assigned to acquired in-process research and
development was determined by an independent appraiser, who identified research
projects in areas for which technological feasibility had not been established.

Interest and other income, net, decreased $759,000, or 30%, in the first half
of 2001 from the first half of 2000. This decrease is due principally
to $552,000 lower interest income caused by both lower cash balances and reduced interest rates
as well as $263,000 lower research and development contract revenues.

The Companys effective tax benefit rate was 2.4% in the first half of 2001 as
compared to an effective tax provision rate of 38.5% in the first half 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 Cardiosystems, 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.

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 and our other filings with the Securities and Exchange
Commission. Actual results, events or performance may differ materially. These
forward-looking statements speak only as of the date hereof.

We undertake no obligation to publicly release the 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.




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 carry a
fixed rate of interest and are currently callable at par value. Our investment
portfolio at the end of the second 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. We do not expect
to be subject to material interest rate risk with respect to our short-term
investments. 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-United States operations are translated into United States dollars at the
fiscal period-end exchange rates, and, except as follows, the resulting
translation adjustments are included in comprehensive income. Exchange rate
fluctuations resulting from the period-end translation of the current portion
of the intercompany obligation of our wholly owned subsidiary in the United
Kingdom into United States dollars are recorded in the income statement as
foreign currency exchange gains or losses and are included in interest and
other income, net. Net foreign currency exchange loss was approximately $41,000
and $102,000, respectively, in the second quarter and first half of 2001. There
were no such gains or losses in the second quarter and first

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half of 2000 as the United Kingdom subsidiary became a part of our operations
upon the completion of the merger between Thoratec and Cardiosystems 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.

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PART II.  OTHER INFORMATION




ITEM 2.  CHANGES IN
SECURITIES

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. During the second
quarter of 2001, the Company paid approximately $1.7 million to repurchase
192,700 shares of its common stock, which were retired.




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

None




ITEM 6.  EXHIBITS AND REPORTS
ON FORM 8-K

None

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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: August 10, 2001 |  | /s/    D. Keith Grossman                  
|                      |  | D. Keith Grossman,
Chief Executive Officer

|                      |  |                                                                     
|--------------------- |  | --------------------------------------------------------------------
|Date: August 10, 2001 |  | /s/  M. Wayne Boylston                                              
|                      |  | M. Wayne Boylston,                                                  
|                      |  | Chief Financial Officer (Principal Financial and
Accounting Officer)

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