##### Table of Contents



---

---

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




---

Form 10-K





|           |  |                                                                                   
|---------- |  | ----------------------------------------------------------------------------------
|(Mark one) |  |                                                                                   
|x          |  | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|           |  |                                                                                   
|           |  | For the fiscal year ended December 28, 2002                                       
|           |  |                                                                                   
|o          |  | TRANSITION REPORT UNDER 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                                                     |  | 94-2340464                          
|(State or Other Jurisdiction of
Incorporation or Organization) |  | (I.R.S. Employer
Identification No.)
|                                                               |  |                                     
|6035 Stoneridge Drive, Pleasanton, California                  |  | 94588                               
|(Address of Principal Executive Offices)                       |  | (Zip Code)                          

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

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock

Indicate by a 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 o

Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x

Indicate by a check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12(b)-2) Yes x No o

The aggregate market value of the voting stock held by non-affiliates
$419,362,221 computed by reference to the last sale reported of such stock on
June 29, 2002 as listed on The Nasdaq National Stock Market.(1)

As of March 11, 2003, registrant had 55,051,485 shares of common stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Designated portion of Thoratecs definitive proxy statement for its 2003
annual meeting of shareholders are incorporated by reference into Part III of
this Form 10-K.



---

|(1) |  | Exclusion of shares held by any person should not be construed to
indicate that such person possesses the power, direct or indirect, to
cause the direction of the management or policies of the issuer, or that
such person is controlled by or under common control with the issuer.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

---





---



##### Table of Contents



FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, including the documents incorporated by
reference in this Annual Report, includes forward-looking statements. We have
based these forward-looking statements on our current expectations and
projections about future events. Our actual results could differ materially
from those discussed in, or implied by, these forward-looking statements.
Forward-looking statements are identified by words such as believe,
anticipate, expect, intend, plan, will, may, hope and other
similar expressions. In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances are
forward-looking statements. Forward-looking statements include, but are not
necessarily limited to, those relating to:



| |  |  | our ability to obtain and maintain regulatory approval of our products in the United States and internationally;
| | - |  | ----------------------------------------------------------------------------------------------------------------
|
| |  |  | results and timing of our clinical trials;                                                                      
|
| |  |  | reimbursement policies and decisions by government agencies and third party payors;                             
|
| |  |  | the other competing therapies that may currently, or in the future, be available to heart failure patients;     
|
| |  |  | our plans to develop and market new products; and                                                               
|
| |  |  | our ability to improve our financial performance.                                                               

Factors that could cause actual results or conditions to differ from those
anticipated by these and other forward-looking statements include those more
fully described in the Risk Factors section and in other documents we file
with the Securities and Exchange Commission. We are not obligated to update or
revise these forward-looking statements to reflect new events or circumstances.

You should assume that the information appearing in this Annual Report on
Form 10-K is accurate only as of the date on the front cover. Our business,
financial condition, results of operations and prospects may have changed since
that date.

Thoratec, the Thoratec logo, Thoralon, TLC-II, HeartMate, HeartPak and
Vectraare registered trademarks, and Aria is a trademark of Thoratec
Corporation.

HEMOCHRON, ProTime, Surgicutt, Tenderlett and tenderfoot are registered
trademarks of International Technidyne Corporation, or ITC, our wholly-owned
subsidiary.

2



---

TABLE OF CONTENTS



|              |                                                                                               |  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                             
|              | Item 2. Properties                                                                           
|              | Item 3. Litigation                                                                           
|              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II      
|              | Item 5. Market for Common Equity and Related Stockholder Matters                             
|              | Item 6. Selected Consolidated Financial Data                                                 
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|              | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|              | Item 8. Financial Statements and Supplementary Data                                          
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III     
|              | Item 10. Directors and Executive Officers of the Registrant                                  
|              | Item 11. Executive Compensation                                                              
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|              | Item 13. Certain Relationships and Related Transactions                                      
|              | Item 14. Controls and Procedures                                                             
|PART IV      
|              | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|EXHIBIT INDEX
|SIGNATURES   
|Exhibit 3.1  
|Exhibit 10.2 
|Exhibit 23.1 
|Exhibit 23.2 
|Exhibit 99.1 



---



##### Table of Contents



TABLE OF CONTENTS

|              |    |                                                                                       |    |  |     
|------------- | -- | ------------------------------------------------------------------------------------- | -- |  | ----
|              |    |                                                                                       |    |  | Page
|PART I       
|Item 1.       |    | Business                                                                              | 4 
|Item 2.       |    | Properties                                                                            | 25
|Item 3.       |    | Litigation                                                                            | 25
|Item 4.       |    | Submission of Matters to a Vote of Security Holders                                   | 25
|PART II      
|Item 5.       |    | Market for Common Equity and Related Stockholder Matters                              | 28
|Item 6.       |    | Selected Consolidated Financial Data                                                  | 29
|Item 7.       |    | Managements Discussion and Analysis of Financial Condition and Results of Operations | 30
|Item 7A.      |    | Quantitative and Qualitative Disclosures About Market Risk                            | 39
|Item 8.       |    | Financial Statements and Supplementary Data                                           | 40
|Item 9.       |    | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure  | 64
|PART III     
|Item 10.      |    | Directors and Executive Officers of the Registrant                                    | 65
|Item 11.      |    | Executive Compensation                                                                | 65
|Item 12.      |    | Security Ownership of Certain Beneficial Owners and Management                       
|Item 13.      |    | Certain Relationships and Related Transactions                                        | 65
|Item 14.      |    | Controls and Procedures                                                               | 65
|PART IV      
|Item 15.      |    | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       | 66
|Exhibit Index | 70

3



---



##### Table of Contents






PART I




Item 1.Business

Overview

We are a leading manufacturer of circulatory support products for use by
patients with congestive heart failure, or CHF. According to the American Heart
Association, 4.9 million patients in the United States suffer from CHF and an
additional 550,000 patients are diagnosed with this disease annually. We were
the first company to receive approval from the United States Food and Drug
Administration, or FDA, to commercially market a ventricular assist device, or
VAD, to treat patients with late-stage heart failure, which comprises
approximately 5% to 10% of the CHF patient population. Our VADs are used
primarily by these CHF patients to perform some or all of the pumping function
of the heart and we currently offer the widest range of products to serve this
market. We believe that our long-standing reputation for quality and innovation
and our excellent relationships with leading cardiovascular surgeons worldwide
position us to capture growth opportunities in the expanding congestive heart
failure market.

We develop and market products that are used by physicians and hospitals
for cardiac assist, vascular and diagnostic applications. Our three types of
products are:



| |  |  | Circulatory Support Products.Our circulatory support products
include VADs for the short-term and long-term treatment of congestive
heart failure. Our products address more indications than the products
of any other cardiac assist device company.                                                                                                                                              
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Vascular Graft Products.We have developed small diameter grafts to
address the vascular access and coronary bypass surgery markets. These
grafts use our proprietary materials that are designed to improve
performance. Our grafts are sold in the United States and
internationally for use in hemodialysis patients and are currently in
clinical trials for coronary artery bypass applications.
|
| |  |  | Blood Coagulation Testing and Skin Incision Devices.We have a
leading market position for devices that monitor blood coagulation and
perform blood-screening analysis for patients undergoing various
surgical procedures. We also offer a family of single-use skin incision
devices used to create a blood sample.                                                                                

Our VADs are regarded as the most versatile and widely used circulatory
support systems for patients with late-stage CHF. We currently market devices
that may be implanted or worn outside the body and that are suitable for
treatments of different durations for patients of varying sizes and ages. We
estimate that our VADs have treated almost 5,700 patients. Our devices are
currently used primarily for patients awaiting a heart transplant or recovering
from open heart surgery. On November 6, 2002, the FDA granted us approval to
market our HeartMate SNAP-VE VAD an alternative to optimal medical management
or maximum drug therapy, which we call destination therapy, for CHF patients
who are not eligible for a heart transplant. We are also pursuing approval to
use our VADs for therapeutic recovery to partially reverse the complications of
late-stage heart failure in certain patients. Although it is difficult to
estimate the size of this market, we believe that the patient population that
could benefit from this use could be substantial. We submitted a Pre-Market
Approval, or PMA, Supplement for the therapeutic recovery indication and expect
to receive FDA approval in 2003.

On February 14, 2001, we completed our merger with Thermo Cardiosystems,
Inc, which we refer to as Thermo Cardiosystems or TCA, a Massachusetts-based
manufacturer of cardiac assist, blood coagulation testing and skin incision
devices, which we refer to as the Merger. As a result of the Merger, we
substantially increased the size of our company and became a leading provider
of circulatory support products worldwide. We now sell VADs to virtually every
leading heart transplant center worldwide and we market three out of the four
VADs approved by the FDA as a bridge to heart transplant. At the time of the
Merger, we changed our name from Thoratec Laboratories Corporation to Thoratec
Corporation. Immediately after the Merger the parent company of TCA, Thermo
Electron Corporation, or Thermo Electron, owned approximately 35% of our
outstanding stock. As of the date of this report, Thermo Electron owns
approximately 14% of our total outstanding common stock.

Destination Therapy

On November 6, 2002, the FDA granted us approval to market our HeartMate
SNAP-VE VAD for destination therapy for CHF patients who are not eligible for a
heart transplant. This approval marks the first time a VAD has been approved
as a long-term, permanent treatment for end-stage congestive heart failure
patients who do not qualify for heart transplantation due to age or extenuating
health circumstances and who have a life expectancy of less than two years.
While our HeartMate VAD has been used

4



---



##### Table of Contents



since 1998 as a bridge to heart transplantation, this new approval gives
regulatory authority for the medical communitys expanded use of VADs.

The FDAs decision to approve the HeartMate SNAP-VE VAD for destination
therapy was based on data from a clinical trial called REMATCH, or Randomized
Evaluation of Mechanical Assistance for the Treatment of Congestive Heart
Failure, which showed our HeartMate device nearly doubled and tripled survival
over the drug therapy group at one and two years, respectively. The results of
the trial were presented at the American Heart Association Scientific Sessions
in November 2001 and the results were published in The New England Journal of
Medicine.

The REMATCH trial involved 129 late-stage CHF patients who, because of
their ages or other diseases, were not eligible to receive one of the very
limited supply of donor organs for heart transplantation. The study was
independently coordinated by Columbia University at 21 prestigious transplant
centers in the United States. The overall purpose of the study was to evaluate
the efficacy, safety and cost effectiveness of our HeartMate VAD versus maximum
drug therapy. The REMATCH publication provided a detailed evaluation of
survivability, device safety and impact on patient quality of life.

The Centers for Medicare & Medicaid Services, or CMS, created a new
diagnosis-related group, which increased payment to hospitals for Medicare
patients receiving a VAD by approximately 40 percent effective October 1, 2002.
While VADs for destination therapy are not yet covered by Medicare, a request
has been filed with CMS to expand Medicare coverage to include VADs that are
used for destination therapy.

Late in 2002, the Technology Evaluation Center, or TEC, of the Blue Cross
and Blue Shield Association, or BCBSA, completed an assessment for use of VADs
as destination therapy and determined that the use of VADs for patients with
end-stage heart failure who are not eligible for heart transplantation meets
its five criteria, including that the technology improves net health outcomes.
The TEC provides rigorous evidence-based technology assessments to many health
care insurance decision makers regarding diagnostics and therapeutic medical
procedures and we believe it is another external validation of the use of VADs
for destination therapy from a fully independent, third party reviewer. The
TEC assessment criteria include the following:



| |  |  | The technology must have final approval from the appropriate governmental bodies;                          
| | - |  | -----------------------------------------------------------------------------------------------------------
|
| |  |  | The scientific evidence must permit conclusions concerning the effect of the technology on health outcomes;
|
| |  |  | The technology must improve the net health outcome;                                                        
|
| |  |  | The technology must be as beneficial as any established alternatives; and                                  
|
| |  |  | The improvement must be attainable outside the investigational settings.                                   

The BCBSA TEC assessment is not binding on individual Blue Cross and Blue
Shield plans, but in the first months of 2003 we have seen several plans update
and expand their policies to recognize coverage for destination therapy.

We filed a PMA Supplement with the FDA in November 2002 seeking approval
to use our HeartMate XVE VAD for destination therapy. The HeartMate XVE, which
is currently approved for use as a bridge to heart transplantation, is an
enhancement to the HeartMate SNAP-VE, based in great part on the REMATCH trial,
and was designed to reduce infection, improve durability and extend device
life. We hope to have this approval in the first half of 2003.

We believe that the destination therapy application for our HeartMate
device represents a long-term market opportunity of up to 100,000 additional
patients annually in the United States. For these patients, maximum drug
therapy is currently the only treatment available and, even with drug therapy,
the 12-month mortality rate for these patients is 75%. We believe that the
HeartMate will provide a significant survival benefit for this patient
population.

Other Recent Developments

On March 12, 2003, a Medicare Coverage Advisory Committee (MCAC) voted
favorably on two questions regarding Medicare coverage for the use of Left
Ventricular Assist Devices (LVADs) for destination therapy. The two questions
addressed by MCAC were:



| |  |  | Is the quality of the evidence adequate to draw conclusions about
the net health outcomes in Medicare beneficiaries comparable to
patients enrolled in the REMATCH trial who undergo LVAD implantation?
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | If the quality of the evidence is adequate, does it demonstrate
any positive net health outcomes of LVADs compared to optimal medical
management for these patients?                                   

5



---



##### Table of Contents



MCACs are expert advisory panels often used by CMS to review new,
leading-edge technology treatment options. The panel members voted that the
quality of the evidence was adequate to draw conclusions about the net health
outcomes in Medicare beneficiaries comparable to patients enrolled in the
REMATCH trial. Furthermore having found the evidence was adequate, a majority
of panel members voted that LVADs provide a substantially more effective net
outcome for these patients, a ranking second only to breakthrough technology
on of a list of eight possible rankings.

The MCAC input will be considered by CMS and we believe that CMS will
issue a national coverage decision in 2003. MCACs are advisory panels and
final decisions regarding national coverage policies are made by CMS.

Our Strategy

We are a leading developer and manufacturer of medical devices for the
CHF, cardiac surgery and vascular graft markets. Our key strategies to maintain
and expand this leadership position are to:

Develop the Destination Therapy Market.We recently received approval
from the FDA to market the HeartMate SNAP-VE VAD for destination therapy in the
treatment of late-stage CHF patients who are not candidates for heart
transplants. We estimate the market size for this indication could be up to
100,000 patients annually in the United States alone.

Increase Cost Effectiveness of Our Products.While a recent study
indicates that the cost of implanting a VAD is comparable with that of a heart,
liver and other major organ transplant, cost remains a significant concern of
our customers. In July 2002, four REMATCH investigators filed a formal request
with CMS to expand Medicare coverage to include VADs that are used for
destination therapy and in March 2003 the MCAC voted that the quality of the
evidence presented to them was adequate to draw conclusions that LVADs provide
a substantially more effective net outcome in Medicare beneficiaries comparable
to patients enrolled in the REMATCH trial. We continue to support third party
payors in assessing the technology of our products. Additionally, we are
expanding our market education and training programs and we continue to
implement improvements that enhance the performance of our products.

Obtain Approval for New Indications or Uses for Our Products.We believe
that there are currently 4.9 million patients in the United States with CHF and
that some of these patients who are currently not using VADs can benefit from
our products. We are in the process of obtaining FDA approvals to market our
products for the following new indications:



| |  |  | Use of the HeartMate XVE for Destination Therapy.In November 2002,
the FDA granted us approval to market our HeartMate SNAP-VE for
destination therapy patients. Later that same month, we filed a PMA
Supplement with the FDA seeking approval to use our HeartMate XVE for
destination therapy. The HeartMate XVE is an enhancement to the
HeartMate SNAP and was designed to reduce infection, improve durability
and extend device life. We hope to have approval of this filing in the
first half of 2003                                      
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Therapeutic recovery.We believe that the use of VADs may lead to
recovery of the natural heart in certain patients. We have submitted a
PMA Supplement for our Thoratec VAD for this indication and hope to
receive approval in 2003. Although it is difficult to estimate the size
of this market, we believe that the patient population that could
benefit from this use could be substantial.                                                                                                                                                   
|
| |  |  | Home discharge for our TLC-II portable driver.We have submitted a
PMA Supplement seeking home discharge approval for our TLC-II portable
VAD driver. This small, lightweight device used to power the Thoratec
VAD was approved in 2001 for use by patients in the hospital or short
excursions away from the hospital. We believe that being able to offer
patients increased mobility through home discharge will be a catalyst
for increased use of the Thoratec VAD System by surgeons. We hope to
have this approval in the first half of 2003.

Increase Penetration of Existing Markets.We plan to treat a greater
number and variety of patients within our current customer base. To accomplish
this, we are leveraging our existing relationships with leading cardiac
surgeons and hospitals and utilizing our existing sales channels to gain
acceptance and adoption of our products.

Offer a Broad Range of Products.We believe that our broad and diverse
product offering is an important competitive advantage because it allows us to
address the various preferences of surgeons and the clinical needs of a wide
variety of patients, as well as the economic needs and concerns of third party
payors. An important part of our growth strategy is to further broaden our
product line to

6



---



##### Table of Contents



meet customer needs by developing new products internally or acquiring or
licensing new products. We intend to further develop a number of new or
improved products including next generation versions of both our HeartMate and
Thoratec VADs.

Focus On and Partner With Leading Heart Centers.We have developed
extremely strong, long-standing relationships with leading cardiovascular
surgeons and heart centers worldwide. We believe that no other cardiac assist
company enjoys the same depth of relationship and access to these customers.
Maintaining and expanding these relationships is an important part of our
growth strategy, particularly for the development and introduction of new
products and the pursuit of additional indications for our existing products.

Increase Our Presence in the Heart Failure and Cardiovascular Disease
Markets.In addition to increasing our presence in the heart failure and
cardiovascular disease markets through internal growth, we will also be
evaluating strategic alliances, joint ventures and related business development
opportunities to achieve this objective.

Our Markets

The primary markets for our VAD products are those patients suffering from
heart failure, and in particular, from CHF. CHF is a chronic disease that
occurs when degeneration of the heart muscle reduces the pumping power of the
heart, causing the heart to become too weak to pump blood at a level sufficient
to meet the bodys demands. CHF can be caused by artery or valve diseases or a
general weakening of the heart muscle itself. In addition, other conditions,
such as high blood pressure or diabetes, can also lead to CHF.

According to the American Heart Association, or the AHA, there are 4.9
million CHF patients in the United States and approximately 550,000 new cases
are diagnosed each year. The AHA also estimates that approximately 70% of CHF
patients under age 65 will die within eight years. We believe that the number
of patients suffering from CHF who could benefit from some form of cardiac
assist could be over 200,000 annually. While the number of treatment options
for CHF has increased in recent years, the use of medication remains the most
widely used approach for treatment of the disease. These drug therapies include
ACE inhibitors, anti-coagulants and beta-blockers, which facilitate blood flow,
thin the blood or help the heart work in a more efficient manner. Other
procedures used to treat CHF include angioplasty, biventricular pacing, valve
replacement, bypass and left ventricular reduction surgery.

Despite attempts to manage CHF through drug therapy, there is currently
only one curative treatment for the disease  a heart transplant.
Unfortunately, the number of hearts available for transplant each year can meet
the needs of only a small number of the patients who need a heart transplant.
The United Network for Organ Sharing reported that there were only 2,275 hearts
available for transplant in the United States in 2001. At any given time, there
are approximately 4,000 patients on the U.S. national transplant waiting list
and we believe a comparable number of patients are waiting in Europe. The
median wait for a donor heart by patients on a heart transplant waiting list is
approximately nine months, and many patients have to wait as long as one to two
years before receiving one of the few donor hearts available. In 2001,
approximately 15% of such patients died while waiting for a donor heart.

In the United States, there are currently two FDA-approved indications for
the use of VADs in patients with CHF  as a bridge to heart transplant and as
destination therapy. We are currently pursuing one additional indication for
our VAD products  for therapeutic recovery of the heart. If approved, this
additional indication will represent larger market opportunities than the
current indications. Beyond the CHF markets, VADs are also approved for use
during recovery following cardiac surgery. All four indications are summarized
below.

Bridge to Transplant

Ventricular assist devices provide additional cardiac support for patients
who are in late-stage heart failure waiting for a donor heart. Of the
approximately 4,000 patients on the waiting list for a heart transplant in the
United States, we estimate that approximately 25% will receive a VAD.

We believe that the percentage of patients bridged to transplant continues
to increase with surgeons level of comfort with the technology, particularly
for longer-term support cases. There are currently four devices approved in the
United States as a bridge to transplant, three of which are manufactured by us.
We estimate that the bridge to transplant indication represents a worldwide
market opportunity of up to 8,000 patients annually.

7



---



##### Table of Contents



Destination Therapy

On November 6, 2002, we received approval to market the HeartMate SNAP-VE
VAD for destination therapy for patients with late-stage CHF who are not
candidates for heart transplantation due to other degenerative illnesses or
advanced age. We believe that the success in transitioning this market from
maximum drug therapy to VADs is dependent on the development of VADs, like our
HeartMate, with substantial longevities and proof of clinical efficacy.

This is the first VAD approved for destination therapy for patients
suffering from late-stage CHF and we believe that the destination therapy
application for our HeartMate device represents a market opportunity of up to
100,000 additional patients annually in the United States alone, which would
represent a significant increase over our existing customer base.

Therapeutic Recovery

We believe that, for most patients, recovery of their own heart is a
better alternative than either heart transplantation or permanent implantation
of a blood pumping device. Based on recently reported cases of recovery in
heart failure patients, we believe that our Thoratec VAD system is a potential
therapy that can reverse the complications of late-stage heart failure in
certain patients.

While this therapeutic recovery indication is not yet approved for our
devices, we are actively investigating the worldwide experience with our VAD
systems as a means of therapeutic recovery and the requirements for pursuing
regulatory approval for this indication. Although it is not certain how many
patients with CHF could benefit from this indication, based upon the percentage
of patients with late-stage CHF, we believe that the patient population could
be substantial. We submitted a PMA Supplement to the FDA in December 2000 and
submitted additional information in a PMA amendment in January 2003. We hope
to receive approval to market our product for this indication in the United
States in 2003. We are also formulating a regulatory and clinical strategy for
non-U.S. markets.

Recovery Following Cardiac Surgery

In addition to CHF, our devices are also used for patients who suffer from
acute cardiac failure and undergo cardiac surgery. Following cardiac surgery,
some patients have difficulty being weaned off heart/lung machines  a
complication that arises in approximately one percent of the more than 900,000
open-heart procedures performed each year. Many of these patients ultimately
die from heart failure when the heart, weakened by disease and the additional
trauma of surgery, fails to maintain adequate blood circulation. We believe
that only a small portion of this market is currently being treated with VADs
and this patient population could benefit substantially from further awareness
and use of our VADs in this market.

Other Markets

In addition to the circulatory support market, we sell other devices
including those that address the vascular access graft market. Our vascular
grafts program has developed the Aria graft for patients undergoing Coronary
Artery Bypass Graft, or CABG, surgery who have too few and/or poor quality
vessels of their own to use for the procedure. The Aria is currently in
clinical trials. We have also developed and are marketing the VectraVascular
Access Graft, or Vectra,for patients undergoing renal hemodialysis.

We believe that the market opportunity for the Aria could be significant
given the patient trauma and costs associated with the harvesting of native
vessels in those patients who undergo CABG surgery. Industry sources estimate
that this market could be approximately 180,000 patients each year. Our Vectra
product targets the estimated over $120 million hemodialysis graft market.

Finally, our diagnostic products for blood coagulation testing and our
single-use skin incision devices, which we sell through ITC, address the market
for those patients who must monitor their blood chemistry. We estimate this
market is smaller than our other markets but that we hold a leading position
for these devices. We currently estimate that the market for these products is
over $250 million per year.

8



---



##### Table of Contents



Our Products

We offer two complementary circulatory support product lines:



| |  |  | the Thoratec Ventricular Assist Device system, which we call the
Thoratec VAD system, an external device for short to mid-term cardiac
support; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the HeartMate Left Ventricular Assist system, which we call the
HeartMate, an internal device for longer term cardiac support.                     

In addition to our cardiac assist products, we offer vascular access
grafts, used in hemodialysis for patients with end stage renal disease. We are
also developing a small diameter access graft for use in CABG surgery.
Additionally, we sell whole-blood coagulation testing equipment used in bedside
anticoagulation management, coagulation screening and skin incision devices for
the drawing of blood from adult, children and infant patients.

Circulatory Support Products

Ventricular assist devices perform some or most of the pumping function of
the heart in patients with severe heart failure. A cannula connects the left
ventricle of the heart to a blood pump that is driven by a power source, which
can be either electric or pneumatic. Blood flows from the left ventricle to the
pump chamber, via the cannula. An electric or air driven mechanism compresses
the pump chamber and forces the blood through another cannula into the aorta.
From the aorta, the blood then circulates throughout the body. Valves, which
can be mechanical or tissue, enable unidirectional flow.

Certain VADs are implanted internally, while others are placed outside the
body. Some external devices are placed immediately adjacent to the body
(paracorporeal), while other external VADs are positioned at a distance from
the body (extracorporeal). Between 15% and 20% of assist patients require
biventricular support and therefore require a second pump for the right
ventricle. Currently the power source remains outside the body for all
FDA-approved VADs.

The Thoratec VAD

The Thoratec VAD has been FDA-approved since 1995 and has treated over
2,100 patients worldwide. The Thoratec VAD is a paracorporeal device that
remains outside of the body. The product is less invasive than implantable VADs
since only the cannulae must be implanted. The paracorporeal nature of the
Thoratec VAD has several positive consequences including relatively shorter and
less invasive implantation times (approximately two hours) and the ability to
use the device in smaller patients.

A pneumatic power source drives our VAD. It is designed for intermediate
duration use of a few weeks to several months, though this device has supported
numerous patients for six to eighteen months. Offering left, right or
biventricular support, the Thoratec VAD is the only biventricular support
system approved for use as a bridge to transplant. This characteristic is
significant since 15% to 20% of bridge to transplant patients require
right-sided ventricular assist. The Thoratec VAD is also the only device
approved for both bridge to transplant and recovery following cardiac surgery.
We submitted a PMA Supplement in December 2000 for a therapeutic recovery
indication, which we expect to receive by the end of 2003. The Thoratec VAD is
made with our proprietary biomaterial, Thoralon, which may reduce clotting.

Ambulation with most paracorporeal VADs is possible, but very limited
because of the large size of the typical drive console. In order to improve
patient mobility, we developed the TLC-II, a small portable driver, which
increases portability and ambulation options. The portable driver was approved
in the United States in June 2001 for use in off-site excursions and is in
clinical trials for a home discharge indication. The TLC-II has been approved
for use in Europe since 1998.

The HeartMate

The HeartMate has been used to treat almost 3,600 patients worldwide.
There are currently two versions of the HeartMate available on the market with
different sources of power. The pneumatic-powered version of the HeartMate,
called the HeartMate IP, was approved in the United States in 1994 and was the
first FDA-approved cardiac assist device for bridge to transplantation. The
electric HeartMate, called the HeartMate VE, received FDA approval in September
1998. Currently, the electric version accounts for over 90% of our total
HeartMate sales and we recently introduced a number of enhancements to the
HeartMate, which have been approved by the FDA. Compared with the Thoratec VAD,
the HeartMate is designed for longer duration use of several months to up

9



---



##### Table of Contents



to two or three years. The HeartMate offers only left ventricular support.
This device is currently approved for the bridge to transplant indication and
for home discharge and, most recently, for destination therapy for patients who
are not eligible for a heart transplant.

Patients with a HeartMate do not require anti-coagulation, since the
device utilizes proprietary textured surfaces and tissue valves rather than
mechanical valves. As a result, we believe that this device has the lowest rate
of stroke for patients using ventricular support. The implantable nature of
this device enables patient ambulation and home discharge.

Implantable VAD

We are developing and expect to commercialize the IVAD, which is an
implantable version of the Thoratec VAD. The IVAD maintains the same blood flow
path, valves and blood pump as the paracorporeal device and is better suited
for longer-term support compared to the Thoratec VAD. The outer covering of the
IVAD is made of a titanium alloy, which facilitates implantation. The device is
approximately half the size of other implantable VADs and weighs less than one
pound. The device can be implanted in patients ranging in weight from 40 kg to
over 100 kg. The small blood pump is implanted in the body and is connected to
a small, briefcase size, battery-powered, external control unit. The device can
provide left, right, or biventricular support. The IVAD is being designed as a
bridge to transplant and possibly for therapeutic recovery, but not as an
alternative to transplant.

In February 2001, we received a conditional IDE approval to commence an
IVAD clinical trial in the United States. The study will evaluate approximately
30 patients in up to 10 centers. We plan to submit a PMA Supplement to the FDA
by the end of 2003, and expect approval in the first half of 2004.

An IVAD clinical trial was also conducted in Europe in 2002. This trial
has concluded and the results have been submitted to European authorities. We
hope to receive authorization to CE Mark the IVAD in the first half of 2003,
thus allowing us to market and distribute the IVAD in the European Union.

HeartMate II and HeartMate III

HeartMate II, the next-generation HeartMate device, is being designed for
use in many types of patients and indications, including for destination
therapy. HeartMate II is a small implantable electrically powered device that
weighs only 12 ounces and is approximately 1.5 inches wide and 3 inches long.
The small size of the device is made possible by a continuous axial flow
mechanism, as compared with the pulsatile flow of other currently marketed
products. The device is also designed to be quieter than currently marketed
products. The pump speed can be controlled manually or by a proprietary
automatic mode, which regulates pumping activity based on the demands of the
body. We believe this will be a competitive advantage since most competitive
axial pumps currently in development must be manually adjusted. The anticipated
longevity of the device is expected to be five to seven years.

The first HeartMate II was implanted in Israel in 2000 and the first
European implant occurred in April 2001. We filed for a U.S. IDE in August
2001. Early clinical results led to several design and software enhancements.
We are preparing to restart clinical trials in the United States and Europe in
the first half of 2003.

In addition, we are developing our third generation device, the HeartMate
III. The HeartMate III is a centrifugal flow pump that employs a magnetically
levitated rotor that eliminates wear from touching parts. No bearings are
present and the device is completely encased in titanium. The anticipated
longevity of the device is 10 to 20 years. Final designs to system components
are being finalized and preclinical studies are being performed to ready the
device for clinical evaluation.

Vascular Graft Products

We are developing small diameter vascular graft products intended
initially to address the vascular access and CABG markets. Both products
utilize our proprietary Thoralon biomaterial, and are protected by several U.S.
and foreign patents covering the material and the structure of the graft
products, as well as several foreign patents covering aspects of the
manufacturing processes used to make the products. We believe that our vascular
grafts are highly compliant, have excellent handling and suturing properties
and have the feel of a natural blood vessel. Our manufacturing process
creates a structure in which the three different layers in the graft wall have
different properties, which make the graft closely resemble natural blood
vessels. The inner textured layer is designed for contact with blood and
provides improved resistance to blood clots. The solid middle layer gives the
graft its strength and self-sealing properties. The outer textured layer is
designed to promote tissue ingrowth and to contain the reinforcing fibers for
kink resistance.

10



---



##### Table of Contents



Aria Coronary Artery Bypass Graft

We are developing a small diameter graft for use in coronary artery bypass
surgery patients who have too few or no suitable vessels of their own. The most
unique aspect of the Aria is that it offers an off-the-shelf alternative to
current natural vessel harvesting, which may prove to reduce the need for
additional surgery and thus reduce the complications associated with such
additional surgery. We believe that to date no other company has developed and
clinically tested a suitable small diameter graft which has remained patent
over long periods of time when used in this critical application.

We received FDA approval for a Phase I IDE study of the Aria graft in May
2000. This study was designed to evaluate the Aria graft in patients with
inadequate autologous vessels to complete revascularization. The Phase I
results, based on 19 patients enrolled across the six centers, were submitted
to the FDA in September 2001 and we requested approval to begin the pivotal
Phase II. In June 2002, the FDA granted approval for conducting the Phase II
clinical trial at 20 centers for up to 162 patients. However, implementation of
the clinical trial is pending the receipt of results from a separate pilot
study being conducted in Europe. In this study, a new anastomotic technique is
being tested, which is designed to improve surgical efficiencies and yield
acceptable patency outcomes. Early patency results are expected to be
available for analysis by the end of 2003.

Vectra Vascular Access Graft

The Vectravascular access graft was approved for sale in the United
States in December 2000 and in Europe in January 1998. It is designed for use
as a shunt between an artery and a vein, primarily to provide access to the
bloodstream for renal hemodialysis patients requiring frequent needle punctures
during treatment. Other currently available vascular access grafts are commonly
made out of ePTFE, which can lose integrity after repeated punctures and
require a three to six week healing period between implantation and the
initiation of dialysis treatment. We believe that the Vectramay provide
significant advantages over existing synthetic vascular access grafts that may
encourage its use by surgeons who are currently using natural vessels for
vascular access. We currently sell Vectrathrough the Bard Peripheral Vascular
division of C.R. Bard Corporation, which we refer to as Bard, in the United
States, Europe and selected countries in Scandinavia, the Middle East and
Northern Africa and through Goodman Co. Ltd. in Japan.

Blood Coagulation Testing and Skin Incision Devices

Through ITC, we manufacture and supply whole blood coagulation testing
equipment and related disposables, as well as premium-quality, single-use skin
incision devices.

Our whole-blood coagulation testing equipment product lines offer systems
for bedside anticoagulation management, coagulation screening and transfusion
management. Each analyzes small blood samples, then processes and quickly
displays comprehensive patient homeostasis information. Blood management of
this type is essential for cardiopulmonary bypass surgery and angioplasty.
HEMOCHRON models are designed for use in a clinical setting at the patients
bedside. They are lightweight, battery-operated, portable and some provide
data-management features.

The ProTime Microcoagulation System is designed to allow testing for
patients who take the blood-thinning drug Warfarin (or Coumadin, the trade
name). The system consists of a hand-held instrument, a five-channel cuvette
and a finger incision device. These tests are performed in a doctors office,
clinic or by the patients at home.

We also manufacture a family of single-use skin incision devices for
drawing blood from adults, children and infants. Each employs a patented skin
incision technology to provide a standardized surgical incision.

Sales and Marketing

We operate in the following business segments: Cardiovascular Products and
ITC. Cardiovascular Products include our circulatory support products and
vascular graft products. ITC includes our blood coagulation testing and skin
incision devices.

Circulatory Support Products

The potential customers for our circulatory support products are hospitals
that perform open heart surgery procedures and heart transplants. We estimate
that 130 of the approximately 900 hospitals in the United States that perform
open-heart surgery also perform heart transplants. We actively are marketing to
these 130 heart transplant hospitals and large cardiac surgery centers in
addition to the approximately 100 heart transplant hospitals in Europe.

11



---



##### Table of Contents



We have recruited and trained a direct sales force that, as of December
28, 2002, was comprised of 20 experienced cardiovascular sales specialists to
sell our circulatory support systems in the United States, Canada, France,
Germany, Spain, United Kingdom, Austria, Switzerland, Netherlands, Portugal and
South Africa.

The sales effort is complemented by 12 direct clinical specialists that
conduct clinical educational seminars, assist with a new open-heart centers
first VAD implant and resolve clinical questions or issues. We also partner
with universities, experienced clinicians and opinion leaders to assist with
expanding clinical educational needs. The sales team focuses on cardiac
surgeons that perform heart transplantation, perfusionists and the transplant
nursing staff. In addition to our direct selling effort, we have established a
network of international distributors who cover those markets that represent
the majority of VAD potential. We employ sales and marketing tactics commonly
found within the cardiovascular device market such as direct mail, clinical
education seminars, symposia, equipment purchase and lease programs and journal
advertisement. We have also assembled a Medical Advisory Board consisting of
opinion leaders who provide clinical input and direction on product
development, marketing and market issues.

Hospitals or other medical institutions that acquire a VAD system
generally purchase VAD pumps, related disposables and training and purchase or
rent two of the associated pump drivers (to ensure that a backup driver is
available). The time from the initial contact with the cardiac surgeon until
purchase is generally between nine and eighteen months, due to the expense of
the product and common hospital capital equipment acquisition procedures. Upon
receipt of a purchase order, we will usually ship the products within thirty
days.

The introduction of a VAD system in a new hospital or other medical
institution requires that the surgical and clinical support personnel possess
certain expertise to use our products. For our customers that do not already
have this expertise, we provide initial training for the surgical and clinical
support teams generally after delivery of one of our VAD products. As many of
our customers already possess sufficient experience and expertise to use our
products, training is provided as a best practice to optimize the use and
success of our products. In addition, a variety of training materials accompany
the initial delivery of our VAD products including instructions for use,
patient management manuals and assorted videos. As a follow-up to the initial
training, we provide clinical support at the first implant whenever possible.
We also provide 24-hour access to clinically trained personnel. Our sales force
also helps customers understand and manage reimbursement from third-party
payors.

Vascular Graft Products

We market the Vectrathrough Bard in the United States, Europe and
selected countries in Scandinavia, the Middle East and Northern Africa and
through Goodman Co. Ltd. in Japan. We intend to market the Aria CABG device
through our direct sales force in the United States and Europe and potentially
through distributors in other international markets.

The Aria is being developed as a preferable clinical option for patients
who lack suitable native vessels. We believe that more clinician education will
be required for the Aria graft in terms of patient indications, product use,
and product capabilities. We may accomplish this education by sponsoring
educational programs, video educational tools and scientific lecture programs.
We also anticipate that we may need a larger domestic sales force structure to
effectively market the Aria graft.

Blood Coagulation Testing and Skin Incision Devices

ITC maintains a direct sales staff of 32 in the United States who sell to
hospitals as well as to third party dealers and distributors including Cardinal
Healthcare. Outside of the United States, ITC has two salespeople selling
principally to third-party dealers.

Manufacturing

We manufacture our products at the following facilities:



| |  |  | The Thoratec VAD systems are manufactured at our facility in
Pleasanton, California. This facility has been inspected, approved and
licensed by the FDA and the State of California Department of Health
Services, Food and Drug Section for the manufacture of medical devices
and has received the International Standards Organization (ISO) 9001
certification. Our manufacturing processes for the Thoratec VAD system
consist of the assembly of standard and custom component parts,
including blood-contacting components fabricated from our proprietary
biomaterials and the testing of completed products. We rely on single
sources of supply for several components of the Thoratec VAD system. We
are aware of alternative suppliers for all single-sourced items.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12



---



##### Table of Contents





| |  |  | HeartMate devices are manufactured in Woburn, Massachusetts. We have
recently completed moving portions of this facility, including all
manufacturing, to our facility in Pleasanton, California. We hope to
receive approval from the FDA to begin manufacturing HeartMate devices
in Pleasanton in the first half of 2003. We will continue performing
some marketing, research and development, clinical affairs and
administrative functions at the Woburn facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | All blood coagulation testing and skin incision devices are
manufactured in Edison, New Jersey, with the exception of the ProTime
instrument, which is manufactured in Asia through a third party contract
manufacturer. The New Jersey facilities have been inspected, approved
and licensed by the FDA and the State of New Jersey and have received
the ISO 9001 certification. Our manufacturing processes for the blood
coagulation instruments and reagents and disposable skin incision
devices consist of the manufacture and assembly of standard and custom
component parts and the testing of completed products. We rely on single
sources of supply for some components and we manufacture some components
of the skin incision devices ourselves. We are aware of alternative
suppliers for all single-sourced items. In addition, these facilities
maintain ISO9001, EN ISO 13485 and Canadian (CMDCAS) ISO certifications.

Patents and Proprietary Rights

We seek to patent certain aspects of our technology. We hold, or have
exclusive rights to, several U.S. and foreign patents. Except for the patents
mentioned below, the Thoratec VAD system is not protected by any patents other
than one patent pertaining to the TLC-II. We do not believe that this lack of
patent protection will have a material adverse effect on our ability to sell
the Thoratec VAD system because of the lengthy regulatory period required to
obtain approval of a VAD. We are not aware of any VADs that are based on our
product design currently approved by the FDA or undergoing clinical trials.
Several patents cover aspects of our HeartMate line of products.

Our patents relating to blood coagulation and skin incision devices are
assigned to ITC. We own or hold rights in the remainder of the U.S. patents by
virtue of the Merger between Thoratec and Thermo Cardiosystems, which resulted
in the transfer of the ownership of the TCA patents to Thoratec.

Several patents cover aspects of our proprietary biomaterials technology,
some of which were sold to TH Goldschmidt AG, a German chemical manufacturer,
in 1989, but we have retained worldwide, royalty-free, exclusive rights to
these patents for most medical applications. The patent license from
Goldschmidt will remain in effect for the duration of the patents sold to
Goldschmidt and includes medical uses that we expect are necessary for our
business as now conducted or as proposed to be conducted in the future. For
example, the medical applications include blood pumps, artificial hearts and
cardiac assist devices of all kinds, cardiovascular products, including heart
valves and prosthetic blood vessels and cannulae and blood tubing of all kinds.
Aspects of our vascular graft products are covered by patents covering
materials, graft structure, and, in some foreign countries, manufacturing
processes used to make the graft products. Aspects of our blood coagulation and
skin incision device products are covered by patents directed to blood
coagulation testing equipment and methods, and to skin incision devices and
methods of manufacturing such devices. The duration of some of our patents on
our HeartMate products range from 13 to 14 years, on our biomaterials from 1 to
7 years, on our grafts from 2 months to 2 years and on our blood coagulation
and skin incision device products from 2 to 16 years. During the term of our
patents, we have the right to prevent third parties from manufacturing,
marketing or distributing products that infringe upon our patents.

In addition, we hold several patents on the HeartMate II axial blood flow
pump and transcutaneous energy transmission technology, the duration of which
range from 9 to 17 years. In August 1998, we obtained a license to incorporate
technology developed by Sulzer Electronics Ltd. into the HeartMate III.
HeartMate III is a miniature centrifugal pump featuring a magnetically
levitated rotor with a bearingless motor that has been developed by Levitronix
GmbH. The license from Sulzer gives us the exclusive right to use in our
HeartMate products technology protected by several U.S. and foreign patents
covering implantable bearingless motors for the duration of those patents,
subject to our payment of royalties. In December 2000, we were informed by
Sulzer Electronics that Sulzer had sold all of their business in the
bearingless motor and magnetic bearing fields to Levitronix and had assigned
the agreements between Sulzer and us to Levitronix. The license remains in full
force and effect.

The validity of any of our patents may be challenged by others, and we
could encounter legal and financial difficulties in enforcing our patent rights
against alleged infringements. In addition, others could develop technologies
that avoid infringement of our patents or obtain patents, which would render
our patents obsolete. Although we do not believe patents are the sole
determinant in the commercial success of our products, the loss of a
significant percentage of our patents or the patents relating to our products
could seriously harm our business.

13



---



##### Table of Contents



We hold, or have exclusive rights to, several international patents,
including several biomaterial patents licensed from Goldschmidt referred to
above.

We have developed technical knowledge, which although non-patentable, we
consider to be significant in enabling us to compete. However, the proprietary
nature of such knowledge may be difficult to protect. It is our policy to enter
into confidentiality agreements with each of our employees prohibiting such
employee from disclosing any confidential information or trade secrets. In
addition, these agreements provide that any inventions or discoveries relating
to our business by these individuals will be assigned to us and become our sole
property. However, we cannot guarantee that every person who gets access to our
confidential information or trade secrets will have signed such an agreement,
or that every person who has signed such an agreement will abide by it. If they
do not, or if our confidential information or trade secrets are otherwise
disclosed, there is no guarantee that any legal remedies will prevent the
harmful disclosure or use of our confidential information or trade secrets.

Claims by competitors and other third parties that our products allegedly
infringe the patent rights of others could seriously harm our business. The
medical device industry is characterized by frequent and substantial
intellectual property litigation. The cardiovascular device market is
characterized by extensive patent and other intellectual property claims.
Intellectual property litigation is complex and expensive and the outcome of
this litigation is difficult to predict. Any future litigation, regardless of
outcome, could result in substantial expense and significant diversion of the
efforts of our technical and management personnel. An adverse determination in
any such proceeding could subject us to significant liabilities or require us
to seek licenses from third parties or pay royalties that may be substantial.
Furthermore, we cannot assure you that necessary licenses would be available on
satisfactory terms, or at all. Accordingly, an adverse determination in a
judicial or administrative proceeding or failure to obtain necessary licenses
could prevent us from manufacturing or selling certain of our products, any of
which could seriously harm our business.

We have received correspondence from a third party alleging that the
textured surface of our HeartMate housing infringes certain patent rights of
such third party. In general, an owner of intellectual property can prevent
others from using such property without a license and is entitled to damages
for unauthorized usage. We have investigated the basis of the allegation and,
based upon an evaluation of all of the facts and circumstances, we believe that
we have meritorious defenses. However, we cannot be sure that our defenses
would prevail, and given the inherent uncertainties in dispute resolution, if
we were sued and the outcome was unfavorable, our results of operations or
financial condition could be seriously harmed.

Competition

Principal competitors of our VAD systems include:



| |  |  | World Heart Corporation, which manufactures and markets an
implantable left ventricular assist device approved only for bridge to
heart transplant in the United States;                                                    
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | ABIOMED, Inc., which manufactures and markets a biventricular assist
device approved only for temporary circulatory support of patients in
post-heart surgery shock and other recovery indications in the United
States; and
|
| |  |  | MicroMed Technology, Inc., which manufactures and markets an
axial-flow implantable left ventricular assist device in Europe and has
begun a phase III pivotal clinical trial in the United States.                         

We believe that the principal competitive factors in the circulatory
support market are patient outcomes, product performance, size and portability,
quality, cost-effectiveness and customer service. We believe that our principal
competitive advantages are:



| |  |  | our ability to provide left, right or biventricular support;           
| | - |  | -----------------------------------------------------------------------
|
| |  |  | our ability to provide short-term or long-term circulatory support;    
|
| |  |  | the lowest known rate of stroke for patients using ventricular support;
|
| |  |  | our ability to provide implantable or paracorporeal VAD placement;     
|
| |  |  | our ability to provide support in the hospital or in the home;         

14



---



##### Table of Contents





| |  |  | our ability to provide support to a greater range of patients as a
result of the smaller size and placement of the paracorporeal system
outside the body;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the greater range of cannulation options available;                                                                                                      
|
| |  |  | the quality of our biomaterials;                                                                                                                         
|
| |  |  | a wider range of indications served by our products;                                                                                                     
|
| |  |  | the availability and quality of service and field support; and                                                                                           
|
| |  |  | our ability to offer numerous products from one company.                                                                                                 

Although we believe that these attributes of our VAD systems offer certain
advantages over existing ventricular assist devices, we expect our current
competitors to defend their market positions vigorously.

Our principal competitors in the vascular access graft market are W.L.
Gore, Inc., C.R. Bard and Boston Scientific Corporation, who manufacture and
market ePTFE grafts worldwide. Smaller competitors include Atrium Medical Inc.
who manufactures and markets an ePTFE vascular graft.

ITCs principal competitor for the HEMOCHRON coagulation monitoring
instruments, used in the operating room and in cardiac catheterization, is the
Cardiac Surgery Division of Metronic, Inc., which markets the HemoTec product
line. Roche Holding AG competes with the ProTime product with a blood
coagulation monitor that is marketed to clinics and also is used for patient
self-testing. There are also several new competitors that have recently entered
the blood coagulation monitoring market. ITCs products compete primarily on
the basis of reputation, utility, and price.

ITCs skin incision devices compete with products offered by a number of
companies, including Organon Teknika B.V.; Becton, Dickinson and Company; and
Owen-Mumford Ltd. The skin incision devices compete primarily on the basis of
safety, quality and reputation.

Government Regulations

Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the manufacture and marketing of our
current and future products and in our ongoing product research and development
activities. All of our proposed products will require regulatory approval prior
to commercialization. In particular, medical devices are subject to rigorous
preclinical testing as a condition of approval by the FDA and by similar
authorities in foreign countries.

U.S. Regulations

In the United States, the FDA regulates the design, manufacture,
distribution and promotion of medical devices pursuant to the Federal Food,
Drug, and Cosmetic Act and the regulations promulgated thereunder, or the FDA
Act and Regulations. Our VAD systems, blood coagulation testing devices, skin
incision devices, and Aria and Vectragraft products are regulated as medical
devices. To obtain FDA approval to market VADs similar to those under
development, the FDA requires proof of safety and efficacy in human clinical
trials performed under an IDE. An IDE application must contain preclinical test
data supporting the safety of the product for human investigational use,
information on manufacturing processes and procedures, proposed clinical
protocols and other information. If the IDE application is accepted, human
clinical trials may begin. The trials must be conducted in compliance with FDA
regulations and with the approval of one or more institutional review boards.
The results obtained from these trials, if satisfactory, are accumulated and
submitted to the FDA in support of either a PMA application or a 510(k)
premarket notification. Premarket approval from the FDA is required before
commercial distribution of devices similar to those under development by us is
permitted in the United States.

The PMA Supplement must be supported by extensive data, including
preclinical and human clinical data, to prove the safety and efficacy of the
device with respect to the modifications disclosed in the supplement. By
regulation, the FDA has 180 days to review a PMA application and during that
time an advisory committee may evaluate the application and provide
recommendations to the FDA. While the FDA has approved PMA applications within
the allotted time period, reviews more often occur over a significantly

15



---



##### Table of Contents



protracted period, usually 18 to 36 months, and a number of devices have
never been cleared for marketing. This is a lengthy and expensive process and
there can be no assurance that such FDA approval will be obtained.

Under the FDAs requirements, if a manufacturer can establish that a newly
developed device is substantially equivalent to a legally marketed predicate
device, the manufacturer may seek marketing clearance from the FDA to market
the device by filing a 510(k) premarket notification with the FDA. This is the
process that is used to gain FDA market clearance for most of the ITC products
including HEMOCHRON and ProTime. The 510(k) premarket notification must be
supported by data establishing the claim of substantial equivalence to the
satisfaction of the FDA. The process of obtaining a 510(k) clearance typically
can take several months to a year or longer. If substantial equivalence cannot
be established, or if the FDA determines that the device requires a more
rigorous review, the FDA will require that the manufacturer submit a PMA
application that must be approved by the FDA prior to marketing the device in
the United States.

Both a 510(k) and a PMA, if approved, may include significant limitations
on the indicated uses for which a product may be marketed. FDA enforcement
policy prohibits the promotion of approved medical devices for unapproved uses.
In addition, product approvals can be withdrawn for failure to comply with
regulatory requirements or the occurrence of unforeseen problems following
initial marketing.

The approval process for each of our products is expensive and time
consuming and we cannot assure you that any regulatory agency will grant its
approval. Our inability to obtain, or delays in obtaining, such approval would
adversely affect our ability to commence marketing our products. We cannot
assure you that we will have sufficient resources to complete the required
testing and regulatory review processes. Furthermore, we are unable to predict
the extent of adverse governmental regulation which might arise from future
U.S. or foreign legislative or administrative action. On October 26, 2002, the
FDA signed into law the The Medical Device User Fee and Modernization Act of
2002 (MDUFMA). This law amends the FDA Act and Regulations to provide, among
other things, the ability for the FDA to impose user fees for medical device
reviews. Our activities require that we make many filings with the FDA that
will now be subject to this new fee structure. Although the precise amount of
fees that we will incur each year will be dependent upon the specific quantity
and nature of our filings, such fees could amount to hundreds of thousands of
dollars per year.

In addition, any products distributed pursuant to the above authorizations
are subject to pervasive and continuing regulation by the FDA. Products must be
manufactured in registered establishments and must be manufactured in
accordance with Quality System Regulations and adverse events must be reported
to the FDA. Labeling and promotional activities are subject to scrutiny by the
FDA and, in certain instances, by the Federal Trade Commission. The failure to
comply with the FDAs regulations can result in enforcement action, including
seizure, injunction, prosecution, civil penalties, recall and suspension of FDA
approval. The export of devices is also subject to regulation in certain
instances.

We are also subject to regulation by the California Department of Health
Services, Food and Drug Section and the New Jersey Department of Health, which
may inspect us and enforce regulations. Failure to comply with applicable state
regulations may result in seizures, injunctions or other types of enforcement
actions.

International Regulations

We are also subject to regulation in each of the foreign countries in
which we sell products with regard to product standards, packaging
requirements, labeling requirements, import restrictions, tariff regulations,
duties and tax requirements. Many of the regulations applicable to our products
in such countries are similar to those of the FDA. The national health or
social security organizations of certain countries require our products to be
qualified before they can be marketed in those countries.

In order to be positioned for access to European and other international
markets, we sought and obtained certification under the ISO 9000 Series of
Standards. ISO 9000 is a set of integrated requirements, which when
implemented, form the foundation and framework for an effective quality
management system. These standards were developed and published by the ISO, a
worldwide federation of national bodies, founded in Geneva, Switzerland in
1947. ISO has over 90 member countries. ISO certification is widely regarded as
essential to enter Western European markets. We obtained certification and were
registered as an ISO 9002 compliant company in January 1995. Commencing in
mid-1998, all companies are required to obtain CE Marks for medical devices
sold or distributed in the European Union. The CE Mark is an international
symbol of quality. With it, medical devices can be distributed within the
European Union, which is comprised of 15 European countries representing a
population of over 377 million people. A prerequisite for obtaining authority
to CE Mark products is to achieve full quality system certification in
accordance with ISO 9001 and EN 46001. These are quality standards that cover
design, production, installation and servicing of medical devices. We have our
ISO 9001 and EN 46001 certification and authority to CE Mark all VAD systems,
including the HeartMate, blood coagulation testing

16



---



##### Table of Contents



and skin incision devices and the Vectragraft. We are also certified to
be in compliance with the requirements of the European Medical Device
Directive, another prerequisite for applying the CE Mark. In early 2003, we
expect to receive additional certification under the Canadian Medical Device
Regulations (CMDRs) for our Pleasanton manufacturing facility, which is
required effective January 1, 2003 to sell medical devices in Canada. We also
maintain certification of our implantable devices such as the HeartMate under
the Active Implantable Medical Device Directive (AIMDD) and anticipate
receiving AIMDD certification for the Thoratec IVAD in the first half of 2003.
AIMDD certification is required to sell these products in Europe. Effective the
end of 2003, our diagnostic equipment manufactured by ITC will be subject to In
Vitro Diagnostic Directives (IVDD). Certification to the IVDD is required to
sell these products in Europe and we anticipate receiving IVDD certification in
2003. Finally, as international standards evolve, we will be subject to the
certification requirements of ISO 13485. This is not only a requirement by
Canadian law, it is also the direction the international standards are moving
in as the 2003 version of ISO 13485 will satisfy the requirements for medical
devices in place of both ISO 9001 and EN 46001.

Other Regulations

We are also subject to various federal, state and local laws and
regulations relating to such matters as safe working conditions, laboratory and
manufacturing practices and the use, handling and disposal of hazardous or
potentially hazardous substances used in connection with our research and
development work. Specifically, the manufacture of our biomaterials is subject
to compliance with federal environmental regulations and by various state and
local agencies. Although we believe we are in compliance with these laws and
regulations in all material respects, we cannot assure you that we will not be
required to incur significant costs to comply with environmental laws or
regulations in the future.

Third Party Reimbursement and Cost Containment

Our products are purchased primarily by hospitals and other users, which
then bill various third party payors for the services provided to the patients.
These payors, which include CMS, private health insurance companies and managed
care organizations, reimburse part or all of the reasonable costs and fees
associated with these devices and the procedures performed with these devices.

Third party payors are increasingly challenging the prices charged for
medical products and services and may deny reimbursement if they determine that
a device was not used in accordance with cost-effective treatment methods as
determined by the payor, was experimental or was used for an unapproved
application. To date, some private insurers and CMS have determined to
reimburse some or all of the costs associated with our VAD systems. Changes in
reimbursement, policies and practices of third party payors could seriously
harm sales of our products.

CMS created a new diagnosis-related group, which increased payment to
hospitals for Medicare patients receiving a VAD by approximately 40 percent
effective October 1, 2002. While VADs for destination therapy are not yet
covered by Medicare, a formal request has been filed with CMS to expand
Medicare coverage to include VADs that are used as long-term destination
therapy.

Late in 2002, the TEC of the BCBSA completed an assessment for use of VADs
as destination therapy and determined that the use of VADs for patients with
end-stage heart failure who are not eligible for heart transplantation meets
its five criteria, including that the technology improves net health outcomes.
The TEC provides rigorous evidence-based technology assessments to many health
care insurance decision makers regarding diagnostics and therapeutic medical
procedures. We believe it is another external validation of the use of VADs for
destination therapy from a fully independent, third party reviewer. The TEC
assessment criteria include the following:



| |  |  | The technology must have final approval from the appropriate governmental bodies;                          
| | - |  | -----------------------------------------------------------------------------------------------------------
|
| |  |  | The scientific evidence must permit conclusions concerning the effect of the technology on health outcomes;
|
| |  |  | The technology must improve the net health outcome;                                                        
|
| |  |  | The technology must be as beneficial as any established alternatives; and                                  
|
| |  |  | The improvement must be attainable outside the investigational settings.                                   

The BCBSA TEC assessment is not binding on individual Blue Cross and Blue
Shield plans, but in the first months of 2003 we have seen several plans update
and expand their policies to recognize coverage for destination therapy.

In March 2003, an MCAC voted favorably on two questions regarding Medicare
coverage for the use of LVADs for destination therapy. The two questions
addressed by MCAC were:

17



---



##### Table of Contents





| |  |  | Is the quality of the evidence adequate to draw conclusions about
the net health outcomes in Medicare beneficiaries comparable to
patients enrolled in the REMATCH trial who undergo LVAD implantation?
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | If the quality of the evidence is adequate, does it demonstrate
any positive net health outcomes of LVADs compared to optimal medical
management for these patients?                                   

MCACs are expert advisory panels often used by CMS to review new,
leading-edge technology treatment options. The panel members voted that the
quality of the evidence was adequate to draw conclusions about the net health
outcomes in Medicare beneficiaries comparable to patients enrolled in the
REMATCH trial. Furthermore having found the evidence was adequate, a majority
of panel members voted that LVADs provide a substantially more effective net
outcome for these patients, a ranking second only to breakthrough technology
on a list of eight possible rankings.

The MCAC input will be considered by CMS and we believe that CMS will
issue a national coverage decision in 2003. MCACs are advisory panels and
final decisions regarding national coverage policies are made by CMS.

Employees

As of December 28, 2002, we had 699 full-time employees, 301 of whom
worked in manufacturing, 100 in engineering, 86 in quality control and
regulatory affairs, 109 in marketing and sales support, 46 in administration
and finance and 57 in other support functions, including human resources,
management information systems, purchasing and facilities. Out of our total
full-time employees, 684 are employed in the United States and 15 are employed
in the United Kingdom and other European countries. None of our employees are
covered by a collective bargaining agreement. We consider relations with our
employees to be good.

Research and Development

Thoratecs research and development expenses in 2002, 2001 and 2000 were
$25.3 million, $22.1 million and $16.2 million, respectively.

Additional Information

You can find additional information about Thoratec on our website at
http://www.thoratec.com. We make filings of our periodic reports to the SEC,
including annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K, as well as amendments to those reports, available
free of charge on our website as soon as reasonably practicable following
electronic filing of those reports with the SEC.

18



---



##### Table of Contents



RISK FACTORS

We make statements in this Annual Report on Form 10-K and other statements
from time to time that relate to future plans, events or performance that are
forward-looking statements which involve risks and uncertainties. Actual
results, events or performance may differ materially from those anticipated in
any forward-looking statements as a result of a variety of factors, including
those set forth below and elsewhere in this Annual Report on Form 10-K. You
should consider each of the risks and uncertainties described in this section
and all of the other information in this Annual Report on Form 10-K in
evaluating our company and our business before deciding to invest in our common
stock.

We have a history of net losses, and we may not maintain profitability.

We were founded in 1976 and we have a history of incurring losses from
operations. As of December 28, 2002, our accumulated deficit was approximately
$32.4 million. We anticipate that our expenses will increase as a result of
increased preclinical and clinical testing, research and development and
selling, general and administrative expenses. We could also incur significant
additional costs in connection with our business development activities and the
development and marketing of new products and indicated uses for our existing
products. Such costs could prevent us from achieving or maintaining
profitability in future periods.

Since our physician and hospital customers depend on third party reimbursement, if third party payors fail to provide appropriate levels of reimbursement for our products, our operations will be harmed.

Significant uncertainty exists as to the reimbursement status of
newly-approved health care products such as VADs and vascular grafts.
Government and other third party payors are increasingly attempting to contain
health care costs. Payors are attempting to contain costs by, for example,
limiting coverage and the level of reimbursement of new therapeutic products.
Payors are also attempting to contain costs by refusing, in some cases, to
provide any coverage of uses of approved products for disease indications other
than those for which the FDA has granted marketing approval.

To date, a majority of private insurers that we have dealt with and CMS
have determined to reimburse some portion of the costs of our VADs and our
diagnostic and vascular graft products. Although HeartMate SNAP-VE recently
received FDA approval for destination therapy and an MCAC has voted that the
quality of the evidence presented to them was adequate to draw conclusions that
LVADs provide a substantially more effective net outcome in Medicare
beneficiaries comparable to patients enrolled in the REMATCH trial, CMS may
decide to not cover this indication. Also, although the TEC has determined
that the HeartMate SNAP-VE for destination therapy meets its five criteria,
some or all of the individual Blue Cross and Blue Shield plans may decide to
not cover this indication or not pay at adequate levels. We cannot, however,
estimate what portion of such costs will be reimbursed and our products may
not continue to be approved for reimbursement. In addition, changes in the
health care system may affect the reimbursability of future products. If
coverage is not expanded or if the reimbursement levels are not increased or
are partially or completely reduced, our revenues would be reduced.

If we fail to obtain approval from the FDA and from foreign regulatory authorities, we cannot market and sell our products under development in the United States and in other countries.

Before we can market new products in the United States, we must obtain
clearance from the FDA. This process is lengthy and uncertain. In the United
States, one must obtain clearance from the FDA of a 510(k) premarket
notification or approval of a more extensive submission known as a PMA
application. If the FDA concludes that any of our products does not meet the
requirements to obtain clearance under Section 510(k) of the Federal Food,
Drug, and Cosmetic Act, then we would be required to file a PMA application.
The process for a PMA application is lengthy, expensive and typically requires
extensive preclinical and clinical trial data. Preclinical data may need to be
obtained in accordance with FDA good laboratory practices.

We may not obtain clearance of a 510(k) notification or approval of a PMA
application with respect to any of our products on a timely basis, if at all.
If we fail to obtain timely clearance or approval for our products, we will not
be able to market and sell our products, harming our ability to generate
revenue. The FDA may also limit the claims that we can make about our products.
We may also be required to obtain clearance of a 510(k) notification or PMA
Supplement from the FDA before we can market products that have been cleared
that we have now modified or for which we wish to use for new indications.

The FDA also requires us to adhere to Quality System Regulations, which
include production design controls, testing, quality control, storage and
documentation procedures. The FDA may at any time inspect our facilities to
determine whether we have

19



---



##### Table of Contents



adequate compliance. Compliance with Quality System Regulations for
medical devices is difficult and costly. In addition, we may not be found to be
compliant as a result of future changes in, or interpretations of, regulations
by the FDA or other regulatory agencies. If we do not achieve compliance, the
FDA may withdraw marketing clearance, require product recall or take other
enforcement action, which in each case would harm our business. Any change or
modification in a device is required to be made in compliance with Quality
System Regulations, which may cause interruptions or delays in the marketing
and sale of our products. The FDA also requires device manufacturers to submit
reports regarding deaths, serious injuries and certain malfunctions.

Sales of our products outside the United States are subject to foreign
regulatory requirements that vary from country to country. The time required to
obtain approvals from foreign countries may be longer or shorter than that
required for FDA approval, and requirements for foreign licensing may differ
from FDA requirements.

The federal, state and foreign laws and regulations regarding the manufacture
and sale of our products are subject to future changes, as are administrative
interpretations and policies of regulatory agencies. If we fail to comply with
applicable federal, state or foreign laws or regulations, we could be subject
to enforcement actions. Enforcement actions could include product seizures,
recalls, withdrawal of clearances or approvals, and civil and criminal
penalties, which in each case would harm our business.

Physicians may not accept or continue to accept our products and products under development.

The success of our current and future products will require acceptance or
continued acceptance by cardiovascular and vascular surgeons and other medical
professionals. Such acceptance will depend on clinical results and the
conclusion by these professionals that our products are safe, cost-effective
and acceptable methods of treatment. Even if the safety and efficacy of our
future products are established, physicians may elect not to use them for a
number of reasons. These reasons could include the high cost of our VAD
systems, restrictions on coverage or unfavorable reimbursement from health care
payors. Also, economic, psychological, ethical and other concerns may limit
general acceptance of our ventricular assist, graft and other products.

We have experienced rapid growth and changes in our business, and our failure to manage this and any future growth could harm our business.

As a result of the Merger in February 2001, the number of our employees
has increased significantly, from 183 on December 30, 2000 to 699 on December
28, 2002. We expect to continue to grow and we may suffer if we do not train
our new employees quickly and effectively. Our revenues may not continue to
grow at a rate sufficient to support the costs associated with an increasing
number of employees. Any future periods of rapid growth may place significant
strains on our managerial, financial and other resources. The rate of any
future expansion, in combination with our complex technologies and products,
may demand an unusually high level of managerial effectiveness in anticipating,
planning, coordinating and meeting our operational needs as well as the needs
of our customers.

If we fail to successfully introduce new products, our future growth may suffer.

As part of our growth strategy, we intend to develop and introduce a
number of new products and product improvements. We also intend to develop new
indications for our existing products. If we do not introduce these new
products, product improvements and new indications on a timely basis, or if
they are not well accepted by the market, our future growth may suffer.

Amortization of our intangible assets, which represents a significant portion of our total assets, will adversely impact our net income and we may never realize the full value of our intangible assets.

As of December 28, 2002, we had $280.8 million of net intangible assets,
representing 60% of our total assets and 75% of our shareholders equity. These
intangible assets consist primarily of goodwill and other intangible assets
arising from our Merger and our trademarks and patented technology.
Amortization expense relating to these intangible assets for 2002 was $12.4
million. No amortization of goodwill was recorded in 2002 after we adopted
Statement of Financial Accounting Standards No. 142 at the beginning of 2002.
Ongoing amortization of purchased intangibles will reduce our future earnings
or increase our future losses.

We may not receive the recorded value for our intangible assets if we sell
or liquidate our business or assets. The material concentration of intangible
assets increases the risk of a large charge to earnings in the event that the
recoverability of these intangible assets is impaired, and in the event of such
a charge to earnings, the market price of our common stock could be adversely
affected.

20



---



##### Table of Contents



We rely on specialized suppliers and alternative suppliers may not be available.

We depend on a number of custom-designed components and materials supplied
by other companies including, in some cases, single source suppliers for
components and materials used in our VAD products and blood testing products.
We do not have long-term written agreements with most of our vendors and
receive components on a purchase order basis. If we need alternative sources
for key raw materials or component parts for any reason, such alternative
sources may not be available and our inventory may not be sufficient to fill
orders before we find alternative suppliers or begin manufacturing such
components or materials ourselves. Cessation or interruption of sales of
circulatory support products would seriously harm our business, financial
condition and results of operations.

Alternative suppliers, if available, may not agree to supply us. In
addition, we may need to obtain FDA approval before using new suppliers or
manufacturing our own components or materials. Existing suppliers could also be
subject to an FDA enforcement action, which could also disrupt our supplies. If
alternative suppliers are not available, we may not have the expertise or
resources necessary to produce such materials or component parts internally.
Any interruption in supply of materials or component parts could seriously harm
our ability to manufacture products until we locate a new supply source.

If we fail to compete successfully against our existing or potential competitors, our revenues or operating results may be harmed.

Competition from medical device companies and medical device subsidiaries
of health care and pharmaceutical companies is intense and is expected to
increase. Competitors for the VAD system include, for example, World Heart
Corporation and ABIOMED, Inc. Principal competitors in the vascular graft
market include W.L. Gore, Inc., C.R. Bard and Boston Scientific Corporation.
The principal competitors in the coagulation monitoring equipment market are
the Cardiac Surgery Division of Metronic, Inc., which markets the HemoTec
product line and Roche Holding AG. The primary competitors in the skin incision
device market are Organon Teknika B.V.; Becton, Dickson and Company; and
Owen-Mumford Ltd.

Many of our competitors have substantially greater financial, technical,
distribution, marketing and manufacturing resources than we do. Accordingly,
our competitors may be able to develop, manufacture and market products more
efficiently and at a lower cost than we can. We expect that the key competitive
factors will include the relative speeds with which we can:



| |  |  | develop products;                                      
| | - |  | -------------------------------------------------------
|
| |  |  | complete clinical testing;                             
|
| |  |  | receive regulatory approvals; and                      
|
| |  |  | manufacture and sell commercial quantities of products.

Additionally, our competitors may succeed in developing and marketing
technologies and products that are more effective than ours. Any such products
may render our technology and products obsolete or noncompetitive. In addition,
new surgical procedures and medications could be developed that replace or
reduce the importance of current procedures that use our products.

We may encounter problems manufacturing our products.

We may encounter difficulties manufacturing our products. We do not have
experience in manufacturing our products in the commercial quantities that
might be required if we receive FDA approval of several or all of the products
and indications currently under development. We have also recently transferred
the manufacturing operations for the HeartMate to Pleasanton and we expect to
receive clearance from the FDA to begin manufacturing the HeartMate in this
location in the first half of 2003. If we have difficulties manufacturing our
products, our business will be harmed.

Since we depend upon distributors, if we lose a distributor or a distributor fails to perform, our operations will be harmed.

With the exception of Canada and the larger countries in Europe, we sell
our VAD and HeartMate systems in foreign markets through distributors. In
addition, we sell our vascular access graft products through the Bard
Peripheral Vascular division of C.R. Bard Corporation, which we refer to as
Bard, in the United States, Europe and selected countries in Scandinavia, the
Middle East and Northern Africa and through Goodman Co. Ltd. in Japan. In 2002,
11% of our total product sales were through Cardinal Healthcare, a distributor
of our blood coagulation testing equipment and skin incision devices.

21



---



##### Table of Contents



To the extent we rely on distributors, our success will depend upon the
efforts of others, over which we may have little control. If we lose a
distributor or a distributor fails to perform, our revenues will be harmed.

Our inability to protect our proprietary technologies or an infringement of others patents could harm our competitive position.

We rely on patents, trade secrets, copyrights, know-how, trademarks,
license agreements and contractual provisions to establish our intellectual
property rights and protect our products. These legal means, however, afford
only limited protection and may not adequately protect our rights. In addition,
we cannot assure you that any of our pending patent applications will issue.
The PTO may deny or significantly narrow claims made under patent applications
and the issued patents, if any, may not provide us with commercial protection.
We could incur substantial costs in proceedings before the PTO or in any future
litigation to enforce our patents in court. These proceedings could result in
adverse decisions as to the validity and/or enforceability of our patents. In
addition, the laws of some of the countries in which our products are or may be
sold may not protect our products and intellectual property to the same extent
as U.S. laws, if at all. We may be unable to protect our rights in trade
secrets and unpatented proprietary technology in these countries.

Aside from the biomaterials patents, which are utilized in the Thoratec
VAD blood pump and cannulae, and one patent covering aspects of our TLC-II, the
Thoratec VAD system is not protected by any patents. We rely principally on
trade secret protection and, to a lesser extent, patents to protect our rights
to the HeartMate. We rely principally on patents to protect our coagulation
testing equipment and skin incision devices.

We seek to protect our trade secrets and unpatented proprietary
technology, in part, with confidentiality agreements with our employees and
consultants. Although it is our policy to require that all employees and
consultants sign such agreements, we cannot assure you that every person who
gains access to such information has done so. Moreover, these agreements may be
breached and we may not have an adequate remedy.

Our products may be found to infringe prior or future patents owned by
others. We may need to acquire licenses under patents belonging to others for
technology potentially useful or necessary, and such licenses may not be
available to us. We could incur substantial costs in defending suits brought
against us on such patents or in bringing suits to protect our patents or
patents licensed by us against infringement.

We have received correspondence from a third party alleging that the
textured surface of our HeartMate housing infringes certain patent rights of
such third party. In general, an owner of intellectual property can prevent
others from using such property without a license and is entitled to damages
for unauthorized usage. We have investigated the basis of the allegation and,
based upon an evaluation of all of the facts and circumstances, we believe that
we have meritorious defenses. However, we cannot be sure that our defenses
would prevail, and given the inherent uncertainties in dispute resolution, if
we were sued and the outcome was unfavorable, our results of operations or
financial condition could be seriously harmed.

Product liability claims could damage our reputation and hurt our financial results.

Our business exposes us to an inherent risk of potential product liability
claims related to the manufacturing, marketing and sale of human medical
devices. We maintain only a limited amount of product liability insurance. Our
insurance policies generally must be renewed on an annual basis. We may not be
able to maintain or increase such insurance on acceptable terms or at
reasonable costs, and such insurance may not provide us with adequate coverage
against potential liabilities. A successful claim brought against us in excess
of, or outside of, our insurance coverage could seriously harm our financial
condition and results of operations. Claims against us, regardless of their
merit or potential outcome, may also reduce our ability to obtain physician
endorsement of our products or expand our business.

If we make acquisitions or divestitures, we could encounter difficulties that harm our business.

We may acquire companies, products or technologies that we believe to be
complementary to our business. If we do so, we may have difficulty integrating
the acquired personnel, operations, products or technologies. Acquisitions may
dilute our earnings per share, disrupt our ongoing business, distract our
management and employees and increase our expenses, which could harm our

22



---



##### Table of Contents



business. We may also sell businesses or assets as part of our strategy or
if we receive offers from third parties. If we do so, we may sell an asset or
business for less than its full value.

The long and variable sales and deployment cycles for our VAD systems may cause our revenue and operating results to vary significantly, which increases the
risk of an operating loss for any given fiscal quarter.

Our VAD systems have lengthy sales cycles and we may incur substantial
sales and marketing expenses and expend significant effort without making a
sale. Even after making the decision to purchase our VAD systems, our customers
often deploy our products slowly. For example, the length of time between
initial contact with cardiac surgeons and the purchase of our VAD systems is
generally between nine and eighteen months. As a result, it is difficult for us
to predict the quarter in which our customers may purchase our VAD systems and
our revenue and operating results may vary significantly from quarter to
quarter, which increases the risk of an operating loss for us for any given
quarter.

Our non-U.S. sales present special risks.

During 2002, sales originating outside the United States and U.S. export
sales accounted for approximately 18% of our total revenues. For 2001, sales
originating outside the United States and U.S. export sales accounted for
approximately 20% of our total revenues. We anticipate that sales outside the
United States and U.S. export sales will continue to account for a significant
percentage of our revenues and we intend to continue to expand our presence in
international markets. Non-U.S. sales are subject to a number of special risks.
For example:



| |  |  | we generally sell many of our products at a lower price outside the United States;                                                                                                                
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | agreements may be difficult to enforce;                                                                                                                                                           
|
| |  |  | receivables may be difficult to collect through a foreign countrys legal system;                                                                                                                 
|
| |  |  | foreign customers may have longer payment cycles;                                                                                                                                                 
|
| |  |  | foreign countries may impose additional withholding taxes or
otherwise tax our foreign income, impose tariffs or adopt other
restrictions on foreign trade;                                       
|
| |  |  | U.S. export licenses may be difficult to obtain;                                                                                                                                                  
|
| |  |  | intellectual property may be more difficult to enforce in foreign countries;                                                                                                                      
|
| |  |  | terrorist activity may interrupt distribution channels or impact our customers or employees; and                                                                                                  
|
| |  |  | fluctuations in exchange rates may affect product demand and
adversely affect the profitability, in U.S. dollars, of products sold in
foreign markets where payments are made in local currencies.

Any of these events could harm our operations.

Any claims relating to improper handling, storage or disposal of hazardous
chemicals and biomaterials could be time consuming and costly.

Producing our products requires the use of hazardous materials, including
chemicals and biomaterials. We cannot eliminate the risk of accidental
contamination or discharge and any resultant injury from these materials.

We could be subject to civil damages in the event of an improper or
unauthorized release of, or exposure of individuals to, hazardous materials. In
addition, claimants may sue us for injury or contamination that results from
our use or the use by third parties of these materials, and our liability may
exceed our total assets. Compliance with environmental laws and regulations may
be expensive, and current or future environmental regulations may impair our
research, development or production efforts.

23



---



##### Table of Contents



Our stock price has been volatile and is likely to continue to be volatile.

The price of our common stock has been, and is likely to continue to be,
highly volatile, which means that it could decline substantially. The price of
our common stock could fluctuate significantly for the following reasons:



| |  |  | future announcements concerning us or our competitors;                                                                                                           
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | timing and reaction to the publication of clinical trial results;                                                                                                
|
| |  |  | quarterly variations in operating results;                                                                                                                       
|
| |  |  | charges, amortization and other financial effects relating to our Merger;                                                                                        
|
| |  |  | introduction of new products or changes in product pricing policies by us or our competitors;                                                                    
|
| |  |  | acquisition or loss of significant customers, distributors or suppliers;                                                                                         
|
| |  |  | business acquisitions or divestitures;                                                                                                                           
|
| |  |  | changes in earnings estimates by analysts;                                                                                                                       
|
| |  |  | changes in third party reimbursement practices;                                                                                                                  
|
| |  |  | regulatory developments, enforcement actions bearing on advertising,
marketing or sales, and disclosure regarding completed ongoing or future
clinical trials; or
|
| |  |  | fluctuations in the economy, world political events or general market
conditions.                                                                                

In addition, stock markets in general, and the market for shares of health
care stocks in particular, have experienced extreme price and volume
fluctuations in recent years which have frequently been unrelated to the
operating performance of the affected companies. These broad market
fluctuations may adversely affect the market price of our common stock. The
market price of our common stock could decline below its current price and the
market price of our stock may fluctuate significantly in the future. These
fluctuations may be unrelated to our performance.

In the past, shareholders have often instituted securities class action
litigation after periods of volatility in the market price of a companys
securities. If a shareholder files a securities class action suit against us,
we would incur substantial legal fees and our managements attention and
resources would be diverted from operating our business in order to respond to
the litigation.

Future issuances and sales of our stock could dilute shareholder ownership and
cause our stock price to decline.

Future sales of substantial amounts of our stock in the public market, or
the perception that such sales could occur, could adversely affect the market
price of our stock. Sale of our shares and the potential for such sales, could
cause our stock price to decline.

The occurrence of a catastrophic disaster or other similar events could cause
damage to our facilities and equipment, which would require us to cease or
curtail operations.

We are vulnerable to damage from various types of disasters, including
earthquake, fire, terrorist acts, flood, power loss, communications failures
and similar events. For example, in October 1989, a major earthquake that
caused significant property damage and a number of fatalities struck near the
area in which our Pleasanton facility is located. If any disaster were to
occur, we may not be able to operate our business at our facilities, which
could seriously harm our business and operations. The insurance we maintain may
not be adequate to cover our losses resulting from disasters or other business
interruptions.

Fluctuations in foreign currency exchange rates could result in declines in our
reported sales and earnings.

Since our international sales are denominated in local currencies and not
in U.S. dollars, our reported sales and earnings are subject to fluctuations in
foreign exchange rates. At present, we do not engage in hedging transactions to
protect against uncertainty in future exchange rates between particular foreign
currencies and the U.S. dollar.

24



---



##### Table of Contents



The competition for qualified personnel is particularly intense in our
industry. If we are unable to retain or hire key personnel, we may not be able
to sustain or grow our business.

Our ability to operate successfully and manage our potential future growth
depends significantly upon retaining key research, technical, sales, marketing,
managerial and financial personnel, and attracting and retaining additional
highly qualified personnel in these areas. We face intense competition for such
personnel, and we may not be able to attract and retain these individuals. We
compete with numerous companies, as well as universities and nonprofit research
organizations throughout all our locations. The loss of key personnel for any
reason or our inability to hire and retain additional qualified personnel in
the future could prevent us from sustaining or growing our business. Our
success will depend in large part on the continued services of our research,
managerial and manufacturing personnel. We cannot assure you that we will
continue to be able to attract and retain sufficient qualified personnel.

Arthur Andersen LLP audited certain financial information included or
incorporated in this report. In the event such financial information is
later determined to contain false statements, you may be unable to recover
damages from Arthur Andersen LLP.

Our consolidated statements of income, comprehensive income, shareholders
equity and cash flows and associated information contained in the footnotes to
these financial statements for the 2000 fiscal year were audited by Arthur
Andersen LLP. In 2002, Arthur Andersen ceased operations and we are unable to
obtain their consent to the incorporation by reference of its report on such
financial statements, dated February 5, 2001, into this Form 10-K. As a
result, you may be limited in your ability to recover damages from Arthur
Andersen under Section 11 of the Securities Act of 1933 if it is later
determined that there are false statements contained in or incorporated by
reference into any portions of this report that have been prepared in
reliance on financial statements audited by Arthur Andersen.




Item 2.Properties

We are headquartered in Pleasanton, California, where we lease
approximately 73,000 square feet of commercial space and 5,000 square feet of
warehouse space. Our leases for these facilities expire through 2012.
Additionally, we lease the following facilities:



| |  |  | Approximately 11,000 square feet of office and research facilities in
Rancho Cordova, California expiring in 2002,            
| | - |  | ------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Approximately 47,000 square feet of office, manufacturing and
research facilities in Edison, New Jersey expiring through 2017,
|
| |  |  | Approximately 3,800 square feet of office facilities in the United Kingdom expiring in 2008, and                              
|
| |  |  | Approximately 34,000 square feet of space in Woburn, Massachusetts under a sublease expiring in 2004.                         

We also own approximately 66,000 square feet of office, manufacturing and
research facilities in Edison, New Jersey.

Each of our manufacturing areas have been inspected, approved and licensed
for the manufacture of medical devices by the FDA. Additionally, the Pleasanton
facility is subject to inspections, approvals and licensing by the State of
California Department of Health Services (Food and Drug Section). The Edison
facility is subject to inspections, approvals and licensing by State of New
Jersey Department of Health.

We believe our facilities will be sufficient for the next two years and
that additional space will be available at a reasonable price to satisfy space
needs thereafter.




Item 3.Litigation

We are not a party to any material legal proceedings.




Item 4.Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the quarter
ended December 28, 2002.

25



---



##### Table of Contents



Our Officers

D.     Keith Grossman,* President, Chief Executive Officer and Director,
joined our company as President and Chief Executive Officer in January 1996. He
was elected to the Board of Directors in February 1996. Prior to joining us,
Mr. Grossman was a Division President of Major Pharmaceuticals, Inc., from June
1992 to September 1995, at which time it was sold. From July 1988 to June 1992,
Mr. Grossman served as the Vice President of Sales and Marketing for Calcitek,
Inc., a manufacturer of implantable medical devices, and division of
SulzerMedica formerly Intermedics, Inc. Prior to 1988, Mr. Grossman held
various other sales and marketing management positions within the McGaw
Laboratories Division of American Hospital Supply Corporation.

M.     Wayne Boylston,* Senior Vice President, Chief Financial Officer and
Secretary,became our Senior Vice President, Chief Financial Officer and
Secretary in August 2001. Prior to joining us, Mr. Boylston was Chief Financial
Officer at Flashcom, Inc., a provider of broadband communications services.
Flashcom filed for bankruptcy protection in December 2000. From July 1998 until
March 2000, Mr. Boylston served as Executive Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary of iXL Enterprises, Inc., an
Internet consulting service provider. From 1995 until 1998, Mr. Boylston served
as Vice President  Finance, Chief Financial Officer and Treasurer of
Healthdyne Technologies, Inc., a medical device manufacturer. Prior to 1995,
Mr. Boylston held a variety of financial management positions with Healthdyne,
Inc., a diversified health care products and services company. Mr. Boylston is
a Certified Public Accountant.

Lawrence
Cohen,* President of ITC,joined our company in May 2001 as
President of ITC. Prior to joining ITC, Mr. Cohen served as CEO of HemoSense,
Inc., a developer of medical diagnostic products, from August 1998 to April
2000. From October 1989 to March 1998, Mr. Cohen held the positions of Vice
President Marketing and Sales, Vice President International and Worldwide
Executive Vice President at Ortho-Clinical Diagnostics, a Johnson & Johnson
company. From 1980 to 1989, Mr. Cohen has also held executive management
positions at Instrumentation Laboratory and Beckman Coulter Corporation. He is
a past president of the Biomedical Marketing Association and is currently on
the Board of Trustees of the National Blood Foundation.

Jeffrey W. Nelson,* President  Cardiovascular Division,joined our
company as President  Cardiovascular Division in August 2002. Prior to joining
us, Mr. Nelson was at Philips Medical Systems (formerly ADAC Laboratories)
where he spent the past eight years, most recently as general manager of the
companys nuclear medicine division. He also served as a senior vice president
of North American sales and general manager of ADAC Radiology Solutions and
held business unit and regional sales and marketing positions at the company.
Before that, he was a marketing manager for Syncor International Corporation,
an associate at Cerulean Venture Fund and was in sales with Baxter Healthcare
International.

David J. Farrar, Ph.D., Vice President  Research and Development,joined
our company as Program Manager of our circulatory support products in January
1980 and became Vice President  Circulatory Support Products in 1988, and Vice
President  Research & Development in 1996. In addition, Dr. Farrar has a
research appointment in the Department of Cardiac Surgery at the California
Pacific Medical Center of San Francisco. Dr. Farrar has over 20 years of
research experience in the cardiovascular and medical device industry.

Bradley D. Goskowicz, Vice President  Sales and Marketing,joined our
company as Vice President, Sales and Marketing in January 2001. Prior to
joining our company, Mr. Goskowicz was Director of Marketing in the Cardiac
Surgery Division of Medtronic, Inc. where he was responsible for directing,
developing and implementing marketing strategies for a broad line of
cardiovascular surgery products worldwide. He joined Medtronic in March 1999,
as part of Medtronics acquisition of Avecor Cardiovascular, and was one of the
original Directors when Avecor Cardiovascular was formed in 1991. Before
assuming the role of Director of Marketing, he held the position of Director of
Sales. Prior to 1991 Mr. Goskowicz held various sales and marketing positions
with Bio-Medicus, Inc., Medtronic, Inc. and Johnson & Johnson.

Jeffrey C. Mack, Vice President  Finance,joined our company as
Controller in 1996. He became Director of Finance and Corporate Controller in
September 1999 and Vice President of Finance in September 2000. Prior to
joining our company, he served as Director of Finance and Corporate Controller
for The North Face, a designer and manufacturer of outdoor apparel and
equipment. He also held various other financial and operational positions with
Kenetech Corporation, a manufacturer and operator of utility grade wind
turbines, and Deloitte & Touche, LLP. Mr. Mack is a Certified Public
Accountant.



---

|* |  | Denotes executive officer as of the date of this report.
|- |  | --------------------------------------------------------

26



---



##### Table of Contents



Donald A. Middlebrook, Vice President  Regulatory Affairs/Quality
Assurance,joined our company as Vice President  Regulatory Affairs/Quality
Assurance in September 1996. Before joining our company, he held the position
of Senior Director, Global Regulatory Affairs and Assurance for Chiron Vision
Corporation, a manufacturer of implantable ophthalmic devices and surgical
equipment. Prior to that, Mr. Middlebrook spent fifteen years with Baxter
International in a number of positions, including Vice President of Regulatory
Affairs and Quality Assurance for the CardioVascular Group, a producer of a
wide range of cardiopulmonary, critical care, vascular and cardiovascular
products.

Victor Poirier, Chief Technology Advisor,joined our company in February
2001. Prior to joining us, Mr. Poirier was President and Director of Thermo
Cardiosystems from 1998 to 2001, and Chief Executive Officer, President and
Director of Thermo Cardiosystems from 1990 to 1998. Prior to that, Mr. Poirier
was Executive Vice President of Thermo Cardiosystems and Sr. Vice President of
Thermedics from 1984 to 2000. Mr. Poirier has more than 40 years of research
experience in the cardiovascular industry.

Joseph G. Sharpe, Vice President  Operations,joined our company as Vice
President  Operations in September 1997. Prior to joining us, Mr. Sharpe was
Director of Operations for the IV Systems Division of Baxter International,
Inc. from 1992 to September 1997. Prior to that, Mr. Sharpe held a number of
other positions at Baxter International, Inc. including Director of Engineering
of the Pharmaseal Division, and Honeywell Information Systems.

Jon R. Shear, Vice President  Business Development, joined our company as
Vice President  Business Development in August 2002. Prior to joining us, Mr.
Shear spent the past 13 years with St. Jude Medical Inc. where he was a senior
member of the corporate business and technology development function from July
2001 to August 2002 and, prior to that, Director of Healthcare Services
Contracting and Business Development Manager for the Cardiac Surgery Division.
In addition, Mr. Shear also held a variety of marketing and finance management
positions at St. Jude Medical Inc., American Express Financial Advisors and
Stirtz Bernards & Company.

Beth A. Taylor, Vice President  Human Resources,joined our company as
Director of Human Resources in November 1999 and became Vice President of Human
Resources in February 2001. Prior to joining our company, Ms. Taylor served as
Director of Human Resources for CCI/Triad. She has also held various other
human resource positions such as Corporate Employee Development Manager with
Valent U.S.A. Corporation, and as Director of Human Resources with Automatic
Data Processing, Inc.

27



---



##### Table of Contents






PART II




Item 5.Market for Common Equity and Related Stockholder Matters

Our common stock is traded on the NASDAQ National Market under the symbol
THOR. The following table sets forth, for the periods indicated, the high and
low closing sales price per share of our common stock, as reported by the
NASDAQ National Market. As of March 11, 2002 there 55,051,485 shares of our
common stock outstanding with approximately 900 holders of record, including
multiple beneficial holders at depositories, banks, and brokerages listed as a
single holder in the street name of each respective depository, bank, or
broker.

|                 |                |  |      |       |     |  |   |       | 
|---------------- | -------------- |  | ---- | ----- | --- |  | - | ----- | 
|                 |                |  | High |       | Low
|                 |                |  |      |       |    
|Fiscal Year 2001 |                |  |      |       |     |  |   |      
|                 | First Quarter  |  | $    | 12.88 |     |  | $ | 7.09  | 
|                 | Second Quarter |  |      | 15.55 |     |  |   | 6.56  | 
|                 | Third Quarter  |  |      | 20.02 |     |  |   | 13.77 | 
|                 | Fourth Quarter |  | $    | 20.85 |     |  | $ | 15.67 | 
|                
|Fiscal Year 2002 |                |  |      |       |     |  |   |      
|                 | First Quarter  |  | $    | 19.35 |     |  | $ | 10.24 | 
|                 | Second Quarter |  |      | 11.46 |     |  |   | 7.80  | 
|                 | Third Quarter  |  |      | 8.24  |     |  |   | 5.55  | 
|                 | Fourth Quarter |  | $    | 9.65  |     |  | $ | 6.40  | 

We have not declared or paid any dividends on our common stock and we
anticipate that for the foreseeable future we will continue to retain our
earnings for use in our business.

28



---



##### Table of Contents






Item 6.Selected Consolidated Financial Data

The selected consolidated financial data presented below for the five
fiscal years ended December 28, 2002 is derived from audited financial
statements. The data set forth below should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of
Operations and our financial statements and related notes thereto appearing
elsewhere in this Annual Report, the consolidated financial statements of TCA
filed with the SEC on Form 8-K/A on March 30, 2001 and on Form 10-K on March
17, 2000 and March 12, 1999. Certain reclassifications have been made to the
financial statements previously filed with the SEC to conform to current
practice.

The Merger of Thoratec with TCA was completed on February 14, 2001. We
issued new shares of our common stock to the shareholders of TCA in exchange
for all the outstanding common stock of TCA at an exchange ratio of 0.835
shares of Thoratec stock for each share of TCA. The Merger was accounted for as
a reverse acquisition because former shareholders of TCA owned a majority of
our outstanding stock subsequent to the Merger. For accounting purposes, TCA is
deemed to have acquired Thoratec and therefore for fiscal years 1998, 1999 and
2000 all financial information presented herein represents the results of
operations of TCA. Our 2001 consolidated financial information presented herein
includes the financial results of TCA for the full fiscal year and Thoratecs
financial results for the post-merger period from February 14, 2001 through
December 29, 2001. The weighted average number of common shares previously
reported by TCA has been adjusted for all periods presented to reflect the
exchange ratio of 0.835 to 1.

Our fiscal year ends on the Saturday closest to December 31. Accordingly,
our fiscal year will periodically contain more or less than 365 days. For
example, 1998 ended on January 1, 1999, 1999 ended on December 31, 1999, 2000
ended on December 30, 2000, 2001 ended on December 29, 2001 and 2002 ended
December 28, 2002.

|                                                         |  |             |         |      |  |                                       |         |          |  |          |         |  |  |   |         |  |  |   |         | 
|-------------------------------------------------------- |  | ----------- | ------- | ---- |  | ------------------------------------- | ------- | -------- |  | -------- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                                         |  | Fiscal Year
|                                                         |  |            
|                                                         |  | 2002        |         | 2001 |  | 2000 (a)                              |         | 1999 (a) |  | 1998 (a)
|                                                         |  |             |         |      |  |                                       |         |          |  |         
|                                                         |  |             |         |      |  | (In thousands, except per share data) |         |          |  |         
|Statement of Operations:                                 |  |             |         |      |  |                                       |         |          |  |          |         |  |  |   |         |  |  |   |         | 
|Product sales                                            |  | $           | 130,844 |      |  | $                                     | 113,384 |          |  | $        | 83,396  |  |  | $ | 78,611  |  |  | $ | 65,301  | 
|Gross profit                                             |  |             | 75,720  |      |  |                                       | 60,544  |          |  |          | 48,566  |  |  |   | 45,285  |  |  |   | 38,244  | 
|Amortization of goodwill and purchased
intangible assets |  |             | 12,384  |      |  |                                       | 15,674  |          |  |          |        |  |  |   |        |  |  |   |        | 
|In-process research and development                      |  |             |       |      |  |                                       | 76,858  |          |  |          |        |  |  |   |        |  |  |   |        | 
|Merger, restructuring and other costs                    |  |             | 1,409   |      |  |                                       | 7,134   |          |  |          | 1,831   |  |  |   |        |  |  |   |        | 
|Net income (loss)                                        |  |             | 511     |      |  |                                       | (87,866 | )        |  |          | 7,524   |  |  |   | 9,584   |  |  |   | 7,820   | 
|Basic and diluted earnings (loss) per share              |  | $           | 0.01    |      |  | $                                     | (1.68   | )        |  | $        | 0.23    |  |  | $ | 0.30    |  |  | $ | 0.24    | 
|Balance Sheet Data:                                      |  |             |         |      |  |                                       |         |          |  |          |         |  |  |   |         |  |  |   |         | 
|Cash and cash equivalents                                |  | $           | 42,044  |      |  | $                                     | 91,726  |          |  | $        | 30,236  |  |  | $ | 418     |  |  | $ | 42,026  | 
|Working capital                                          |  |             | 107,972 |      |  |                                       | 135,924 |          |  |          | 149,207 |  |  |   | 115,471 |  |  |   | 98,904  | 
|Total assets                                             |  |             | 468,432 |      |  |                                       | 530,241 |          |  |          | 176,685 |  |  |   | 169,928 |  |  |   | 172,363 | 
|Subordinated convertible debentures                      |  |             |       |      |  |                                       | 54,838  |          |  |          | 54,838  |  |  |   | 58,011  |  |  |   | 70,000  | 
|Long-term deferred tax liability and other               |  |             | 75,454  |      |  |                                       | 81,020  |          |  |          |        |  |  |   |        |  |  |   |        | 
|Total shareholders equity                               |  | $           | 374,340 |      |  | $                                     | 373,343 |          |  | $        | 105,869 |  |  | $ | 96,940  |  |  | $ | 88,714  | 



---

|(a) |  | Our financial statements for 1998-2000 were audited by Arthur Andersen LLP, who have ceased operations.
|--- |  | -------------------------------------------------------------------------------------------------------

29



---



##### Table of Contents






|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|Item 7. |  | Managements Discussion and Analysis of Financial Condition and
Results of Operations

The statements in Managements Discussion and Analysis of Financial
Condition and Results of Operations that relate to future plans, events or
performance are forward-looking statements which involve risks and
uncertainties. These factors, and others, are discussed more fully in Item 1
above and our other filings with the SEC. Actual results, events or performance
may differ materially from those anticipated in these forward-looking
statements as a result of a variety of factors, including those set forth in
Risk Factors presented in Item 1 above in this Annual Report on Form 10-K.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. We undertake no obligation
to publicly release the result of any revisions to these forward-looking
statements that may be needed to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.

Overview

We are a leading manufacturer of circulatory support products for use by
patients with congestive heart failure, or CHF. According to the American Heart
Association, 4.9 million patients in the United States suffer from CHF and an
additional 550,000 patients are diagnosed with this disease annually. We were
the first company to receive FDA approval to commercially market a ventricular
assist device, or VAD, to treat patients with late-stage heart failure, which
comprises approximately 5% to 10% of the CHF patient population. Our VADs are
used primarily by these CHF patients to perform some or all of the pumping
function of the heart and we currently offer the widest range of products to
serve this market. We believe that our long-standing reputation for quality and
innovation and our excellent relationships with leading cardiovascular surgeons
worldwide position us to capture growth opportunities in the expanding
congestive heart failure market. We also develop and sell products that are
used by physicians and hospitals for vascular and diagnostic applications that
include vascular grafts, blood coagulation testing and skin incision devices.
We conduct business both domestically and internationally.

The Merger with Thermo Cardiosystems

The Merger of Thoratec with TCA was completed on February 14, 2001. We
issued new shares of our common stock to the shareholders of TCA in exchange
for all the outstanding common stock of TCA at an exchange ratio of 0.835
shares of Thoratec stock for each share of TCA stock. The Merger was accounted
for as a reverse acquisition because former shareholders of TCA owned a
majority of our outstanding stock subsequent to the Merger. For accounting
purposes, TCA is deemed to have acquired Thoratec and, therefore, for fiscal
year 2000 all financial information presented herein represents the results of
operations of TCA.

Our 2001 consolidated financial information presented herein includes the
financial results of TCA for the full fiscal year and Thoratecs financial
results for the post-merger period from February 14, 2001 through December 29,
2001.

Restructuring Plan

In June 2001, we approved a plan to consolidate all of our VAD
manufacturing operations to our manufacturing facilities and headquarters in
Pleasanton, California, which we called the Restructuring Plan. This
Restructuring Plan specifically provided for the reduction of approximately 90
of our manufacturing and related workforce at our Woburn and Chelmsford,
Massachusetts facilities, both of which were acquired in the Merger in February
2001. We notified the affected employees during the second quarter of 2001 both
through direct personal contact and written notification. The Chelmsford
facility was closed in February 2002. Our HeartMate family of products, which
were manufactured at the Woburn facility, were transitioned to the Pleasanton
facility. We completed the Restructuring Plan in the first quarter of 2003.
Through December 28, 2002, we have recorded $1.6 million of restructuring
charges, in accordance with Emerging Issues Task Force (EITF) 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity, and Staff Accounting Bulletin (SAB) 100, Restructuring and
Impairment Charges. These charges represent estimated severance costs and
stock option acceleration charges. As of December 28, 2002, we have paid
approximately $0.7 million in severance payments to 47 employees related to the
restructuring. We expect to pay out the remaining accrued restructuring charges
of $0.7 million in the first half of 2003.

30



---



##### Table of Contents



Results of Operations

The following table sets forth selected consolidated statements of
operations data for the years indicated as a percentage of total product sales:

|                                                         |                          |  |             |    |      |  |      |     |  |  |     |    | 
|-------------------------------------------------------- | ------------------------ |  | ----------- | -- | ---- |  | ---- | --- |  |  | --- | -- | 
|                                                         |                          |  | Fiscal Year
|                                                         |                          |  |            
|                                                         |                          |  | 2002        |    | 2001 |  | 2000
|Product sales                                            |                          |  | 100         | %  |      |  | 100  | %   |  |  | 100 | % 
|Cost of product sales                                    |                          |  | 42          |    |      |  | 47   |     |  |  | 42  |   
|                                                         |                          |  |             |    |      |  |      |     |  |  |     |   
|Gross profit                                             |                          |  | 58          |    |      |  | 53   |     |  |  | 58  |   
|                                                         |                          |  |             |    |      |  |      |     |  |  |     |   
|Operating expenses:                                      |                          |  |             |    |      |  |      |     |  |  |     |   
|Selling, general & administrative                        |                          |  | 29          |    |      |  | 29   |     |  |  | 28  |   
|Research & development                                   |                          |  | 19          |    |      |  | 19   |     |  |  | 20  |   
|Amortization of purchased intangible assets              |                          |  | 10          |    |      |  | 10   |     |  |  |    |   
|Amortization of goodwill                                 |                          |  |           |    |      |  | 4    |     |  |  |    |   
|In-process research and development                      |                          |  |           |    |      |  | 68   |     |  |  |    |   
|Merger, restructuring and other costs                    |                          |  | 1           |    |      |  | 6    |     |  |  | 2   |   
|                                                         |                          |  |             |    |      |  |      |     |  |  |     |   
|                                                         | Total operating expenses |  |             | 59 |      |  |      | 136 |  |  |     | 50 | 
|Income (loss) from operations                            |                          |  | (1          | )  |      |  | (83  | )   |  |  | 8   |   
|Interest and other income  net                          |                          |  | 2           |    |      |  | 2    |     |  |  | 6   |   
|                                                         |                          |  |             |    |      |  |      |     |  |  |     |   
|Income (loss) before income taxes and extraordinary item |                          |  | 1           |    |      |  | (81  | )   |  |  | 14  |   
|Income tax expense (benefit)                             |                          |  |           |    |      |  | (3   | )   |  |  | 5   |   
|                                                         |                          |  |             |    |      |  |      |     |  |  |     |   
|Income (loss) before extraordinary item                  |                          |  | 1           |    |      |  | (78  | )   |  |  | 9   |   
|Extraordinary item  net of tax                          |                          |  |           |    |      |  |     |     |  |  |    |   
|                                                         |                          |  |             |    |      |  |      |     |  |  |     |   
|Net income (loss)                                        |                          |  | 1           | %  |      |  | (78  | )%  |  |  | 9   | % 
|                                                         |                          |  |             |    |      |  |      |     |  |  |     |   

Fiscal Years 2002 and 2001

Product Sales

Product sales in 2002 were $130.8 million compared to $113.4 million in
2001, an increase of $17.4 million or 15%. This increase was primarily
attributable to an increase in VAD product sales of $10.5 million resulting
from higher unit sales and average selling prices, an increase in vascular
graft product sales of $2.1 million due to higher unit sales, and an increase
in ITC sales of $4.8 million. Product sales in 2001 included Thoratec sales
for the post-merger period from February 14, 2001 through December 29, 2001
whereas product sales in 2002 included Thoratec sales for the full 12 months of
2002.

The increase in ITC sales $4.8 million was primarily due to increases in
sales of our blood coagulation testing products of $4.4 million and our skin
incision products of $0.4 million.

Gross Profit

Gross profit in 2002 was $75.7 million, representing approximately 58% of
product sales, compared to $60.5 million, representing approximately 53% of
product sales in 2001. This increase in gross profit as a percentage of sales
was primarily due to higher average selling prices for our VAD products and
lower manufacturing and product service costs as a percentage of sales in 2002
compared to 2001.

Selling, General and Administrative

Selling, general, and administrative expenses in 2002 were $37.4 million,
or 29% of product sales, compared to $32.3 million, or 29% of revenues, in
2001. While selling, general and administrative expenses were consistent as a
percentage of revenues from period to period, they increased as a result of
promotional activities, new product introductions and costs to expand markets
for our blood coagulation testing equipment and VADs as well as higher
insurance costs, costs associated with computer systems installed in 2002 and
business development activities.

31



---



##### Table of Contents



Research and Development

Research and development expenses in 2002 were $25.3 million, or 19% of
product sales, compared to $22.1 million, or 19% of product sales, in 2001.
This increase resulted from an increase in spending for certain VAD product
development programs partially offset by lower spending related to the REMATCH
trials.

Amortization of Purchased Intangible Assets

Amortization of purchased intangible assets in 2002 was $12.4 million
compared to $11.3 million in 2001. As of December 28, 2002, intangible assets
of $207.0 million have been recorded as a result of our Merger and are being
amortized over their estimated useful lives of eight to twenty years. In
accordance with SFAS No. 142, at the beginning of 2002 we reclassified our
purchased intangible asset related to acquired workforce in the net amount of
$1.3 million to goodwill and ceased amortization of that asset. The increase in
the amortization of purchased intangible assets from 2001 is due to the
inclusion of a full year of amortization in 2002 compared to only ten months of
amortization in 2001.

Amortization of Goodwill

Amortization of goodwill in 2001 was $4.4 million. Beginning in 2002, we
have stopped amortizing goodwill in accordance with SFAS No. 142.

In-process Research and Development Costs

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

One of the projects was completed in 2001. There have been no significant
developments subsequent to the Merger related to the current status of any of
the remaining IPR&D projects that would result in material changes to the
assumptions or resulting valuation performed at the time of the Merger.
Development of the IPR&D products continues and while the timing of completion
of these projects may vary due to the highly regulated and technical nature of
our products, current estimates remain materially consistent with our initial
estimates.

There can be no assurances that we will be able to complete the
development of these products on a timely basis. Failure to complete these
projects could have an adverse impact on our financial condition or results of
operations.

Merger, Restructuring and Other Costs

Merger, restructuring and other charges in 2002 were $1.4 million compared
to $7.1 million in 2001. The 2002 amount included costs consisting mainly of
executive waiver agreement costs of $0.4 million, restructuring costs of $0.5
million representing estimated severance costs related to the consolidation of
our VAD manufacturing operations, and other costs of $0.5 million related to
the termination of a European distribution agreement. The 2001 amount included
employee severance of $2.8 million, executive waiver agreement costs of $0.7
million, consulting, accounting and legal expenses of $1.8 million,
restructuring costs of $1.1 million, representing estimated severance costs
related to the consolidation of our VAD manufacturing operations, and costs of
$0.7 million related to the events of September 11, 2001.

Interest and Other Income  Net

Interest and other income  net in 2002 was $2.1 million compared to $2.4
million in 2001. This decrease was primarily due to a decrease of $3.2 million
in interest income caused by both lower cash balances and a reduction in
interest rates during 2002. The decrease in interest income was partially
offset by a reduction of interest expense due to the redemption of our
subordinated convertible debentures in the first quarter of 2002 and an
increase in other income primarily related to foreign currency translation
gains.

32



---



##### Table of Contents



Income Taxes

Our effective tax provision rate was 42% in 2002 compared to an effective
tax benefit rate of 4% in 2001. For 2002, the effective tax provision rate
exceeded the federal statutory income tax rate primarily due to the impact of
state income taxes. Our effective tax benefit rate for 2001 differed from the
statutory federal income tax rate primarily due to the impact on the reported
net loss of nondeductible expenses related to our Merger with TCA, including
the write-off of IPR&D costs, the amortization of goodwill and other
nondeductible merger transaction costs.

Extraordinary Item

In 2002, we recorded an extraordinary loss of $0.3 million, net of a tax
benefit of $0.2 million, as a result of the redemption of our 4.75%
subordinated convertible debentures. The extraordinary loss related to the
write-off of the capitalized debt issuance costs associated with the
debentures. There was no extraordinary item in 2001.

Fiscal Years 2001 and 2000

Product Sales

Product sales in 2001 were $113.4 million compared to $83.4 million in
2000, an increase of $30.0 million or 36%. This increase was primarily
attributable to the addition of Thoratec product sales of $34.7 million as a
result of our Merger and an increase in ITC sales of $1.2 million, partially
offset by a $5.9 million reduction in sales of HeartMate products due primarily
to significant distractions and uncertainties among TCAs sales force during
the first and second quarters of 2001 while the Merger was being closed and the
companies were being integrated.

The impact of the reduction in HeartMate sales was principally in the VAD
domestic market because we use employees to sell these products domestically
compared to the international markets where distributors are primarily used.
Domestic sales of the HeartMate in 2001 were $7.4 million lower than the
previous year, partially offset by a $1.5 million increase in sales of the
HeartMate internationally. The decrease in domestic HeartMate sales in 2001 was
also attributable, in part, to fluctuations in the VAD market as customers used
existing inventories to address their implantation needs.

The increase in ITC sales of $1.2 million was primarily due to increases
in sales of our blood coagulation testing products of $1.9 million partially
offset by a decrease in sales of our skin incision products of $0.7 million.

Gross Profit

Gross profit in 2001 was $60.5 million, representing approximately 53% of
product sales, compared to $48.6 million, representing approximately 58% of
product sales in 2000. This decrease in gross profit as a percentage of sales
was primarily due to a lower proportion of domestic sales to total product
sales as our products that are sold in the United States generally have a
higher gross profit than those sold in the rest of the world. In addition,
production costs for the HeartMate product line were higher in 2001 due to $1.4
million of employee retention and plant relocation costs and $0.4 million of
write-offs of product inventory related to the HeartMate pneumatic driver,
which was discontinued in the second half of 2001.

In addition, approximately 1% of our decrease in gross profit as a
percentage of sales was attributable to a lower gross profit on ITCs products.
This decrease was primarily due to lower average selling prices of our skin
incision products because of increased market competition.

Selling, General and Administrative

Selling, general, and administrative expenses in 2001 were $32.3 million,
or 29% of product sales, compared to $23.6 million, or 28% of revenues, in
2000. This increase resulted from the addition of Thoratecs selling, general
and administrative expenses of $12.0 million as a result of our Merger, offset
by lower employee related expenses due to personnel reductions primarily in the
sales and marketing areas since the Merger.

33



---



##### Table of Contents



Research and Development

Research and development expenses in 2001 were $22.1 million, or 19% of
product sales, compared to $16.2 million, or 19% of product sales, in 2000.
This increase resulted from the addition of Thoratecs research and development
expenses of $8.0 million as a result of our Merger, offset by a decrease in
clinical trial and other costs related to the TLC-II, Aria graft and REMATCH
trials and various other research and development projects.

Amortization of Purchased Intangible Assets

Amortization of purchased intangible assets in 2001 was $11.3 million. All
recorded purchased intangible assets relate to the Merger of Thoratec and TCA
in February 2001.

Amortization of Goodwill

Amortization of goodwill assets in 2001 was $4.4 million. All recorded
goodwill relates to the Merger of Thoratec and TCA in February 2001.

In-process Research and Development Costs

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

Merger, Restructuring and Other Costs

Merger, restructuring and other charges in 2001 were $7.1 million compared
to $1.8 million in 2000. The 2001 charges included costs consisting mainly of
employee severance of $2.8 million, executive waiver agreement costs of $0.7
million, consulting, accounting and legal expenses of $1.8 million,
restructuring costs of $1.1 million, representing estimated severance costs
related to the consolidation of our VAD manufacturing operations, and costs of
$0.7 million related to the events of September 11, 2001. The 2000 charges
consisted of pre-merger retention costs for TCA employees of $1.8 million.

Interest and Other Income  Net

Interest and other income  net in 2001 was $2.4 million compared to $5.0
million in 2000. This decrease was due to a $2.5 million reduction in interest
income caused by both lower cash balances and a reduction in interest rates.

Income Taxes

Our effective tax benefit rate was 4% in 2001 compared to an effective tax
provision rate of 39% in 2000. Our effective tax benefit rate for 2001 differed
from the statutory federal income tax rate primarily due to the impact on the
reported net loss of nondeductible expenses related to our Merger with TCA,
including the write-off of IPR&D costs, the amortization of goodwill and other
nondeductible merger transaction costs. For 2000, the effective tax provision
rate exceeded the federal statutory income tax rate primarily due to the impact
of state income taxes.

Extraordinary Item

We recorded an extraordinary gain of $0.2 million in 2000 as a result of
our purchase of a portion of our 4.75% subordinated convertible debentures.
There was no extraordinary item in 2001.

34



---



##### Table of Contents



Liquidity and Capital Resources

At the end of 2002, we had working capital of $108.0 million compared with
$135.9 million at the end of 2001. Cash and cash equivalents at the end of
2002 were $42.0 million compared to $91.7 million at the end of 2001, a
decrease of $49.7 million. This decrease in cash and cash equivalents was due
principally to purchases of long-term investments of $34.0 million, use of $9.8
million for the redemption of our outstanding subordinated debentures, and
$18.3 million used to repurchase our common stock. These decreases were
partially offset by $15.3 million of net proceeds received from the issuance of
our common stock and higher accounts receivable collections.

Cash provided by operating activities was $2.2 million in 2002 resulting
from our net income of $0.5 million adding back $18.4 million for items not
affecting 2002 cash flows, primarily depreciation and amortization expenses,
less changes in working capital of $16.7 million. The change in working
capital in 2002 was due principally to inventory increasing by $12.6 million
due primarily to VAD product inventory being built in preparation for the
relocation of the HeartMate manufacturing operations to our Pleasanton
facilities. Net cash used by operating activities during 2001 was $3.1 million
resulting from our net loss of $87.9 million adding back $94.7 million for
items not affecting 2001 cash flows, primarily depreciation and amortization
expenses and write-off of IPR&D costs, less changes in working capital of $10.0
million. Net cash provided by operating activities during 2000 was $8.7
million resulting from our net income of $7.5 million adding back $2.9 million
for items not affecting cash flows, primarily depreciation and amortization
expenses, less changes in working capital of $1.7 million.

Cash provided by investing activities was $5.0 million in 2002, $55.3
million in 2001 and $23.4 million in 2000. Cash provided in 2002 was due to the
reclassification of $45.9 million of restricted cash and cash equivalents to
retire our subordinated debentures partially offset by $34.1 million used to
purchase long-term available-for-sale investments and $7.5 million used for
capital expenditures. Cash provided in 2001 was due to $98.6 million, net,
provided from available-for-sale investments and $16.2 million cash acquired in
the Merger partially offset by $45.8 million reclassified to restricted cash
and cash equivalents, transaction costs of $5.8 capitalized in conjunction with
the Merger and capital expenditures of $7.9 million. Cash provided in 2000 was
due to $21.0 million, net, provided from available-for-sale investments
partially offset by $2.4 million used for capital expenditures.

Cash used in financing activities was $57.0 million in 2002, compared to
$9.4 million provided by financing activities in 2001 and cash used of $2.3
million in 2000. Cash used in 2002 was due to $54.8 million to retire our
subordinated debentures and $18.3 million to repurchase our common stock
partially offset by $15.3 million, net, proceeds received in a public stock
offering and $0.8 million provided from exercises of common stock options.
Cash provided in 2001 was due to $11.1 million from exercises of common stock
options partially offset by $1.7 million used to repurchase our common stock.
Cash used in 2000 was due to $2.8 million to retire our subordinated debentures
partially offset by $0.6 million provided from exercises of common stock
options.

During 2002, we made cash payments of $2.9 million for merger,
restructuring and other costs. These payments consisted mainly of employee
retention and executive waiver agreement costs related to the Merger and
severance costs related to the Restructuring Plan.

In April 2001, we announced a stock repurchase program under which up
to $20 million in market value of our common stock could be acquired in the
open market or in privately negotiated transactions. The number of shares to be
purchased and the timing of purchases were based on several conditions,
including the price of our stock, general market conditions and other factors.
The program was completed in the fourth quarter of 2002. During 2002, $18.3
million in common stock was repurchased, representing 2.3 million shares. All
repurchased shares were subsequently retired.

We filed a Registration Statement on Form S-3 with the SEC to register
1,055,000 newly issued shares of our common stock and to register for resale
5,945,000 shares of our common stock held by selling shareholders, of which
5,825,000 shares were held by Thermo Electron. This registration statement
became effective on February 12, 2002 and all shares registered were sold on
February 15, 2002. We received $15.3 million, net of underwriting fees and
discounts and other expenses of the offering, from the sale of the newly issued
shares.

In January 2002, we announced a plan to redeem at par value all
outstanding 4.75% convertible subordinated debentures due 2004, which were
originally issued by TCA. We completed the redemption in March 2002 using our
restricted cash and cash equivalents of $45.9 million and cash of $9.8 million.
We recorded an extraordinary loss in the amount of $0.3 million, net of a tax
benefit of $0.2 million, in the first quarter of 2002 related to the write-off
of capitalized debt issuance costs associated with the initial issuance of the
debentures, which were being amortized over the life of the debentures.

35



---



##### Table of Contents



We believe that cash and investments on-hand and expected cash flows from
operations will be sufficient to fund our operations and capital requirements
for the foreseeable future. We expect that our operating expenses will increase
in future periods as we spend more on product manufacturing, marketing, and
research and development of new product lines.

The impact of inflation on our financial position and the results of
operations was not significant during any of the years presented.

Critical Accounting Policies

We have identified the policies below as critical to our business
operations and the understanding of our results of operations. The impact and
any associated risks related to these policies on our business operations is
discussed below. For a more detailed discussion on the application of these and
other accounting policies, see the Notes to the Consolidated Financial
Statements included in this Annual Report on Form 10-K. The preparation of
financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amount of assets, liabilities, revenue and expenses and the
disclosure of contingent assets and liabilities. There can be no assurance that
actual results will not differ from those estimates.

Merger Accounting

On February 14, 2001, Thoratec completed its Merger with TCA. Pursuant to
the Merger agreement between Thoratec and TCA, Thoratec issued new shares of
its common stock to the shareholders of TCA in exchange for all the outstanding
common stock of TCA. The merger was treated as a reverse acquisition because
the shareholders of TCA owned the majority of Thoratec common stock after the
Merger. TCA was considered the acquiror for accounting and financial reporting
purposes. The Merger was accounted for under the purchase method of accounting.
Due to the reverse acquisition, Thoratecs assets and liabilities were recorded
based upon their estimated fair values at the date of acquisition. The purchase
price is also allocated to intangible assets, including goodwill. As of
December 28, 2002, approximately $309.0 million of the total purchase price of
$346.2 million has been allocated to goodwill and other purchased intangibles.
The determination of the value of such intangible assets requires management to
make estimates and assumptions that affect our consolidated financial
statements. The amounts allocated to goodwill and other intangible assets will
affect the amount of amortization expense we recognize in future periods and
could result in a possible impairment expense if at some future date such
assets were determined to be impaired.

As a result of the Merger, $76.9 million relating to IPR&D was expensed in
the first quarter of 2001. The write-off of IPR&D was related to projects that
were in development, had not reached technological feasibility, had no
alternative future use and for which successful development was uncertain.
There have been no significant developments subsequent to the Merger related to
the current status of any of the IPR&D projects that would result in material
changes to the assumptions or resulting valuation performed at the time of the
Merger. Development of IPR&D projects continues and while the timing of
completion of these projects may vary due to the highly regulated and technical
nature of the Companys products, current estimates remain materially
consistent with the Companys initial estimates.

Revenue Recognition

We recognize revenue from product sales when evidence of an arrangement
exists, title has passed (generally upon shipment) or services have been
rendered, the selling price is fixed or determinable and collectibility is
reasonably assured. Sales to distributors are recorded when title transfers
upon shipment. One distributor has certain limited product return rights. A
limited number of other distributors have certain rights of return upon
termination of their distribution agreement. A reserve for sales returns is
recorded for these customers applying reasonable estimates of product returns
based upon significant historical experience in accordance with SFAS No. 48,
Revenue Recognition when Right of Return Exists. No other direct sales
customers or distributors have return rights or price protection.

Sales of certain Cardiovascular segment products to first-time customers
are recognized when it has been determined that the customer has the ability to
use such products. These sales frequently include the sale of products and
training services under multiple element arrangements. For most customers,
training is not essential to the functionality of the products as the customers
already possess sufficient expertise and experience to use the products. In
these situations, training is provided as a best practice to optimize the use
and success of the products. The amount of revenues under these arrangements
allocated to training is based upon fair market value of the training,
performed principally by third party providers. The amount of revenues
allocated to the Cardiovascular segment products is done on a residual method
basis. Under this method, the total value of the arrangement is allocated first
to the undelivered training element based on the fair market value, with the
remainder being allocated to the Cardiovascular segment products. The amount of
revenues allocated to training is recorded as deferred revenue and is
recognized when the training is completed. As of the

36



---



##### Table of Contents



end of 2002, $1.4 million of products have been delivered and recorded as
product sales for customers that were determined to be able to use those
products, but for which training had not yet been completed. The amount of
revenue deferred related to this training not yet completed was $0.1 million at
the end of 2002 and $38,000 at the end of 2001. As of the end of 2000 all
training related to product sales had been completed.

We also rent certain medical devices to customers on a month-to-month or
as-used basis. Rental income is based on utilization and is included in product
sales as earned. Included in product sales for 2002, 2001 and 2000 are $3.8
million, $3.5 million and $2.7 million, respectively, of income earned from the
rental of these medical devices.

The majority of our products are covered by a one-year limited
manufacturers warranty from the date of installation. Estimated contractual
warranty obligations are recorded when related sales are recognized and any
additional amounts are recorded when such costs are probable and can be
reasonably estimated. The change in accrued warranty expense in 2002 and 2001
is summarized in the following table (in thousands):

|                             |  |           |     |            |  |            |     |         |  |         |      |   |  |   |     | 
|---------------------------- |  | --------- | --- | ---------- |  | ---------- | --- | ------- |  | ------- | ---- | - |  | - | --- | 
|                             |  | Balance   |     | Charges to |  |            |     |         |  | Balance
|                             |  | Beginning |     | Costs and  |  |            |     |         |  | End    
|                             |  | of Year   |     | Expenses   |  | Deductions |     | of Year
|                             |  |           |     |            |  |            |     |        
|Year ended December 28, 2002 |  | $         | 910 |            |  | $          | 45  |         |  | $       | (260 | ) |  | $ | 695 | 
|Year ended December 29, 2001 |  | $         | 970 |            |  | $          | 594 |         |  | $       | (654 | ) |  | $ | 910 | 

Reserves

We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make payments owed to us for
product sales. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.

In June 2001, we approved a Restructuring Plan to consolidate all of our
VAD manufacturing operations to our manufacturing facilities and headquarters
in Pleasanton, California. Through December 28, 2002, we have recorded $1.6
million of restructuring charges in accordance with Emerging Issues Task Force
94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity and Staff Accounting Bulletin 100,
Restructuring and Impairment Charges. These charges represent estimated
employee severance costs and stock option acceleration charges. We completed
the relocation of the Woburn, Massachusetts manufacturing operations to our
Pleasanton facility in the first quarter of 2003 and in February 2003 the FDA
inspected the Pleasanton facility related to this transfer. We expect to
receive FDA approval in the half quarter of 2003. We do not believe there are
likely to be any developments until FDA approval which would have a significant
impact on our original restructuring cost estimates.

Commitments

As of December 28, 2002, we have the following outstanding commitments:

Leases The Company leases manufacturing, office, research facilities,
and equipment under various operating lease agreements. Future minimum lease
payments as of the end of 2002 are noted below:

|             |  |              
|------------ |  | -------------
|Fiscal year: |  |              
|             |  |              
|2003         |  | $1.9 million 
|2004         |  | 1.6 million  
|2005         |  | 1.5 million  
|2006         |  | 1.5 million  
|2007         |  | 1.5 million  
|Thereafter   |  | 8.6 million  
|             |  |              
|Total        |  | $16.6 million
|             |  |              

Rent expense for all operating leases was $1.8 million in 2002, $1.8
million in 2001 and $0.6 million in 2000.

Purchase Commitments We had various firm purchase commitments totaling
approximately $11 million at December 28, 2002.

37



---



##### Table of Contents



Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standard, or SFAS, No. 143, Accounting for
Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs, including legal obligations.
We plan to adopt SFAS No. 143 at the beginning of fiscal 2003 and do not expect
this statement to materially impact our financial position, results of
operations or cash flows.

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

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

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires a liability
to be recognized at the time a company issues a guarantee for the fair value of
the obligations assumed under certain guarantee agreements. Additional
disclosures about guarantee agreements are also required in the interim and
annual financial statements, including a roll forward of the entitys product
warranty liabilities. The disclosure provisions of FIN 45 are effective for us
as of fiscal year end 2002. The provisions for initial recognition and
measurement of guarantee agreements are effective on a prospective basis for
guarantees that are issued or modified after December 28, 2002. We do not
expect that the recognition provisions of FIN 45 will have a material impact
upon our consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure which amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS 148 amends
the disclosure requirements of SFAS 123 to require prominent disclosures in
both annual and interim financial statements of the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for fiscal years beginning after December
15, 2002. We plan to adopt the disclosure provisions of SFAS No. 148 at the
beginning of fiscal 2003. We do not expect to change to use the fair value
based method of accounting for stock-based financial position, results of
operations or cash flows.

38



---



##### Table of Contents






Item 7A.Quantitative and Qualitative Disclosures About Market Risk

Short-Term and Long-Term Investments

We do not use derivative financial instruments for speculative or trading
purposes. However, we are exposed to market risk related to changes in interest
rates. Our investment portfolio at the end of 2002 consisted of short-term and
long-term corporate bonds that are classified as available-for-sale and have
maturities of two years or less. The fair market value of these investments
will fall if market interest rates increase. If market interest rates were to
increase by 10% from levels at December 28, 2002, the fair market value of our
investment portfolio would decline by an immaterial amount.

Foreign Currency Rate Fluctuations

We conduct business in foreign countries. Our international operations
consist primarily of sales and service personnel for our ventricular assist
products. The employees report into our U.S. sales and marketing group and are
internally reported as part of that group. All assets and liabilities of our
non-U.S. operations are translated into U.S. dollars at the period-end exchange
rates. The resulting translation adjustments are included in comprehensive
income. The period-end translation of the non-functional currency balances (the
result of foreign sales, foreign expenses, and intercompany transactions) in
our wholly-owned subsidiary in the United Kingdom at the period-end exchange
rate into the functional currency of our subsidiary results in foreign currency
exchange gains and losses. These foreign currency exchange gains and losses are
included in interest and other income-net. Net foreign currency exchange gain
was approximately $0.5 million for 2002. Net foreign currency exchange loss was
approximately $0.1 million in 2001. There were no such gains or losses in 2000
as Thoratecs United Kingdom subsidiary did not become part of our operations
until completion of our Merger 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. To date, we have not entered
into any significant foreign currency hedging contracts or other derivative
financial instruments to hedge the effects of adverse fluctuations in foreign
currency exchange, however, we are currently evaluating possible future use of
such contracts and instruments.

39



---



##### Table of Contents






Item 8.Financial Statements and Supplementary Data

THORATEC CORPORATION AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                         |  |      |  | 
|---------------------------------------------------------------------------------------- |  | ---- |  | 
|                                                                                         |  | Page
|                                                                                         |  |     
|Financial Statements:                                                                   
|Independent Auditors Report  Deloitte & Touche LLP                                    
|Copy of Previously Issued Report of Independent Public Accountants  Arthur Andersen LLP
|Consolidated Balance Sheets                                                             
|Consolidated Statements of Operations                                                   
|Consolidated Statements of Comprehensive Income (Loss)                                  
|Consolidated Statements of Shareholders Equity                                         
|Consolidated Statements of Cash Flows                                                   
|Notes to Consolidated Financial Statements                                              

40



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

To the Shareholders and Board of Directors of
Thoratec Corporation:

We have audited the accompanying consolidated balance sheets of Thoratec
Corporation and subsidiaries (the Company) as of December 28, 2002 and
December 29, 2001 and the related consolidated statements of operations,
comprehensive income (loss), shareholders equity and cash flows for the years
then ended. The financial statements of the Company as of
December 30, 2000, and for the year then ended were audited by
other auditors who have ceased operations. Those auditors expressed
an unqualified opinion on those financial statements in their report
dated February 5, 2001. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

We
conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our
opinion, such 2002 and 2001 consolidated financial statements present fairly, in
all material respects, the financial position of Thoratec Corporation and
subsidiaries as of December 28, 2002 and December 29, 2001 and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, in 2002
the Company changed its method of accounting for goodwill and other intangible
assets to conform to Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets.

/s/ DELOITTE & TOUCHE LLP

San Francisco, California
March 7, 2003

41



---



##### Table of Contents



THE FOLLOWING REPORT IS A COPY OF THE PREVIOUSLY ISSUED REPORT FROM ARTHUR
ANDERSEN LLP (ANDERSEN). ANDERSEN DID NOT PERFORM ANY PROCEDURES IN CONNECTION
WITH THIS ANNUAL REPORT ON FORM 10-K. ACCORDINGLY, THIS REPORT HAS NOT BEEN
REISSUED BY ANDERSEN.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors of Thoratec Corporation:

We have audited the accompanying consolidated balance sheet of Thoratec
Corporation (formerly Thermo Cardiosystems Inc., a Massachusetts corporation
and 60%-owned subsidiary of Thermo Electron Corporation) and subsidiaries as of
December 30, 2000, and the related consolidated statements of income, cash
flows, and comprehensive income and shareholders investment for each of the
two years in the period ended December 30, 2000. These consolidated financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Thoratec
Corporation (formerly Thermo Cardiosystems Inc.) and subsidiaries as of
December 30, 2000, and the results of their operations and their cash flows for
each of the two years in the period ended December 30, 2000, in conformity with
accounting principles generally accepted in the United States.



| | /s/ ARTHUR ANDERSEN LLP
| | -----------------------

Boston, Massachusetts
February 5, 2001

42



---



##### Table of Contents



THORATEC CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                             |                                    |                                                     |                                      |         |                    |         |         |         |         |   | 
|------------------------------------------ | ------------------------------------------------------------------------------------------- | ---------------------------------- | --------------------------------------------------- | ------------------------------------ | ------- | ------------------ | ------- | ------- | ------- | ------- | - | 
|                                           |                                                                                             |                                    |                                                     |                                      |         | As of Fiscal Years
|                                           |                                                                                             |                                    |                                                     |                                      |         |                   
|                                           |                                                                                             |                                    |                                                     |                                      |         | 2002               |         | 2001   
|                                           |                                                                                             |                                    |                                                     |                                      |         |                    |         |        
|                                           |                                                                                             |                                    |                                                     |                                      |         | (In thousands)    
|                                           |                                                                                             |                                    |                                                     | ASSETS                               |         |                    |         |         |         |         |   | 
|Current assets:                            |                                                                                             |                                    |                                                     |                                      |         |                    |         |        
|                                           | Cash and cash equivalents                                                                   |                                    | $                                                   | 42,044                               |         |                    | $       | 91,726  |        
|                                           | Short-term available-for-sale investments                                                   |                                    |                                                     | 3,439                                |         |                    |         |        |        
|                                           | Receivables, net of allowances of $238 in 2002 and $551 in 2001                             |                                    |                                                     | 27,593                               |         |                    |         | 26,820  |        
|                                           | Inventories                                                                                 |                                    |                                                     | 38,835                               |         |                    |         | 25,673  |        
|                                           | Deferred tax asset                                                                          |                                    |                                                     | 12,182                               |         |                    |         | 11,789  |        
|                                           | Prepaid expenses and other assets                                                           |                                    |                                                     | 2,517                                |         |                    |         | 956     |        
|                                           |                                                                                             |                                    |                                                     |                                      |         |                    |         |        
|                                           |                                                                                             | Total current assets               |                                                     |                                      | 126,610 |                    |         |         | 156,964 |        
|                                           |                                                                                             |                                    |                                                     |                                      |         |                    |         |        
|Property, plant and equipment, net         |                                                                                             |                                    | 24,715                                              |                                      |         |                    | 22,645  |        
|Long-term available-for-sale investments   |                                                                                             |                                    | 30,051                                              |                                      |         |                    |        |        
|Restricted cash and cash equivalents       |                                                                                             |                                    |                                                    |                                      |         |                    | 45,884  |        
|Goodwill                                   |                                                                                             |                                    | 96,492                                              |                                      |         |                    | 95,209  |        
|Purchased intangible assets                |                                                                                             |                                    | 184,282                                             |                                      |         |                    | 198,608 |        
|Long-term deferred tax asset               |                                                                                             |                                    | 5,244                                               |                                      |         |                    | 9,313   |        
|Other assets                               |                                                                                             |                                    | 1,038                                               |                                      |         |                    | 1,618   |        
|                                           |                                                                                             |                                    |                                                     |                                      |         |                    |         |        
|                                           |                                                                                             | Total Assets                       |                                                     | $                                    | 468,432 |                    |         | $       | 530,241 |        
|                                           |                                                                                             |                                    |                                                     |                                      |         |                    |         |        
|                                           |                                                                                             |                                    |                                                     | LIABILITIES AND SHAREHOLDERS EQUITY |         |                    |         |         |         |         |   | 
|Current liabilities:                       |                                                                                             |                                    |                                                     |                                      |         |                    |         |        
|                                           | Accounts payable                                                                            |                                    | $                                                   | 6,319                                |         |                    | $       | 8,271   |        
|                                           | Accrued compensation                                                                        |                                    |                                                     | 6,372                                |         |                    |         | 6,481   |        
|                                           | Accrued merger, restructuring and other                                                     |                                    |                                                     | 1,208                                |         |                    |         | 1,335   |        
|                                           | Estimated liabilities for warranty, legal and other                                         |                                    |                                                     | 1,304                                |         |                    |         | 1,781   |        
|                                           | Other accrued liabilities                                                                   |                                    |                                                     | 3,435                                |         |                    |         | 3,172   |        
|                                           |                                                                                             |                                    |                                                     |                                      |         |                    |         |        
|                                           |                                                                                             | Total current liabilities          |                                                     |                                      | 18,638  |                    |         |         | 21,040  |        
|                                           |                                                                                             |                                    |                                                     |                                      |         |                    |         |        
|Subordinated convertible debentures        |                                                                                             |                                    |                                                    |                                      |         |                    | 54,838  |        
|Long-term deferred tax liability and other |                                                                                             |                                    | 75,454                                              |                                      |         |                    | 81,020  |        
|                                           |                                                                                             |                                    |                                                     |                                      |         |                    |         |        
|                                           |                                                                                             | Total Liabilities                  |                                                     |                                      | 94,092  |                    |         |         | 156,898 |        
|                                           |                                                                                             |                                    |                                                     |                                      |         |                    |         |        
|Commitments                                |                                                                                             |                                    |                                                     |                                      |         |                    |         |        
|Shareholders equity:                      |                                                                                             |                                    |                                                     |                                      |         |                    |         |        
|                                           | Common shares; 100,000 authorized, issued and outstanding 55,037 in 2002 and
56,114 in 2001 |                                    |                                                     | 410,266                              |         |                    |         | 409,081 |        
|                                           | Deferred compensation                                                                       |                                    |                                                     | (3,735                               | )       |                    |         | (4,555  | )      
|                                           | Accumulated deficit                                                                         |                                    |                                                     | (32,412                              | )       |                    |         | (31,166 | )      
|                                           | Accumulated other comprehensive income (loss):                                              |                                    |                                                     |                                      |         |                    |         |         |        
|                                           |                                                                                             | Unrealized gain on investments     |                                                     |                                      | 130     |                    |         |         |        |        
|                                           |                                                                                             | Cumulative translation adjustments |                                                     |                                      | 91      |                    |         |         | (17     | )      
|                                           |                                                                                             |                                    |                                                     |                                      |         |                    |         |        
|                                           |                                                                                             |                                    | Total
accumulated other comprehensive income (loss) |                                      |         | 221                |         |         |         | (17     | )
|                                           |                                                                                             |                                    |                                                     |                                      |         |                    |         |        
|                                           |                                                                                             |                                    | Total Shareholders Equity                          |                                      |         | 374,340            |         |         |         | 373,343 |  
|                                           |                                                                                             |                                    |                                                     |                                      |         |                    |         |        
|                                           |                                                                                             |                                    | Total Liabilities and Shareholders Equity          |                                      | $       | 468,432            |         |         | $       | 530,241 |  
|                                           |                                                                                             |                                    |                                                     |                                      |         |                    |         |        

See notes to consolidated financial statements.

43



---



##### Table of Contents



THORATEC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                  |                                             |                          |         |                                       |        |      |         |        |         |   |        |        |        | 
|------------------------------------------------- | ------------------------------------------- | ------------------------ | ------- | ------------------------------------- | ------ | ---- | ------- | ------ | ------- | - | ------ | ------ | ------ | 
|                                                  |                                             |                          |         | For the Fiscal Years Ended           
|                                                  |                                             |                          |         |                                      
|                                                  |                                             |                          |         | 2002                                  |        | 2001 |         | 2000  
|                                                  |                                             |                          |         |                                       |        |      |         |       
|                                                  |                                             |                          |         | (In thousands, except per share data)
|Product sales                                     |                                             | $                        | 130,844 |                                       |        | $    | 113,384 |        |         | $ | 83,396 |       
|Cost of product sales                             |                                             |                          | 55,124  |                                       |        |      | 52,840  |        |         |   | 34,830 |       
|                                                  |                                             |                          |         |                                       |        |      |         |        |         |   |        |       
|Gross profit                                      |                                             |                          | 75,720  |                                       |        |      | 60,544  |        |         |   | 48,566 |       
|                                                  |                                             |                          |         |                                       |        |      |         |        |         |   |        |       
|Operating expenses:                               |                                             |                          |         |                                       |        |      |         |        |         |   |        |       
|                                                  | Selling, general and administrative         |                          |         | 37,413                                |        |      |         | 32,346 |         |   |        | 23,587 |       
|                                                  | Research and development                    |                          |         | 25,251                                |        |      |         | 22,082 |         |   |        | 16,190 |       
|                                                  | Amortization of purchased intangible assets |                          |         | 12,384                                |        |      |         | 11,321 |         |   |        |       |       
|                                                  | Amortization of goodwill                    |                          |         |                                     |        |      |         | 4,353  |         |   |        |       |       
|                                                  | In-process research and development         |                          |         |                                     |        |      |         | 76,858 |         |   |        |       |       
|                                                  | Merger, restructuring and other costs       |                          |         | 1,409                                 |        |      |         | 7,134  |         |   |        | 1,831  |       
|                                                  |                                             |                          |         |                                       |        |      |         |        |         |   |        |       
|                                                  |                                             | Total operating expenses |         |                                       | 76,457 |      |         |        | 154,094 |   |        |        | 41,608 | 
|                                                  |                                             |                          |         |                                       |        |      |         |        |         |   |        |       
|Income (loss) from operations                     |                                             |                          | (737    | )                                     |        |      | (93,550 | )      |         |   | 6,958  |       
|Interest and other income  net                   |                                             |                          | 2,146   |                                       |        |      | 2,359   |        |         |   | 5,005  |       
|                                                  |                                             |                          |         |                                       |        |      |         |        |         |   |        |       
|Income (loss) before taxes and extraordinary item |                                             |                          | 1,409   |                                       |        |      | (91,191 | )      |         |   | 11,963 |       
|Income tax expense (benefit)                      |                                             |                          | 589     |                                       |        |      | (3,325  | )      |         |   | 4,630  |       
|                                                  |                                             |                          |         |                                       |        |      |         |        |         |   |        |       
|Income (loss) before extraordinary item           |                                             |                          | 820     |                                       |        |      | (87,866 | )      |         |   | 7,333  |       
|Extraordinary item  net of tax                   |                                             |                          | (309    | )                                     |        |      |        |        |         |   | 191    |       
|                                                  |                                             |                          |         |                                       |        |      |         |        |         |   |        |       
|Net income (loss)                                 |                                             | $                        | 511     |                                       |        | $    | (87,866 | )      |         | $ | 7,524  |       
|                                                  |                                             |                          |         |                                       |        |      |         |        |         |   |        |       
|                                                  |                                             |                          |         |                                       |        |      |         |        |         |   |        |       
|Basic and diluted earnings (loss) per share       |                                             | $                        | 0.01    |                                       |        | $    | (1.68   | )      |         | $ | 0.23   |       
|                                                  |                                             |                          |         |                                       |        |      |         |        |         |   |        |       
|                                                  |                                             |                          |         |                                       |        |      |         |        |         |   |        |       
|Shares used to compute earnings (loss) per share: |                                             |                          |         |                                       |        |      |         |        |         |   |        |       
|                                                  | Basic                                       |                          |         | 56,184                                |        |      |         | 52,336 |         |   |        | 32,193 |       
|                                                  | Diluted                                     |                          |         | 56,762                                |        |      |         | 52,336 |         |   |        | 32,209 |       

See notes to consolidated financial statements.

44



---



##### Table of Contents



THORATEC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

|                                       |                                                   |   |                            |     |      |   |         |     |   |   |       |     |  
|-------------------------------------- | ------------------------------------------------- | - | -------------------------- | --- | ---- | - | ------- | --- | - | - | ----- | --- | -
|                                       |                                                   |   | For the Fiscal Years Ended
|                                       |                                                   |   |                           
|                                       |                                                   |   | 2002                       |     | 2001 |   | 2000   
|                                       |                                                   |   |                            |     |      |   |        
|                                       |                                                   |   | (In thousands)            
|Net income (loss)                      |                                                   | $ | 511                        |     |      | $ | (87,866 | )   |   | $ | 7,524 |    
|Other net comprehensive income (loss): |                                                   |   |                            |     |      |   |         |     |   |   |       |    
|                                       | Unrealized gain on available-for-sale investments |   |                            | 130 |      |   |         | 39  |   |   |       | 299 |  
|                                       | Foreign currency translation adjustments          |   |                            | 108 |      |   |         | (26 | ) |   |       | (38 | )
|                                       |                                                   |   |                            |     |      |   |         |     |   |   |       |    
|Comprehensive income (loss)            |                                                   | $ | 749                        |     |      | $ | (87,853 | )   |   | $ | 7,785 |    
|                                       |                                                   |   |                            |     |      |   |         |     |   |   |       |    

See notes to consolidated financial statements.

45



---



##### Table of Contents



THORATEC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

|                                                                                   |                                                   |  |              |   |              |   |          |   |               |               |                |        |  |   |        |   |             |       |      |     |   |   |         |     |  
|---------------------------------------------------------------------------------- | ------------------------------------------------- |  | ------------ | - | ------------ | - | -------- | - | ------------- | ------------- | -------------- | ------ |  | - | ------ | - | ----------- | ----- | ---- | --- | - | - | ------- | --- | -
|                                                                                   |                                                   |  |              |   |              |   |          |   |               |               | Retained       |        |  |   |        |   | Accumulated |       |      |     |  
|                                                                                   |                                                   |  |              |   |              |   |          |   |               |               | Earnings       |        |  |   |        |   | Other       | Total
|                                                                                   |                                                   |  | Common Stock |   | (Accumulated |   | Deferred |   | Comprehensive | Shareholders'
|                                                                                   |                                                   |  | Shares       |   | $            |   | Deficit) |   | Compensation  |               | Inc (Loss)     | Equity
|                                                                                   |                                                   |  |              |   |              |   |          |   |               |               |                |       
|                                                                                   |                                                   |  |              |   |              |   |          |   |               |               | (In thousands) |        |  |   |        |   |             |       |     
|BALANCE, FISCAL YEAR ENDED 1999                                                    |                                                   |  | 32,128       |   |              | $ | 48,253   |   |               | $             | 49,501         |        |  | $ | (521   | ) |             | $     | (291 | )   |   | $ | 96,942  |    
|Exercise of common stock options for
cash                                          |                                                   |  | 44           |   |              |   | 266      |   |               |               |                |        |  |   |        |   |             |       |      |     |   |   | 266     |    
|Exercise of common stock warrant for
cash                                          |                                                   |  | 50           |   |              |   | 350      |   |               |               |                |        |  |   |        |   |             |       |      |     |   |   | 350     |    
|Tax benefit related to employees and
directors stock plans                       |                                                   |  |              |   |              |   | 319      |   |               |               |                |        |  |   |        |   |             |       |      |     |   |   | 319     |    
|Activity under employees and directors
stock plans                               |                                                   |  | (5           | ) |              |   | 19       |   |               |               |                |        |  |   |        |   |             |       |      |     |   |   | 19      |    
|Termination of restricted common stock
award                                       |                                                   |  | (2           | ) |              |   | (82      | ) |               |               |                |        |  |   | 82     |   |             |       |      |     |   |   |        |    
|Amortization of deferred compensation                                              |                                                   |  |              |   |              |   |          |   |               |               |                |        |  |   | 188    |   |             |       |      |     |   |   | 188     |    
|Other comprehensive income:                                                        |                                                   |  |              |   |              |   |          |   |               |               |                |        |  |   |        |   |             |       |      |     |   |   |         |    
|                                                                                   | Unrealized gain on available-for-sale
investments |  |              |   |              |   |          |   |               |               |                |        |  |   |        |   |             |       |      | 299 |   |   |         | 299 |  
|                                                                                   | Foreign currency translation
adjustment           |  |              |   |              |   |          |   |               |               |                |        |  |   |        |   |             |       |      | (38 | ) |   |         | (38 | )
|Net income                                                                         |                                                   |  |              |   |              |   |          |   |               |               | 7,524          |        |  |   |        |   |             |       |      |     |   |   | 7,524   |    
|                                                                                   |                                                   |  |              |   |              |   |          |   |               |               |                |        |  |   |        |   |             |       |      |     |   |   |         |    
|BALANCE, FISCAL YEAR ENDED 2000                                                    |                                                   |  | 32,215       |   |              | $ | 49,125   |   |               | $             | 57,025         |        |  | $ | (251   | ) |             | $     | (30  | )   |   | $ | 105,869 |    
|                                                                                   |                                                   |  |              |   |              |   |          |   |               |               |                |        |  |   |        |   |             |       |      |     |   |   |         |    
|Common stock issued in connection with
merger of Thoratec and Thermo
Cardiosystems |                                                   |  | 22,452       |   |              |   | 306,889  |   |               |               |                |        |  |   | (841   | ) |             |       |      |     |   |   | 306,048 |    
|Common Stock options granted for Thermo
Cardiosystems merger                       |                                                   |  |              |   |              |   | 33,524   |   |               |               |                |        |  |   |        |   |             |       |      |     |   |   | 33,524  |    
|Common stock issued for services                                                   |                                                   |  | 12           |   |              |   | 136      |   |               |               |                |        |  |   |        |   |             |       |      |     |   |   | 136     |    
|Non-cash compensation for services                                                 |                                                   |  |              |   |              |   | 166      |   |               |               |                |        |  |   |        |   |             |       |      |     |   |   | 166     |    
|Exercise of common stock options for
cash                                          |                                                   |  | 1,378        |   |              |   | 11,077   |   |               |               |                |        |  |   |        |   |             |       |      |     |   |   | 11,077  |    
|Tax benefit related to employees and
directors stock plans                       |                                                   |  |              |   |              |   | 5,402    |   |               |               |                |        |  |   |        |   |             |       |      |     |   |   | 5,402   |    
|Common stock issued under restricted
common stock award                            |                                                   |  | 250          |   |              |   | 4,140    |   |               |               |                |        |  |   | (4,140 | ) |             |       |      |     |   |   |        |    
|Repurchase of common stock                                                         |                                                   |  | (193         | ) |              |   | (1,378   | ) |               |               | (325           | )      |  |   |        |   |             |       |      |     |   |   | (1,703  | )  
|Amortization of deferred compensation                                              |                                                   |  |              |   |              |   |          |   |               |               |                |        |  |   | 677    |   |             |       |      |     |   |   | 677     |    
|Other comprehensive income:                                                        |                                                   |  |              |   |              |   |          |   |               |               |                |        |  |   |        |   |             |       |      |     |   |   |         |    
|                                                                                   | Unrealized gain on available-for-sale
investments |  |              |   |              |   |          |   |               |               |                |        |  |   |        |   |             |       |      | 39  |   |   |         | 39  |  
|                                                                                   | Foreign currency translation
adjustment           |  |              |   |              |   |          |   |               |               |                |        |  |   |        |   |             |       |      | (26 | ) |   |         | (26 | )
|Net Loss                                                                           |                                                   |  |              |   |              |   |          |   |               |               | (87,866        | )      |  |   |        |   |             |       |      |     |   |   | (87,866 | )  
|                                                                                   |                                                   |  |              |   |              |   |          |   |               |               |                |        |  |   |        |   |             |       |      |     |   |   |         |    
|BALANCE, FISCAL YEAR ENDED 2001                                                    |                                                   |  | 56,114       |   |              | $ | 409,081  |   |               | $             | (31,166        | )      |  | $ | (4,555 | ) |             | $     | (17  | )   |   | $ | 373,343 |    
|                                                                                   |                                                   |  |              |   |              |   |          |   |               |               |                |        |  |   |        |   |             |       |      |     |   |   |         |    
|Issuance of common shares,
net of costs                                            |                                                   |  | 1,055        |   |              |   | 16,120   |   |               |               |                |        |  |   |        |   |             |       |      |     |   |   | 16,120  |    
|Non-cash compensation for services                                                 |                                                   |  |              |   |              |   | 100      |   |               |               |                |        |  |   |        |   |             |       |      |     |   |   | 100     |    
|Exercise of common stock options for
cash                                          |                                                   |  | 93           |   |              |   | 829      |   |               |               |                |        |  |   |        |   |             |       |      |     |   |   | 829     |    
|Tax benefit related to employees and
directors stock plans                       |                                                   |  |              |   |              |   | 334      |   |               |               |                |        |  |   |        |   |             |       |      |     |   |   | 334     |    
|Common stock issued under restricted
common stock award                            |                                                   |  | 50           |   |              |   | 328      |   |               |               |                |        |  |   | (328   | ) |             |       |      |     |   |   |        |    
|Repurchase of common stock                                                         |                                                   |  | (2,275       | ) |              |   | (16,526  | ) |               |               | (1,757         | )      |  |   |        |   |             |       |      |     |   |   | (18,283 | )  
|Amortization of deferred compensation                                              |                                                   |  |              |   |              |   |          |   |               |               |                |        |  |   | 1,148  |   |             |       |      |     |   |   | 1,148   |    
|Other comprehensive income:                                                        |                                                   |  |              |   |              |   |          |   |               |               |                |        |  |   |        |   |             |       |      |     |   |   |         |    
|                                                                                   | Unrealized gain on available-for-sale
investments |  |              |   |              |   |          |   |               |               |                |        |  |   |        |   |             |       |      | 130 |   |   |         | 130 |  
|                                                                                   | Foreign currency translation
adjustment           |  |              |   |              |   |          |   |               |               |                |        |  |   |        |   |             |       |      | 108 |   |   |         | 108 |  
|Net Income                                                                         |                                                   |  |              |   |              |   |          |   |               |               | 511            |        |  |   |        |   |             |       |      |     |   |   | 511     |    
|                                                                                   |                                                   |  |              |   |              |   |          |   |               |               |                |        |  |   |        |   |             |       |      |     |   |   |         |    
|BALANCE, FISCAL YEAR ENDED 2002                                                    |                                                   |  | 55,037       |   |              | $ | 410,266  |   |               | $             | (32,412        | )      |  | $ | (3,735 | ) |             | $     | 221  |     |   | $ | 374,340 |    
|                                                                                   |                                                   |  |              |   |              |   |          |   |               |               |                |        |  |   |        |   |             |       |      |     |   |   |         |    

See notes to consolidated financial statements.

46



---



##### Table of Contents



THORATEC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                   |                                                                 |                                                     |         |                            |         |      |         |                |        |   |        |          |        |  
|-------------------------------------------------------------------------------------------------- | --------------------------------------------------------------- | --------------------------------------------------- | ------- | -------------------------- | ------- | ---- | ------- | -------------- | ------ | - | ------ | -------- | ------ | -
|                                                                                                   |                                                                 |                                                     |         | For the Fiscal Years Ended
|                                                                                                   |                                                                 |                                                     |         |                           
|                                                                                                   |                                                                 |                                                     |         | 2002                       |         | 2001 |         | 2000          
|                                                                                                   |                                                                 |                                                     |         |                            |         |      |         |               
|                                                                                                   |                                                                 |                                                     |         |                            |         |      |         | (In thousands) |        |   |        |         
|Cash flows from operating activities:                                                              |                                                                 |                                                     |         |                            |         |      |         |                |        |   |        |         
|Net income (loss)                                                                                  |                                                                 | $                                                   | 511     |                            |         | $    | (87,866 | )              |        | $ | 7,524  |         
|Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities: |                                                                 |                                                     |         |                            |         |      |         |                |        |   |        |         
|                                                                                                   | Depreciation and amortization                                   |                                                     |         | 17,076                     |         |      |         | 19,845         |        |   |        | 2,840    |       
|                                                                                                   | Write-off of in-process research and development costs          |                                                     |         |                           |         |      |         | 76,858         |        |   |        |         |       
|                                                                                                   | Non-cash compensation expense                                   |                                                     |         | 100                        |         |      |         | 303            |        |   |        |         |       
|                                                                                                   | Amortization of deferred compensation                           |                                                     |         | 1,148                      |         |      |         | 677            |        |   |        | 270      |       
|                                                                                                   | Change in net deferred tax liability                            |                                                     |         | (503                       | )       |      |         | (2,993         | )      |   |        |         |       
|                                                                                                   | Gain on sale of investments                                     |                                                     |         |                           |         |      |         |               |        |   |        | (3       | )     
|                                                                                                   | Extraordinary item, net of taxes                                |                                                     |         | 309                        |         |      |         |               |        |   |        | (191     | )     
|Changes in assets and liabilities:                                                                 |                                                                 |                                                     |         |                            |         |      |         |                |        |   |        |         
|                                                                                                   | Receivables                                                     |                                                     |         | (420                       | )       |      |         | (5,892         | )      |   |        | (1,000   | )     
|                                                                                                   | Inventories                                                     |                                                     |         | (12,640                    | )       |      |         | (560           | )      |   |        | (2,444   | )     
|                                                                                                   | Prepaid expenses and other assets                               |                                                     |         | (1,521                     | )       |      |         | 814            |        |   |        | (7       | )     
|                                                                                                   | Accounts payable and other liabilities                          |                                                     |         | (1,835                     | )       |      |         | (4,326         | )      |   |        | 1,745    |       
|                                                                                                   |                                                                 |                                                     |         |                            |         |      |         |                |        |   |        |         
|                                                                                                   |                                                                 | Net cash provided by (used in) operating activities |         |                            | 2,225   |      |         |                | (3,140 | ) |        |          | 8,734  |  
|                                                                                                   |                                                                 |                                                     |         |                            |         |      |         |                |        |   |        |         
|Cash flows from investing activities:                                                              |                                                                 |                                                     |         |                            |         |      |         |                |        |   |        |         
|                                                                                                   | Repayments from affiliate, net                                  |                                                     |         |                          |         |      |         |               |        |   |        | 13,961   |       
|                                                                                                   | Purchases of available-for-sale investments                     |                                                     |         | (34,060                    | )       |      |         | (120,267       | )      |   |        | (120,002 | )     
|                                                                                                   | Sales and maturities of available-for-sale investments          |                                                     |         | 700                        |         |      |         | 218,989        |        |   |        | 131,802  |       
|                                                                                                   | Reclassification from (to) restricted cash and cash equivalents |                                                     |         | 45,884                     |         |      |         | (45,884        | )      |   |        |         |       
|                                                                                                   | Capitalized transaction costs                                   |                                                     |         |                          |         |      |         | (5,838         | )      |   |        |         |       
|                                                                                                   | Purchases of property, plant and equipment                      |                                                     |         | (7,528                     | )       |      |         | (7,947         | )      |   |        | (2,360   | )     
|                                                                                                   | Cash and equivalents acquired in business acquisition           |                                                     |         |                          |         |      |         | 16,199         |        |   |        |         |       
|                                                                                                   |                                                                 |                                                     |         |                            |         |      |         |                |        |   |        |         
|                                                                                                   |                                                                 | Net cash provided by investing activities           |         |                            | 4,996   |      |         |                | 55,252 |   |        |          | 23,401 |  
|                                                                                                   |                                                                 |                                                     |         |                            |         |      |         |                |        |   |        |         
|Cash flows from financing activities:                                                              |                                                                 |                                                     |         |                            |         |      |         |                |        |   |        |         
|                                                                                                   | Proceeds from stock option exercises, net                       |                                                     |         | 829                        |         |      |         | 11,077         |        |   |        | 601      |       
|                                                                                                   | Proceeds from common stock offering                             |                                                     |         | 15,335                     |         |      |         |               |        |   |        |         |       
|                                                                                                   | Payment of withholding taxes related to stock option exercises  |                                                     |         |                           |         |      |         |               |        |   |        | (47      | )     
|                                                                                                   | Repurchase of common stock                                      |                                                     |         | (18,283                    | )       |      |         | (1,703         | )      |   |        |         |       
|                                                                                                   | Repurchase of convertible debentures                            |                                                     |         | (54,838                    | )       |      |         |               |        |   |        | (2,825   | )     
|                                                                                                   |                                                                 |                                                     |         |                            |         |      |         |                |        |   |        |         
|                                                                                                   |                                                                 | Net cash provided by (used in) financing activities |         |                            | (56,957 | )    |         |                | 9,374  |   |        |          | (2,271 | )
|Effect of exchange rate changes on cash and cash equivalents                                       |                                                                 |                                                     | 54      |                            |         |      | 4       |                |        |   | (46    | )       
|                                                                                                   |                                                                 |                                                     |         |                            |         |      |         |                |        |   |        |         
|Net increase (decrease) in cash and cash equivalents                                               |                                                                 |                                                     | (49,682 | )                          |         |      | 61,490  |                |        |   | 29,818 |         
|Cash and cash equivalents at beginning of period                                                   |                                                                 |                                                     | 91,726  |                            |         |      | 30,236  |                |        |   | 418    |         
|                                                                                                   |                                                                 |                                                     |         |                            |         |      |         |                |        |   |        |         
|Cash and cash equivalents at end of period                                                         |                                                                 | $                                                   | 42,044  |                            |         | $    | 91,726  |                |        | $ | 30,236 |         
|                                                                                                   |                                                                 |                                                     |         |                            |         |      |         |                |        |   |        |         
|Supplemental disclosure of cash flow information:                                                  |                                                                 |                                                     |         |                            |         |      |         |                |        |   |        |         
|                                                                                                   | Cash paid for taxes                                             |                                                     | $       | 347                        |         |      | $       | 470            |        |   | $      | 4,691    |       
|                                                                                                   |                                                                 |                                                     |         |                            |         |      |         |                |        |   |        |         
|                                                                                                   | Cash paid for interest                                          |                                                     | $       | 839                        |         |      | $       | 2,604          |        |   | $      | 2,918    |       
|                                                                                                   |                                                                 |                                                     |         |                            |         |      |         |                |        |   |        |         
|Supplemental disclosure of noncash investing and financing
activities:                             |                                                                 |                                                     |         |                            |         |      |         |                |        |   |        |         
|                                                                                                   | Issuance of restricted stock for services                       |                                                     | $       | 328                        |         |      | $       | 4,140          |        |   | $      |         |       
|                                                                                                   |                                                                 |                                                     |         |                            |         |      |         |                |        |   |        |         
|                                                                                                   | Tax benefit related to stock option exercises                   |                                                     | $       | 334                        |         |      | $       | 5,402          |        |   | $      | 319      |       
|                                                                                                   |                                                                 |                                                     |         |                            |         |      |         |                |        |   |        |         
|                                                                                                   | Reclassification of acquired workforce, net of taxes            |                                                     | $       | 1,334                      |         |      | $       |               |        |   | $      |         |       
|                                                                                                   |                                                                 |                                                     |         |                            |         |      |         |                |        |   |        |         

See notes to consolidated financial statements

47



---



##### Table of Contents



THORATEC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Operations and Significant Accounting Policies

Operations Thoratec Corporation, referred to as we, our, Thoratec or our
Company, is headquartered in Pleasanton, California and is a leading
manufacturer of circulatory support products for use by patients with
congestive heart failure. We develop, manufacture and market products that are
used by physicians and hospitals for cardiac assist, vascular and diagnostic
applications. We organize and manage our business by functional operating
entities, which operate in two business segments: ventricular-assist products
and grafts, referred to as Cardiovascular and ITC. Our Cardiovascular segment
develops, manufactures and markets proprietary medical devices used for
circulatory support and vascular graft applications. Our ITC segment develops,
manufactures and markets near-patient, whole-blood coagulation testing
equipment and related disposables, as well as premium quality, single-use skin
incision devices. We conduct business both domestically and internationally. In
February 2001, we merged with Thermo Cardiosystems, Inc. (TCA) (Note 2).
Prior to the merger (the Merger), TCA was a subsidiary of Thermo Electron
Corporation (Thermo Electron).

Fiscal Year We report on a 52-53 week fiscal year, which ends on the
Saturday closest to December 31. The fiscal years ended December 30, 2000,
(2000), December 29, 2001, (2001), and December 28, 2002, (2002) all
included 52 weeks.

Principles of Consolidation The consolidated financial statements
include the accounts of our Company and our wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.

Use of Estimates The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires our management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.

Major Customers and Concentration of Credit Risk We primarily sell our
products to large hospitals and distributors in the United States and Europe.
For fiscal years 2002, 2001 and 2000, one distributor customer accounted for
11%, 12% and 17% of total product sales, respectively. Accounts receivable for
this same distributor customer accounted for 10% and 8% of total accounts
receivable as of the end of 2002 and 2001, respectively. No other customer
accounted for more than 10% of total product sales in 2002, 2001 or 2000 or had
an accounts receivable balance greater than 10% of total accounts receivable at
the end of 2002 or 2001.

Credit is extended based on an evaluation of a customers financial
condition and generally collateral is not required. To date, credit losses have
not been significant, however, we maintain allowances for potential credit
losses.

Additionally, we are potentially subject to concentrations of credit risk
in our investments. To mitigate this credit risk, we invest in high-grade
instruments and limit our exposure to any one issuer.

Certain Risks and Uncertainties We are subject to certain risks and
uncertainties and believe that changes in any of the following areas could have
a material adverse effect on our future financial position or results of
operations: the ability to achieve or maintain profitability; the ability to
receive FDA approval to manufacture our HeartMate products in our Pleasanton,
California manufacturing plant following the relocation of these operations
from Woburn, Massachusetts; the ability to manage current and future growth,
including the integration of any future acquisitions of companies or
technologies; stock price volatility due to general economic conditions or
future issuances and sales of our stock; foreign currency fluctuations; new
product development and introduction, including Food and Drug Administration
(FDA) approval and market receptiveness; the long and variable sales and
deployment cycle of our ventricular assist device (VAD) products; the ability
to protect our proprietary technologies or an infringement of others patents;
competition from other products; worldwide demand for circulatory support and
graft products and blood coagulation testing and skin incision devices; product
liability or other claims; the ability to obtain timely deliveries of parts
from suppliers; the reliance on specialized suppliers; the ability to
manufacture products on an efficient and timely basis and at a reasonable cost
and in sufficient volume; the dependence upon distributors; the ability of
third party payors to cover and provide appropriate levels of reimbursement for
our products; the ability to maintain compliance with changing federal and
state regulations; the ability to attract and retain talented employees; the
occurrence of natural catastrophic disasters; the ability to realize the full
value

48



---



##### Table of Contents



of our intangible assets; and other risks as detailed from time to time in
our filings with the Securities and Exchange Commission, referred to as the
SEC.

Cash and Cash Equivalents Cash and cash equivalents are defined as
short-term highly liquid investments with original maturities of 90 days or
less.

Short-Term and Long-Term Available-For-Sale Investments Our investments
are classified as available-for-sale and are reported at fair market value. Net
unrealized gains and losses are excluded from earnings and reported as a
separate component of shareholders equity. As of the end of fiscal year 2002,
short-term investments were comprised primarily of corporate bonds having
maturities of one year or less from the date of investment and long-term
investments were comprised primarily of corporate bonds having maturities of
one to two years from the date of investment.

Inventories Inventories are stated at the lower of first-in, first-out
cost or market.

Property, Plant and Equipment Property, plant and equipment are stated
at cost. Depreciation is computed using the straight-line method based on
estimated useful lives of 2 to 30 years. Leasehold improvements are amortized
over the lesser of the useful life or the remaining term of the lease.
Property, plant and equipment includes certain medical devices rented to
customers on a short-term or long-term basis. Amortization expense of all
rental equipment included in our rental program is recognized ratably over 2 to
3 years and is recorded in cost of product sales.

Capitalized Software Costs We capitalize the costs of computer software
developed or obtained for internal use in accordance with Statement of Position
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. Capitalized computer software costs consist of purchased
software licenses, implementation costs and consulting for certain projects
that qualify for capitalization. We expense costs related to preliminary
project assessment, research and development, re-engineering, training and
application maintenance as incurred. In fiscal years 2002 and 2001, costs
capitalized for a new enterprise resource planning software system were
$1,250,000 and $2,416,000, respectively. Depreciation expense related to this
new computer system of $413,000 was recorded in 2002. No depreciation was
charged in any prior period as the relevant computer software system was not
placed into service until early 2002. The capitalized software costs will be
depreciated on a straight-line method over a period of eight years upon being
placed in service.

Restricted Cash and Cash Equivalents Upon closing the Merger with TCA in
February 2001, $45,000,000 in cash and cash equivalents was pledged as
collateral for a letter of credit guarantee to Thermo Electron related to
Thermo Electrons guarantee of our subordinated debentures (Note 7).
Accordingly, these cash and cash equivalents, including interest earnings, were
reclassified to restricted cash and cash equivalents on our 2001 balance sheet.
As a result of our redemption of the outstanding subordinated convertible
debentures in the first quarter of 2002, the letter of credit guarantee was
extinguished.

Valuation of Long-Lived Assets We periodically evaluate the carrying
value of long-lived assets to be held and used including intangible assets,
when events or circumstances warrant such a review. The carrying value of a
long-lived asset to be held and used is considered impaired when the
anticipated separately identifiable undiscounted cash flows from such an asset
are less than the carrying value of the asset. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
value of the long-lived asset. Fair value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk
involved. At the beginning of 2002 we adopted Statement of Financial Accounting
Standards (SFAS) No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets, which did not impact our results of operations of financial
position.

Purchased Intangible Assets and Goodwill As of the beginning of fiscal
year 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets, and
ceased the amortization of purchased goodwill. In addition, we reevaluated the
useful lives of our identifiable intangible assets and determined that the
remaining useful lives were appropriate. Each year we complete impairment tests
of goodwill as required by SFAS No. 142. At adoption and again during 2002, we
determined that our goodwill was not impaired.

49



---



##### Table of Contents



The following table presents the impact of adopting SFAS No. 142 on net
income (loss) and net income (loss) per share had the standard been in effect
for the years ended December 29, 2001 and December 30, 2000 (in thousands,
except per share amounts):

|                                                          |  |              |         |              |  |   |       | 
|--------------------------------------------------------- |  | ------------ | ------- | ------------ |  | - | ----- | 
|                                                          |  | Year Ended  
|                                                          |  |             
|                                                          |  | December 29, |         | December 30,
|                                                          |  | 2001         |         | 2000        
|                                                          |  |              |         |             
|Net income (loss) as reported                             |  | $            | (87,866 | )            |  | $ | 7,524 | 
|Adjustments:                                              |  |              |         |              |  |   |       | 
|Amortization of goodwill, net of tax                      |  |              | 4,194   |              |  |   |     | 
|                                                          |  |              |         |              |  |   |       | 
|Adjusted net income (loss)                                |  | $            | (83,672 | )            |  | $ | 7,524 | 
|                                                          |  |              |         |              |  |   |       | 
|As
reported basic and diluted net income (loss) per share |  | $            | (1.68   | )            |  | $ | 0.23  | 
|Impact of amortization of goodwill, net of tax            |  |              | 0.08    |              |  |   |     | 
|                                                          |  |              |         |              |  |   |       | 
|Adjusted
basic and diluted net income (loss) per share    |  | $            | (1.60   | )            |  | $ | 0.23  | 
|                                                          |  |              |         |              |  |   |       | 

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

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

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

|                       |                                   |   |                         |         |                          |   |                     |         |   |   |         |         | 
|---------------------- | --------------------------------- | - | ----------------------- | ------- | ------------------------ | - | ------------------- | ------- | - | - | ------- | ------- | 
|                       |                                   |   | As of December 28, 2002
|                       |                                   |   |                        
|                       |                                   |   | Gross Carrying          |         |                          |   |                     |         |   |   |        
|                       |                                   |   | Amount                  |         | Accumulated Amortization |   | Net Carrying Amount
|                       |                                   |   |                         |         |                          |   |                    
|Patents and Trademarks |                                   | $ | 37,478                  |         |                          | $ | (6,789              | )       |   | $ | 30,689  |        
|Core Technology        |                                   |   | 37,181                  |         |                          |   | (3,486              | )       |   |   | 33,695  |        
|Developed Technology   |                                   |   | 132,301                 |         |                          |   | (12,403             | )       |   |   | 119,898 |        
|                       |                                   |   |                         |         |                          |   |                     |         |   |   |         |        
|                       | Total Purchased Intangible Assets |   | $                       | 206,960 |                          |   | $                   | (22,678 | ) |   | $       | 184,282 | 
|                       |                                   |   |                         |         |                          |   |                     |         |   |   |         |        

|                       |                                   |   |                         |         |                          |   |                     |         |   |   |         |         | 
|---------------------- | --------------------------------- | - | ----------------------- | ------- | ------------------------ | - | ------------------- | ------- | - | - | ------- | ------- | 
|                       |                                   |   | As of December 29, 2001
|                       |                                   |   |                        
|                       |                                   |   | Gross Carrying          |         |                          |   |                     |         |   |   |        
|                       |                                   |   | Amount                  |         | Accumulated Amortization |   | Net Carrying Amount
|                       |                                   |   |                         |         |                          |   |                    
|Patents and Trademarks |                                   | $ | 37,478                  |         |                          | $ | (3,169              | )       |   | $ | 34,309  |        
|Core Technology        |                                   |   | 37,181                  |         |                          |   | (1,627              | )       |   |   | 35,554  |        
|Developed Technology   |                                   |   | 132,301                 |         |                          |   | (5,787              | )       |   |   | 126,514 |        
|Assembled Workforce    |                                   |   | 2,612                   |         |                          |   | (381                | )       |   |   | 2,231   |        
|                       |                                   |   |                         |         |                          |   |                     |         |   |   |         |        
|                       | Total Purchased Intangible Assets |   | $                       | 209,572 |                          |   | $                   | (10,964 | ) |   | $       | 198,608 | 
|                       |                                   |   |                         |         |                          |   |                     |         |   |   |         |        

As of the beginning of fiscal 2002, the purchased intangible asset
associated with the assembled workforce in the amount of $1,334,000, net of
accumulated amortization of $381,000 and taxes of $897,000, was reclassified to
goodwill.

Amortization expense related to identifiable intangible assets for fiscal
2002, 2001 and 2000 was $12,384,000, $11,321,000, and nil, respectively.
Amortization expense is expected to be approximately $12,300,000 for each of
the next five years. The purchased intangible assets have estimated useful
lives of eight to twenty years.

Fair Value of Financial Instruments Financial instruments include cash
and cash equivalents, short-term and long-term available-for-sale investments,
customer receivables, accounts payable and certain other accrued liabilities.
The fair value of short-term and long-term investments are assessed using
current market quotations from major investment brokers. The carrying amounts
of these investments are adjusted to market value monthly. The carrying amounts
of all other financial investments are reasonable estimates of their fair
values.

Foreign Currency Translation All assets and liabilities of our
non-United States operations are translated into United States dollars at
period-end exchange rates, and the resulting translation adjustments are
included in other comprehensive income. Income items are translated at actual
or average monthly rates of exchange. Exchange rate fluctuations resulting from
the period-end translation of the current portion of the intercompany
obligation of our wholly-owned subsidiary into United States dollars are

50



---



##### Table of Contents



recorded in the statements of operations as foreign currency translation
gains or losses and are included in interest and other income-net.

Repurchases
of Common Stock In April 2001, we announced that our Board of
Directors authorized a stock repurchase program under which up to $20 million
of our common stock could be acquired. We completed this stock repurchase
program in the third quarter of 2002. During 2002, we repurchased 2,274,900
shares of our common stock on the open market for $18,300,000. From the
inception of the program through the end of 2002, we repurchased 2,467,600
shares of our common stock for $20,000,000. For each share repurchased, we
reduce the common stock account by the average value per share reflected in the
account prior to the repurchase with the excess allocated to retained earnings.
All repurchased shares have been retired.

Revenue Recognition and Product Warranty We recognize revenue from
product sales when evidence of an arrangement exists, title has passed
(generally upon shipment) or services have been rendered, the selling price is
fixed or determinable and collectibility is reasonably assured. Sales to
distributors are recorded when title transfers upon shipment. One distributor
has certain limited product return rights. A limited number of other
distributors have certain rights of return upon termination of their
distribution agreement. A reserve for sales returns is recorded for these
customers applying reasonable estimates of product returns based upon
significant historical experience in accordance with SFAS No. 48, Revenue
Recognition when Right of Return Exists. No other direct sales customers or
distributors have return rights or price protection.

Sales of certain Cardiovascular segment products to first-time customers
are recognized when it has been determined that the customer has the ability to
use such products. These sales frequently include the sale of products and
training services under multiple element arrangements. For most customers,
training is not essential to the functionality of the products as the customers
already possess sufficient expertise and experience to use the products. In
these situations, training is provided as a best practice to optimize the use
and success of the products. The amount of revenues under these arrangements
allocated to training is based upon fair market value of the training,
performed principally by third party providers. The amount of revenues
allocated to the Cardiovascular segment products is done on a residual method
basis. Under this method, the total value of the arrangement is allocated first
to the undelivered training element based on the fair market value, with the
remainder being allocated to the Cardiovascular segment products. The amount of
revenues allocated to training is recorded as deferred revenue and is
recognized when the training is completed. As of the end of 2002, $1,410,000 of
products have been delivered and recorded as product sales for customers that
were determined to be able to use those products, but for which training had
not yet been completed. The amount of revenue deferred related to this training
not yet completed was $148,000 at the end of 2002 and $38,000 at the end of
2001. As of the end of 2000 all training related to product sales had been
completed.

We also rent certain medical devices to customers on a month-to-month or
as-used basis. Rental income is based on utilization and is included in product
sales as earned. Included in product sales for 2002, 2001 and 2000 are
$3,884,000, $3,456,000 and $2,724,000, respectively, of income earned from the
rental of these medical devices.

The majority of our products are covered by a one-year limited
manufacturers warranty. Estimated contractual warranty obligations are
recorded when related sales are recognized and any additional amounts are
recorded when such costs are probable and can be reasonably estimated. The
change in accrued warranty expense in 2002 and 2001 is summarized in the
following table (in thousands):

|                             |  |           |     |            |  |            |     |         |  |         |      |   |  |   |     | 
|---------------------------- |  | --------- | --- | ---------- |  | ---------- | --- | ------- |  | ------- | ---- | - |  | - | --- | 
|                             |  | Balance   |     | Charges to |  |            |     |         |  | Balance
|                             |  | Beginning |     | Costs and  |  |            |     |         |  | End    
|                             |  | of Year   |     | Expenses   |  | Deductions |     | of Year
|                             |  |           |     |            |  |            |     |        
|Year ended December 28, 2002 |  | $         | 910 |            |  | $          | 45  |         |  | $       | (260 | ) |  | $ | 695 | 
|Year ended December 29, 2001 |  | $         | 970 |            |  | $          | 594 |         |  | $       | (654 | ) |  | $ | 910 | 

51



---



##### Table of Contents



Stock-Based Compensation We account for stock-based awards to employees
using the intrinsic value method in accordance with Accounting Principals Board
Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no
accounting recognition is given to stock options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to equity. The fair value of each option granted is
estimated using the Black-Scholes option pricing model. If compensation cost
for our stock-based plans had been determined based on the fair value at the
grant dates for awards under those plans, consistent with the method of FASB
Statement No. 123, our reported net income (loss) would have been adversely
affected, as shown in the following table (in thousands, except per share
data):

|                                             |             |                                                                                                                                             |   |             |        |      |   |         |        |   |   |       |        |  
|-------------------------------------------- | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------- | ------ | ---- | - | ------- | ------ | - | - | ----- | ------ | -
|                                             |             |                                                                                                                                             |   | Fiscal Year
|                                             |             |                                                                                                                                             |   |            
|                                             |             |                                                                                                                                             |   | 2002        |        | 2001 |   | 2000   
|                                             |             |                                                                                                                                             |   |             |        |      |   |        
|Net income (loss):                           |             |                                                                                                                                             |   |             |        |      |   |         |        |   |   |      
|                                             | As reported |                                                                                                                                             | $ | 511         |        |      | $ | (87,866 | )      |   | $ | 7,524 |       
|                                             |             | Add: Stock-based compensation expense
included in reported net income, net of
related tax effects                                           |   |             | 726    |      |   |         | 812    |   |   |       | 166    |  
|                                             |             | Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects |   |             | (9,788 | )    |   |         | (9,421 | ) |   |       | (1,503 | )
|                                             |             |                                                                                                                                             |   |             |        |      |   |         |        |   |   |      
|                                             | Pro forma   |                                                                                                                                             | $ | (8,551      | )      |      | $ | (96,475 | )      |   | $ | 6,187 |       
|                                             |             |                                                                                                                                             |   |             |        |      |   |         |        |   |   |       |       
|Basic and diluted earnings (loss) per share: |             |                                                                                                                                             |   |             |        |      |   |         |        |   |   |      
|                                             | As reported |                                                                                                                                             | $ | 0.01        |        |      | $ | (1.68   | )      |   | $ | 0.23  |       
|                                             | Pro forma   |                                                                                                                                             | $ | (0.15       | )      |      | $ | (1.84   | )      |   | $ | 0.19  |       

The fair value of each option granted is estimated at the date of grant
using the Black-Scholes option-pricing model with the following assumptions
used for grants made:

|                        |  |             |      |            |  |           |      |   |  |  |      |  
|----------------------- |  | ----------- | ---- | ---------- |  | --------- | ---- | - |  |  | ---- | -
|                        |  | Fiscal Year
|                        |  |            
|                        |  | 2002        |      | 2001       |  | 2000     
|                        |  |             |      |            |  |          
|Risk-free interest rate |  |             | 4.79 | %          |  |           | 5.08 | % |  |  | 4.90 | %
|Expected volatility     |  |             | 69   | %          |  |           | 71   | % |  |  | 61   | %
|Expected option life    |  | 3.85 years  |      | 2.85 years |  | 4.8 years
|Dividends               |  | None        |      | None       |  | None     

Earnings (Loss) Per Share Basic earnings (loss) per share were computed
using the weighted average number of common shares outstanding for each
respective year. Diluted earnings (loss) per share amounts reflect the weighted
average impact from the date of issuance of all potentially dilutive securities
during the years presented unless the inclusion would have had an antidilutive
effect. (Note 16)

Other Comprehensive Income (Loss) Comprehensive income (loss) includes
net income (loss) and is defined as the change in net assets during the period
from non-owner sources, including unrealized gains and losses on
available-for-sale investments and foreign currency translation adjustments.

Recently Issued Accounting Standards In June 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs, including legal obligations. We plan to adopt SFAS No. 143 at the
beginning of fiscal 2003 and do not expect this statement to materially impact
our financial position, results of operations or cash flows.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment of Long-Lived Assets, which requires that long-lived assets be
measured at the lower of carrying amount or fair value less cots to sell,
whether reported in continuing operations or in discontinued operations. We
adopted SFAS No. 144 at the beginning of fiscal year 2002. The adoption of this
standard did not have any impact on our financial position, results of
operations or cash flows.

In April 2002, the FASB issued SFAS No. 145, which, among other things,
changed the presentation of gains and losses on the extinguishment of debt. Any
gain or loss on extinguishment of debt that does not meet the criteria in APB
Opinion 30, Reporting the Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, is to be included in operating
earnings and not presented separately as an extraordinary item. We

52



---



##### Table of Contents



plan to adopt SFAS No. 145 at the beginning of fiscal year 2003 and
therefore, we will reclassify in the first quarter of 2003 the extraordinary
loss incurred in 2002 of $515,000 to interest and other income-net.

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

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires a liability
to be recognized at the time a company issues a guarantee for the fair value of
the obligations assumed under certain guarantee agreements. Additional
disclosures about guarantee agreements are also required in the interim and
annual financial statements, including a roll forward of the entitys product
warranty liabilities. The disclosure provisions of FIN 45 are effective for us
as of fiscal year end 2002. The provisions for initial recognition and
measurement of guarantee agreements are effective on a prospective basis for
guarantees that are issued or modified after December 28, 2002. We do not
expect that the recognition provisions of FIN 45 will have a material impact
upon our consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 amends FASB
Statement No. 123, Accounting for Stack-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value base
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements of the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148 is effective for fiscal years beginning
after December 15, 2002. We plan to adopt the disclosure provisions of SFAS No.
148 at the beginning of fiscal 2003. We do not expect to change to use the fair
value based method of accounting for stock-based financial position, results of
operations or cash flows.

Presentation Certain 2001 and 2000 amounts have been reclassified to
conform to the presentation in the 2002 financial statements.



|2. |  | Merger of Thoratec and TCA
|-- |  | --------------------------

On February 14, 2001, we completed our Merger with TCA. Pursuant to the
Merger agreement between us and TCA dated October 3, 2000, we issued 32,226,074
new shares of its common stock to the shareholders of TCA in exchange for all
the outstanding common stock of TCA (38,594,281 shares outstanding as of
February 14, 2001) at an exchange ratio of 0.835 shares of our stock for each
share of TCA stock.

The Merger was accounted for under the purchase method of accounting and
was treated as a reverse acquisition because the shareholders of TCA owned the
majority of our common stock after the Merger. TCA was 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 consolidated financial
information for 2000 includes the results of operations of TCA. The operating
results of Thoratec have been included in the accompanying consolidated
financial statements from the date of acquisition forward. All reported amounts
of outstanding common shares and common share equivalents (stock options and
convertible debentures) prior to the Merger have been adjusted to reflect the
exchange ratio of 0.835 to 1. Approximately $309,025,000 of the total purchase
price of $346,193,000 was allocated to goodwill and other purchased intangible
assets.

As a result of the Merger, $76,858,000 relating to in-process research and
development (IPR&D) was expensed in the first quarter of 2001. The one-time
write-off of IPR&D related to four technology projects that were in
development, had not reached technological feasibility, had no alternative
future use and for which successful development was uncertain. One of the
projects was completed in 2002. There have been no significant developments
subsequent to the Merger related to the current status of any of the three
remaining IPR&D projects that would result in material changes to the
assumptions or resulting valuation performed at the time of the Merger.
Development of IPR&D projects continues and while the timing of completion of
these projects may vary due to the highly regulated and technical nature of our
products, current estimates remain materially consistent with our initial
estimates.

53



---



##### Table of Contents



3. Investments

Our investments are considered available-for-sale investments in the
accompanying balance sheet and are carried at fair value with the difference
between cost and fair value, net of related tax effects, recorded in
accumulated other comprehensive income in the consolidated statements of
shareholders equity. We classify investments that mature in less than one year
of the purchase date as short-term investments. Investments that mature greater
than one year from the purchase date are classified as long-term investments.
At the end of 2002, we had no investments which will mature more than two years
from the date of purchase.

The aggregate market value, cost basis and gross unrealized gains and
losses of short-term and long-term available-for-sale investments for 2002 by
major security type are as follows (in thousands):

|                        |                 |   |           |        |            |   |            |     |       |   |    |    |   |   |        |        | 
|----------------------- | --------------- | - | --------- | ------ | ---------- | - | ---------- | --- | ----- | - | -- | -- | - | - | ------ | ------ | 
|                        |                 |   |           |        |            |   | Gross      |     | Gross |   |    |    |  
|                        |                 |   | Amortized |        | Unrealized |   | Unrealized |     | Fair 
|                        |                 |   | Cost      |        | Gains      |   | Losses     |     | Value
|                        |                 |   |           |        |            |   |            |     |      
|Fiscal 2002:            |                 |   |           |        |            |   |            |     |       |   |    |    |   |   |        |       
|Short-term investments: |                 |   |           |        |            |   |            |     |       |   |    |    |   |   |        |       
|                        | Corporate bonds |   | $         | 3,438  |            |   | $          | 1   |       |   | $  |   |   |   | $      | 3,439  | 
|Long-term investments:  |                 |   |           |        |            |   |            |     |       |   |    |    |   |   |        |       
|                        | Corporate bonds |   |           | 29,834 |            |   |            | 218 |       |   |    | (1 | ) |   |        | 30,051 | 
|                        |                 |   |           |        |            |   |            |     |       |   |    |    |   |   |        |        | 
|                        |                 | $ | 33,272    |        |            | $ | 219        |     |       | $ | (1 | )  |   | $ | 33,490 |       
|                        |                 |   |           |        |            |   |            |     |       |   |    |    |   |   |        |        | 

The cost of available-for-sale investments that are sold is based on
specific identification in determining recorded realized gains and losses. In
2002 and 2001 there were no significant gains or losses recorded.



|4. |  | Inventories                                         
|-- |  | ----------------------------------------------------
|  
|   |  | Inventories consist of the following (in thousands):

|                |       |   |             |        |      |   |        |        | 
|--------------- | ----- | - | ----------- | ------ | ---- | - | ------ | ------ | 
|                |       |   | Fiscal Year
|                |       |   |            
|                |       |   | 2002        |        | 2001
|                |       |   |             |        |     
|Finished goods  |       | $ | 22,119      |        |      | $ | 15,276 |       
|Work-in-process |       |   | 6,645       |        |      |   | 4,322  |       
|Raw materials   |       |   | 10,071      |        |      |   | 6,075  |       
|                |       |   |             |        |      |   |        |       
|                | Total |   | $           | 38,835 |      |   | $      | 25,673 | 
|                |       |   |             |        |      |   |        |       



|5. |  | Property, Plant and Equipment                                          
|-- |  | -----------------------------------------------------------------------
|  
|   |  | Property, plant, and equipment consist of the following (in thousands):

|                                          |       |   |             |        |      |   |         |        | 
|----------------------------------------- | ----- | - | ----------- | ------ | ---- | - | ------- | ------ | 
|                                          |       |   | Fiscal Year
|                                          |       |   |            
|                                          |       |   | 2002        |        | 2001
|                                          |       |   |             |        |     
|Land                                      |       | $ | 341         |        |      | $ | 341     |       
|Building                                  |       |   | 2,445       |        |      |   | 2,445   |       
|Building lease                            |       |   | 2,285       |        |      |   | 2,285   |       
|Equipment                                 |       |   | 28,897      |        |      |   | 24,458  |       
|Rental equipment                          |       |   | 6,095       |        |      |   | 4,653   |       
|Leasehold improvements                    |       |   | 9,292       |        |      |   | 7,368   |       
|                                          |       |   |             |        |      |   |         |       
|                                          | Total |   |             | 49,355 |      |   |         | 41,550 | 
|Accumulated depreciation and amortization |       |   | (24,640     | )      |      |   | (18,905 | )     
|                                          |       |   |             |        |      |   |         |       
|                                          |       | $ | 24,715      |        |      | $ | 22,645  |       
|                                          |       |   |             |        |      |   |         |       



| |  | Depreciation expense in 2002, 2001 and 2000 was $5,187,000, $4,523,000 and
$2,564,000, respectively.
| |  | ----------------------------------------------------------------------------------------------------

54



---



##### Table of Contents





|6. |  | Leases
|-- |  | ------

We lease manufacturing, office, research facilities, and equipment under
various operating lease agreements. Future minimum lease payments as of the end
of 2002 are noted below (in thousands):

|             |  |   |        |  |  |  |  | 
|------------ |  | - | ------ |  |  |  |  | 
|Fiscal year: |  |   |        | 
|2003         |  | $ | 1,844  | 
|2004         |  |   | 1,591  | 
|2005         |  |   | 1,526  | 
|2006         |  |   | 1,496  | 
|2007         |  |   | 1,490  | 
|Thereafter   |  |   | 8,636  | 
|             |  |   |        | 
|Total        |  | $ | 16,583 | 
|             |  |   |        | 



|   |  | Rent expense for all operating leases was $1,808,000 in 2002, $1,778,000
in 2001 and $623,000 in 2000.
|-- |  | ------------------------------------------------------------------------------------------------------
|  
|7. |  | Subordinated Convertible Debentures                                                                   

On March 11, 2002 we completed the redemption of our outstanding
subordinated convertible debentures using restricted cash, cash and cash
equivalents of approximately $54,800,000. An extraordinary loss in the amount
of $309,000 net of a tax benefit of $206,000 was recorded on the date of the
redemption related to the write-off of the capitalized debt issuance costs. The
restricted cash had been pledged as collateral for a letter of credit guarantee
to Thermo Electron related to Thermo Electrons guarantee of our subordinated
debentures. As a result of the redemption, the letter of credit guarantee to
Thermo Electron was extinguished.

We recorded an extraordinary gain of $191,000 in 2000 as a result of our
purchase of a portion of our subordinated convertible debentures. There was no
extraordinary item in 2001.



|8. |  | Common and Preferred Stock and Warrants
|-- |  | ---------------------------------------

We have authorized 100,000,000 no par common shares, and 2,500,000 shares
of preferred stock, of which 540,541 shares have been designated Series A and
500,000 shares designated Series B.

The Series A preferred stock is entitled to cumulative annual dividends of
$1.30 per share and has a liquidation preference of $9.25 per share plus
cumulative unpaid dividends. We may redeem the Series A preferred stock at any
time for our liquidation preference. Each share of preferred stock is
convertible into one-third of a share of common stock, after adjusting for
earned but unpaid dividends. At December 28, 2002, no shares of Series A
preferred stock were outstanding.

The Series B preferred stock is senior to the Series A in all preferences.
Series B is entitled to cumulative annual dividends of $0.96 per share and has
a liquidation preference of $8.00 per share plus cumulative unpaid dividends.
The Series B preferred stock is redeemable by us five years after its issuance
for $8.00 per share plus cumulative unpaid dividends. Each share of Series B
preferred stock is convertible at any time into three and one-third shares of
common stock and has certain anti-dilution provisions. Series B preferred vote
on an as-converted basis. At December 28, 2002, no shares of Series B preferred
stock were outstanding.

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

55



---



##### Table of Contents



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

On May 31, 2002, our shareholders approved an Employee Stock Purchase
Plan, or ESPP. The ESPP authorizes the issuance of up to 500,000 shares of
common stock to participating employees. In addition, the ESPP provides for an
annual increase of up to 250,000 shares in the total number of shares available
for issuance under the ESPP on March 1 of each year. As of December 28, 2002,
684 of our employees would have been eligible to participate in the ESPP. As
the first offering period under the ESPP will not close until the end of April
2003, no shares were issued under this plan in fiscal 2002.

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

We filed a Registration Statement on Form S-3 with the SEC to register for
sale 1,055,000 newly issued shares of our common stock and 5,945,000 shares
held by selling shareholders, of which 5,825,000 shares were held by Thermo
Electron. This Registration Statement became effective February 12, 2002, and
all of the registered shares were subsequently sold. We received $15,335,000,
net of underwriting discounts, fees and other expenses of the offering, from
the sale of the 1,055,000 newly issued shares. In addition, the underwriters
exercised a 30-day option to purchase from Thermo Electron 1,050,000 shares of
common stock to cover any over-allotments. We received no proceeds from the
sale of these over-allotment shares.

We filed another Registration Statement on Form S-3 with the SEC to
register for sale the remaining 7,609,719 shares of our common stock owned by
Thermo Electron. This Registration Statement became effective August 14, 2002.
As of the date of this document no shares have been sold. We will receive no
proceeds from the sale of these shares.

In 2001, an award of 250,000 shares of restricted common stock was made to
one of our executive officers under our 1997 Stock Option Plan. This award was
valued at $4,140,000, recorded as deferred compensation, and is being amortized
over the restriction lapse period. In 2002, a similar award of 50,000 shares
was made to another of our executive officers. This award was valued at
$328,000, was recorded as deferred compensation, and is being amortized over
the restriction lapse period. As of December 28, 2002, none of the restrictions
on these shares have lapsed.



|9. |  | Stock-Based Compensation
|-- |  | ------------------------

Historically, TCA had a variety of stock-based compensation plans for
employees and directors that allowed the granting of options, stock, and
stock-based awards. There were no grants under any of TCAs plans during 2002
or 2001. Pursuant to the terms of the Thoratec and TCA Merger agreement, all
TCA stock-based compensation plans were assumed by Thoratec effective February
14, 2001. Moreover, all outstanding options and restrictions on past TCA grants
were accelerated and became fully vested as of the Merger date of February 14,
2001 and were converted to 971,222 of our common stock options at the Merger
conversion ratio of 0.835 to 1. Although assumed by Thoratec, the TCA stock
options remain exercisable upon the same terms and conditions as under the TCA
stock option plan pursuant to which it was granted and the applicable option
agreement.

The stock-based compensation plans placed in effect after the Merger and
post-merger activity under these plans are summarized as follows:

In 1993, our Board of Directors approved the 1993 Stock Option Plan (1993
SOP), which permits us to grant options to purchase up to 666,667 shares of
common stock. No options were granted under this plan in 2002 or 2001.

In 1996, the Directors adopted the 1996 Stock Option Plan (1996 SOP) and
the 1996 Non-employee Directors Stock Option Plan (Directors Option Plan).
The 1996 SOP consists of two parts. Part One permits us to grant options to
purchase up to 500,000 shares of common stock. During 2002 no options were
granted at fair market value under Part One of the 1996 SOP. Part Two related
to the Chief Executive Officer (CEO) and permitted us to grant non-qualified
options to the CEO to purchase up to 333,333 shares of common stock, which were
granted in 1996. The Directors Option Plan, as amended, permits us to grant up
to 350,000 shares and provides for an initial grant to a Director to purchase
15,000 shares (granted in four equal installments, once when elected to the
Board then quarterly thereafter), and annual grants thereafter to purchase
7,500 shares (granted in four equal installments after re-election). Provisions
also include immediate vesting of both initial and annual grants and a five
year life on the options. In addition, the plan administrator has been
provided with the discretion to impose any repurchase rights in our favor on
any optionee. We currently have

56



---



##### Table of Contents



seven non-employee directors, six of whom are eligible to participate in
the Directors Option Plan. In each of 2002 and 2001 45,000 options were granted
at fair market value under the Directors Option Plan.

In 1997, the Directors adopted the 1997 Stock Option Plan (1997 SOP).
The 1997 SOP was amended by approval of a vote of our shareholders in February
2001 and amended again by the Board of Directors in December 2001. During 2002,
2,780,200 options were granted at fair market value under this plan and during
2001, 3,863,112 options were granted at fair market value under this plan.

We have five common stock option plans with options still outstanding at
December 28, 2002. Options may be granted by the Board of Directors at the fair
market value on the date of grant and generally become exercisable within five
years of grant and expire between five and ten years from the date of grant. At
the end of 2002, options to purchase 1,056,300 common shares remain available
for grant under all the plans.

Agreements have been entered into with selected consultants whereby
options to purchase our common stock were accepted by these consultants as full
or partial payment for the services rendered to us. The fair market value of
the consulting services is the basis for recording the transaction in our
financial records and is recognized as the related services are performed. No
options were issued under these agreements in 2002 or 2001.

Stock option activity is summarized as follows (in thousands, except per
share data):

|                                                                                                   |  |           |        |                |  |          |       | 
|-------------------------------------------------------------------------------------------------- |  | --------- | ------ | -------------- |  | -------- | ----- | 
|                                                                                                   |  |           |        |                |  | Weighted
|                                                                                                   |  | Number of |        | Average       
|                                                                                                   |  | Options   |        | Exercise Price
|                                                                                                   |  |           |        |               
|Outstanding at fiscal year end 1999
(1,173 exercisable at $16.55 weighted average price per share) |  |           | 1,173  |                |  | $        | 16.55 | 
|Granted ($6.40 weighted average fair value per share)                                              |  |           | 45     |                |  |          | 11.65 | 
|Cancelled and expired                                                                              |  |           | (208   | )              |  |          | 20.67 | 
|Exercised                                                                                          |  |           | (33    | )              |  |          | 8.30  | 
|                                                                                                   |  |           |        |                |  |          |       | 
|Outstanding at fiscal year end 2000
(977 exercisable at $15.72 weighted average price per share)   |  |           | 977    |                |  |          | 15.72 | 
|Granted ($5.22 weighted average fair value per share)                                              |  |           | 2,817  |                |  |          | 11.02 | 
|Cancelled and expired                                                                              |  |           | (527   | )              |  |          | 12.35 | 
|Exercised                                                                                          |  |           | (1,378 | )              |  |          | 8.04  | 
|Options assumed during Merger                                                                      |  |           | 3,696  |                |  |          | 8.09  | 
|                                                                                                   |  |           |        |                |  |          |       | 
|Outstanding at fiscal year end 2001
(2,615 exercisable at $9.99 weighted average price per share)  |  |           | 5,585  |                |  |          | 10.51 | 
|Granted ($9.45 weighted average fair value per share)                                              |  |           | 2,825  |                |  |          | 13.31 | 
|Cancelled and expired                                                                              |  |           | (582   | )              |  |          | 13.19 | 
|Exercised                                                                                          |  |           | (93    | )              |  |          | 8.90  | 
|                                                                                                   |  |           |        |                |  |          |       | 
|Outstanding at fiscal year end 2002
(3,392 exercisable at $9.94 weighted average price per share)  |  |           | 7,735  |                |  | $        | 11.36 | 
|                                                                                                   |  |           |        |                |  |          |       | 

In conjunction with the Merger, 887,621 options of the 3,696,000 Thoratec
options assumed as a result of the Merger became fully vested pursuant to
existing change of control agreements. This acceleration of vesting was
provided in the terms of the original Thoratec grants. Of the options that
accelerated, agreements involving substantially all of the underlying shares
were entered into whereby certain option holders agreed not to sell or transfer
any of their shares for a period of up to 18 months and to remain employed with
us for a period of 12 months after the effective date of the Merger. In
exchange, the options holders received cash payments totaling $810,000 on the
one-year anniversary of the Merger.

In addition, all options to purchase TCA shares that were outstanding at
the date of the Merger were exchanged for options to purchase 971,222 Thoratec
shares and became fully vested as of the Merger date. This acceleration of
vesting was provided for in the terms of the underlying TCA grants.

57



---



##### Table of Contents



Options outstanding as of the end of 2002 are summarized as follows:

|               |  |                     |           |                  |  |           |      |             |  |          |       |  |  |                     |           |  |  |   |       | 
|-------------- |  | ------------------- | --------- | ---------------- |  | --------- | ---- | ----------- |  | -------- | ----- |  |  | ------------------- | --------- |  |  | - | ----- | 
|               |  | Options Outstanding |           |                  |  |           |      |             |  |          |       |  |  |                    
|               |  |                     |           |                  |  |           |      |             |  |          |       |  |  |                    
|               |  |                     |           |                  |  |           |      |             |  |          |       |  |  | Options Exercisable
|               |  |                     |           |                  |  | Weighted  |      |             |  |          |       | 
|               |  |                     |           |                  |  | Average   |      | Weighted    |  |          |       |  |  | Weighted           
|Exercise       |  |                     |           |                  |  | Remaining |      | Average     |  |          |       |  |  | Average            
|Price          |  | Number              |           | Contractual Life |  | Exercise  |      | Number      |  | Exercise
|Range          |  | Outstanding         |           | (In Years)       |  | Price     |      | Outstanding |  | Price   
|               |  |                     |           |                  |  |           |      |             |  |         
|$2.25          |  |                     | 104,866   |                  |  |           | 0.68 |             |  | $        | 2.25  |  |  |                     | 104,866   |  |  | $ | 2.25  | 
|4.38  6.38    |  |                     | 1,170,192 |                  |  |           | 6.36 |             |  |          | 5.75  |  |  |                     | 779,683   |  |  |   | 5.76  | 
|6.40  9.29    |  |                     | 1,048,360 |                  |  |           | 6.90 |             |  |          | 8.20  |  |  |                     | 674,691   |  |  |   | 8.23  | 
|9.31  11.06   |  |                     | 2,191,846 |                  |  |           | 7.83 |             |  |          | 9.77  |  |  |                     | 975,369   |  |  |   | 10.01 | 
|11.15  14.73  |  |                     | 764,012   |                  |  |           | 5.40 |             |  |          | 13.32 |  |  |                     | 514,736   |  |  |   | 13.37 | 
|15.00  20.85  |  |                     | 2,395,392 |                  |  |           | 8.64 |             |  |          | 16.16 |  |  |                     | 282,036   |  |  |   | 17.16 | 
|29.40  33.05  |  |                     | 60,516    |                  |  |           | 3.91 |             |  |          | 32.35 |  |  |                     | 60,516    |  |  |   | 32.35 | 
|               |  |                     |           |                  |  |           |      |             |  |          |       |  |  |                     |           |  |  |   |       | 
|$2.25 -$ 33.05 |  |                     | 7,735,184 |                  |  |           | 7.36 |             |  | $        | 11.36 |  |  |                     | 3,391,897 |  |  | $ | 9.94  | 
|               |  |                     |           |                  |  |           |      |             |  |          |       |  |  |                     |           |  |  |   |       | 



|10. |  | Related Parties
|--- |  | ---------------

Corporate Service Agreement

We had a corporate services agreement with Thermo Electron, which
terminated upon completion of the Merger. Thermo Electrons corporate staff
provided to us certain administrative and financial services. We paid Thermo
Electron an annual amount equal to 0.8% of our revenues for these services. In
addition, we incurred direct charges that Thermo Electron paid directly on our
behalf. In 2002, 2001 and 2000, we paid nil, $124,000 and $980,000,
respectively, for these administrative and financial services and direct
charges.

Operating Leases

We subleased manufacturing, office and research facilities from Thermedics
Inc. in connection with the development and manufacturing of our VADs in
Woburn, Massachusetts. Thermedics was a division of Thermo Electron until
November 21, 2001 when it was divested by Thermo Electron and became an
unrelated third party. We were charged for actual square footage occupied at
approximately the same rent paid per square foot by Thermedics under its lease.
The accompanying statement of income includes expenses from the sublease when
Thermedics was owned by Thermo Electron of $193,600 and $177,000 in 2001 and
2000, respectively.

Purchases

We purchased metal fabrication products and services from Tecomet, Inc. in
connection with the manufacture of the ventricular-assist products we sell.
Tecomet was a division of Thermo Electron until November 15, 2001 when it was
sold by Thermo Electron to an unrelated third party. We paid $2,931,000 and
$3,283,000 to Tecomet in 2001 and 2000, respectively.

Subordinated Convertible Debentures

The outstanding principal balance of the subordinated convertible
debentures as of the end of 2001 of $54,838,000 included $1,500,000 of
debentures held by Thermo Electron (Note 7).

58



---



##### Table of Contents



11. Taxes on Income

The provisions for income tax expenses (benefits) and extraordinary items,
are as follows (in thousands):

|                                 |  |             |        |      |  |      |        |   |  |   |       | 
|-------------------------------- |  | ----------- | ------ | ---- |  | ---- | ------ | - |  | - | ----- | 
|                                 |  | Fiscal Year
|                                 |  |            
|                                 |  | 2002        |        | 2001 |  | 2000
|                                 |  |             |        |      |  |     
|Current:                         |  |             |        |      |  |      |        |   |  |   |       | 
|Federal                          |  | $           | 833    |      |  | $    |       |   |  | $ | 3,747 | 
|State                            |  |             | 1,137  |      |  |      | 420    |   |  |   | 352   | 
|Foreign                          |  |             | 14     |      |  |      |      |   |  |   |     | 
|                                 |  |             |        |      |  |      |        |   |  |   |       | 
|                                 |  |             | 1,984  |      |  |      | 420    |   |  |   | 4,099 | 
|                                 |  |             |        |      |  |      |        |   |  |   |       | 
|Deferred:                        |  |             |        |      |  |      |        |   |  |   |       | 
|Federal                          |  |             | (930   | )    |  |      | (2,915 | ) |  |   | 465   | 
|State                            |  |             | (465   | )    |  |      | 662    |   |  |   | 66    | 
|                                 |  |             |        |      |  |      |        |   |  |   |       | 
|                                 |  |             | (1,395 | )    |  |      | (2,253 | ) |  |   | 531   | 
|                                 |  |             |        |      |  |      |        |   |  |   |       | 
|                                 |  |             |        |      |  |      | (1,833 | ) |  |   | 4,630 | 
|Reduction of valuation allowance |  |             |      |      |  |      | (1,492 | ) |  |   |      | 
|                                 |  |             |        |      |  |      |        |   |  |   |       | 
|                                 |  | $           | 589    |      |  | $    | (3,325 | ) |  | $ | 4,630 | 
|                                 |  |             |        |      |  |      |        |   |  |   |       | 

The provision for income taxes in the accompanying statements of
operations differs from the provision calculated by applying the U.S. federal
statutory income tax rate of 35% to income before provision for income taxes
and extraordinary item due to the following (in thousands):

|                                                                         |  |             |      |      |  |      |       |   |  |   |         |   |  |  |       |    |  |   |       |   |  |  |      |  
|------------------------------------------------------------------------ |  | ----------- | ---- | ---- |  | ---- | ----- | - |  | - | ------- | - |  |  | ----- | -- |  | - | ----- | - |  |  | ---- | -
|                                                                         |  | Fiscal Year
|                                                                         |  |            
|                                                                         |  | 2002        |      | 2001 |  | 2000
|                                                                         |  |             |      |      |  |     
|U.S. federal statutory income tax
expense (benefit)                      |  | $           | 493  |      |  |      | 35.0  | % |  | $ | (31,916 | ) |  |  | (35.0 | )% |  | $ | 4,187 |   |  |  | 35.0 | %
|State income tax expense
(benefit), net of federal tax
expense (benefit) |  |             | 203  |      |  |      | 14.4  |   |  |   | (794    | ) |  |  | (0.9  | )  |  |   | 272   |   |  |  | 2.3  |  
|Non-deductible amortization of
goodwill                                  |  |             |     |      |  |      |      |   |  |   | 1,524   |   |  |  | 1.7   |    |  |   |      |   |  |  |     |  
|Non-deductible acquired IPR&D                                            |  |             |     |      |  |      |      |   |  |   | 26,900  |   |  |  | 29.5  |    |  |   |      |   |  |  |     |  
|Non-deductible merger expenses                                           |  |             |     |      |  |      |      |   |  |   | 175     |   |  |  | 0.2   |    |  |   |      |   |  |  |     |  
|Export benefits                                                          |  |             | (334 | )    |  |      | (23.7 | ) |  |   | (50     | ) |  |  | (0.1  | )  |  |   | (134  | ) |  |  | (1.1 | )
|Federal research and development
credits                                 |  |             | (118 | )    |  |      | (8.4  | ) |  |   | (100    | ) |  |  | (0.1  | )  |  |   |      |   |  |  |     |  
|Non-deductible amortization of
deferred compensation                     |  |             | 101  |      |  |      | 7.2   |   |  |   | 82      |   |  |  | 0.1   |    |  |   |      |   |  |  |     |  
|Meals and entertainment                                                  |  |             | 101  |      |  |      | 7.2   |   |  |   | 63      |   |  |  | 0.1   |    |  |   | 40    |   |  |  | 0.3  |  
|Expiration of net operating losses                                       |  |             | 154  |      |  |      | 10.9  |   |  |   | 154     |   |  |  | 0.2   |    |  |   |      |   |  |  |     |  
|Other                                                                    |  |             | (11  | )    |  |      | (0.8  | ) |  |   | 637     |   |  |  | 0.7   |    |  |   | 265   |   |  |  | 2.2  |  
|                                                                         |  |             |      |      |  |      |       |   |  |   |         |   |  |  |       |    |  |   |       |   |  |  |      |  
|                                                                         |  | $           | 589  |      |  |      | 41.8  | % |  | $ | (3,325  | ) |  |  | (3.6  | )% |  | $ | 4,630 |   |  |  | 38.7 | %
|                                                                         |  |             |      |      |  |      |       |   |  |   |         |   |  |  |       |    |  |   |       |   |  |  |      |  

Deferred income taxes reflect the net tax effects of: (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
(b) operating loss and tax credits carryforwards.

59



---



##### Table of Contents



Significant components of our net deferred taxes are as follows (in
thousands):

|                             |                                               |   |             |         |      |   |         |         |  
|---------------------------- | --------------------------------------------- | - | ----------- | ------- | ---- | - | ------- | ------- | -
|                             |                                               |   | Fiscal Year
|                             |                                               |   |            
|                             |                                               |   | 2002        |         | 2001
|                             |                                               |   |             |         |     
|Deferred tax assets:         |                                               |   |             |         |      |   |         |        
|                             | Write-off of acquired technology              |   | $           | 1,173   |      |   | $       | 1,304   |  
|                             | Reserves and accruals                         |   |             | 1,895   |      |   |         | 2,186   |  
|                             | Depreciation and amortization                 |   |             | 1,536   |      |   |         | 2,709   |  
|                             | Inventory basis difference                    |   |             | 2,196   |      |   |         | 2,361   |  
|                             | Research and development credit carryforwards |   |             | 1,997   |      |   |         | 1,609   |  
|                             | Net operating loss carryovers                 |   |             | 8,339   |      |   |         | 10,586  |  
|                             | Other, net                                    |   |             | 290     |      |   |         | 347     |  
|                             |                                               |   |             |         |      |   |         |        
|Total deferred tax assets    |                                               |   | 17,426      |         |      |   | 21,102  |        
|                             |                                               |   |             |         |      |   |         |        
|Deferred tax liabilities:    |                                               |   |             |         |      |   |         |        
|                             | Purchased intangibles                         |   |             | (74,081 | )    |   |         | (79,697 | )
|                             |                                               |   |             |         |      |   |         |        
|Net deferred tax liabilities |                                               | $ | (56,655     | )       |      | $ | (58,595 | )      
|                             |                                               |   |             |         |      |   |         |        

At the end of 2002, we had federal and state net operating loss (NOL)
carryforwards of approximately $23,000,000 and $2,000,000, respectively, which
expire from 2003 through 2021. Use of $1,300,000 of the federal NOL
carryforwards, which arose prior to a greater than 50% change in ownership in
1992, is limited to approximately $440,000 per year.

At the end of 2002, we had available carryforward research and
experimentation tax credits for federal and state income tax purposes of
approximately $1,300,000 and $900,000, respectively. Federal tax credit
carryforwards expire from 2009 through 2022. State tax credits carry forward
indefinitely.



|12. |  | Enterprise and Related Geographic Information
|--- |  | ---------------------------------------------

We organize and manage our business by functional operating entities. Our
functional entities operate in two segments: (1) Cardiovascular and (2) ITC.
The Cardiovascular segment develops, manufactures and markets proprietary
medical devices used for circulatory support and vascular graft applications.
The ITC segment develops, manufactures and markets near-patient, whole-blood
coagulation testing equipment and related disposables, as well as premium
quality, single-use skin incision devices. All 2000 financial information
presented herein represents the results of operations of TCAs Cardiovascular
segment and ITC segment. The 2001 financial information presented herein
includes the financial results of TCAs segments for the entire fiscal year and
the financial results of Thoratecs Cardiovascular segment only for the
post-merger period from February 14, 2001 through December 29, 2001.

60



---



##### Table of Contents



Business segments (in thousands):

|                                                          |                                                          |                                     |                                                         |         |             |       |      |         |         |         |   |         |         |        | 
|--------------------------------------------------------- | -------------------------------------------------------- | ----------------------------------- | ------------------------------------------------------- | ------- | ----------- | ----- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------ | 
|                                                          |                                                          |                                     |                                                         |         | Fiscal Year
|                                                          |                                                          |                                     |                                                         |         |            
|                                                          |                                                          |                                     |                                                         |         | 2002        |       | 2001 |         | 2000   
|                                                          |                                                          |                                     |                                                         |         |             |       |      |         |        
|Product sales:                                            |                                                          |                                     |                                                         |         |             |       |      |         |         |         |   |        
|                                                          | Cardiovascular                                           |                                     | $                                                       | 84,442  |             |       | $    | 71,809  |         |         | $ | 43,049  |        
|                                                          | ITC                                                      |                                     |                                                         | 46,402  |             |       |      | 41,575  |         |         |   | 40,347  |        
|                                                          |                                                          |                                     |                                                         |         |             |       |      |         |         |         |   |        
|                                                          |                                                          | Total product sales                 |                                                         | $       | 130,844     |       |      | $       | 113,384 |         |   | $       | 83,396  |       
|                                                          |                                                          |                                     |                                                         |         |             |       |      |         |         |         |   |         |        
|Income (loss) before income taxes and extraordinary item: |                                                          |                                     |                                                         |         |             |       |      |         |         |         |   |        
|                                                          | Cardiovascular                                           |                                     | $                                                       | 8,392   |             |       | $    | (177    | )       |         | $ | 1,499   |        
|                                                          | ITC                                                      |                                     |                                                         | 9,680   |             |       |      | 8,953   |         |         |   | 8,270   |        
|                                                          | Corporate(a)                                             |                                     |                                                         | (5,016  | )           |       |      | (2,660  | )       |         |   | (980    | )      
|                                                          | Amortization of goodwill and purchased intangibles       |                                     |                                                         | (12,384 | )           |       |      | (15,674 | )       |         |   |        |        
|                                                          | In-process research and development                      |                                     |                                                         |       |             |       |      | (76,858 | )       |         |   |        |        
|                                                          | Merger, restructuring and other costs                    |                                     |                                                         | (1,409  | )           |       |      | (7,134  | )       |         |   | (1,831  | )      
|                                                          |                                                          |                                     |                                                         |         |             |       |      |         |         |         |   |         |        
|                                                          |                                                          | Total operating income (loss)       |                                                         |         | (737        | )     |      |         | (93,550 | )       |   |         | 6,958   |       
|                                                          | Interest and other income, net                           |                                     |                                                         | 2,146   |             |       |      | 2,359   |         |         |   | 5,005   |        
|                                                          |                                                          |                                     |                                                         |         |             |       |      |         |         |         |   |         |        
|                                                          |                                                          |                                     | Total income (loss) before taxes and extraordinary item |         | $           | 1,409 |      |         | $       | (91,191 | ) |         | $       | 11,963 | 
|                                                          |                                                          |                                     |                                                         |         |             |       |      |         |         |         |   |         |        
|Total assets:                                             |                                                          |                                     |                                                         |         |             |       |      |         |         |         |   |        
|                                                          | Cardiovascular                                           |                                     | $                                                       | 71,234  |             |       | $    | 57,299  |         |         | $ | 25,136  |        
|                                                          | ITC                                                      |                                     |                                                         | 23,464  |             |       |      | 19,883  |         |         |   | 15,808  |        
|                                                          | Corporate(a)                                             |                                     |                                                         | 92,960  |             |       |      | 159,242 |         |         |   | 135,741 |        
|                                                          | Goodwill and purchased intangible assets                 |                                     |                                                         | 280,774 |             |       |      | 293,817 |         |         |   |        |        
|                                                          |                                                          |                                     |                                                         |         |             |       |      |         |         |         |   |         |        
|                                                          |                                                          | Total assets                        |                                                         | $       | 468,432     |       |      | $       | 530,241 |         |   | $       | 176,685 |       
|                                                          |                                                          |                                     |                                                         |         |             |       |      |         |         |         |   |         |        
|Depreciation and amortization:                            |                                                          |                                     |                                                         |         |             |       |      |         |         |         |   |        
|                                                          | Cardiovascular                                           |                                     | $                                                       | 4,766   |             |       | $    | 3,634   |         |         | $ | 1,664   |        
|                                                          | ITC                                                      |                                     |                                                         | 1,074   |             |       |      | 1,214   |         |         |   | 1,446   |        
|                                                          | Amortization of goodwill and purchased intangible assets |                                     |                                                         | 12,384  |             |       |      | 15,674  |         |         |   |        |        
|                                                          |                                                          |                                     |                                                         |         |             |       |      |         |         |         |   |         |        
|                                                          |                                                          | Total depreciation and amortization |                                                         | $       | 18,224      |       |      | $       | 20,522  |         |   | $       | 3,110   |       
|                                                          |                                                          |                                     |                                                         |         |             |       |      |         |         |         |   |        
|Capital expenditures:                                     |                                                          |                                     |                                                         |         |             |       |      |         |         |         |   |        
|                                                          | Cardiovascular                                           |                                     | $                                                       | 6,321   |             |       | $    | 6,789   |         |         | $ | 1,243   |        
|                                                          | ITC                                                      |                                     |                                                         | 1,207   |             |       |      | 1,158   |         |         |   | 1,117   |        
|                                                          |                                                          |                                     |                                                         |         |             |       |      |         |         |         |   |        
|                                                          |                                                          | Total capital expenditures          |                                                         | $       | 7,528       |       |      | $       | 7,947   |         |   | $       | 2,360   |       
|                                                          |                                                          |                                     |                                                         |         |             |       |      |         |         |         |   |        



|(a) |  | Primarily represents general and administrative items not specifically
allocated to any particular business segment.
|--- |  | --------------------------------------------------------------------------------------------------------------------

Geographic Areas (in thousands):

|               |                         |                     |       |         |             |         |      |        |        |         |   |        |        |        | 
|-------------- | ----------------------- | ------------------- | ----- | ------- | ----------- | ------- | ---- | ------ | ------ | ------- | - | ------ | ------ | ------ | 
|               |                         |                     |       |         | Fiscal Year
|               |                         |                     |       |         |            
|               |                         |                     |       |         | 2002        |         | 2001 |        | 2000  
|               |                         |                     |       |         |             |         |      |        |       
|Product Sales: |                         |                     |       |         |             |         |      |        |        |         |   |       
|               | Domestic                |                     | $     | 106,983 |             |         | $    | 90,678 |        |         | $ | 69,786 |       
|               | Europe                  |                     |       | 15,188  |             |         |      | 13,000 |        |         |   | 8,140  |       
|               | All other international |                     |       | 8,673   |             |         |      | 9,706  |        |         |   | 5,470  |       
|               |                         |                     |       |         |             |         |      |        |        |         |   |       
|               |                         | Total international |       |         | 23,861      |         |      |        | 22,706 |         |   |        | 13,610 |       
|               |                         |                     |       |         |             |         |      |        |        |         |   |       
|               |                         |                     | Total |         | $           | 130,844 |      |        | $      | 113,384 |   |        | $      | 83,396 | 
|               |                         |                     |       |         |             |         |      |        |        |         |   |        |       



|13. |  | Commitments
|--- |  | -----------

We had various firm purchase commitments totaling approximately
$11,032,000 at December 28, 2002.

61



---



##### Table of Contents



14. Retirement Savings Plan

Substantially all of our full-time employees are eligible to participate
in a 401(k) retirement savings plan. As of the date of the Merger and
continuing through June 30, 2001, two retirement savings plans were in effect,
representing the pre-merger plan of Thoratec and a new plan set in place as of
the Merger date. Prior to February 14, 2001, TCA participated in Thermo
Electrons retirement savings plan. Effective July 1, 2001, the two plans were
combined into a new savings plan (the Retirement Plan). Under the Retirement
Plan, employees may elect to contribute up to 25% of their eligible
compensation to the Retirement Plan, subject to certain limitations. In 2002
and 2001 our match was 50%, up to the first 6% of eligible employee plan
compensation. Employees vest under the Retirement Plan at the rate of 25% per
year, with full vesting after four years of service with us. For 2002, 2001 and
2000, we made contributions to the Retirement Plan of approximately $806,000,
$674,000 and $804,000, respectively.

15. Merger, Restructuring and Other Costs

During 2002, 2001 and 2000, the following merger, restructuring and other
costs were recorded in expense (in thousands):

|              |  |             |       |      |  |      |       |  |  |   |       | 
|------------- |  | ----------- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|              |  | Fiscal Year
|              |  |            
|              |  | 2002        |       | 2001 |  | 2000
|              |  |             |       |      |  |     
|Merger        |  | $           | 356   |      |  | $    | 5,326 |  |  | $ | 1,831 | 
|Restructuring |  |             | 524   |      |  |      | 1,093 |  |  |   |      | 
|Other         |  |             | 529   |      |  |      | 715   |  |  |   |      | 
|              |  |             |       |      |  |      |       |  |  |   |       | 
|Total         |  | $           | 1,409 |      |  | $    | 7,134 |  |  | $ | 1,831 | 
|              |  |             |       |      |  |      |       |  |  |   |       | 

Merger Costs

Merger costs recorded during 2002, 2001 and 2000 consisted principally of
employee severance, pre-merger employee retention costs, and outside
consulting, accounting and legal expenses associated with the Merger. Early in
2000, Thermo Electron announced its intent to sell TCA. In conjunction with
this announcement, TCA put in place an employee retention plan, which offered a
bonus to certain key employees to continue employment with TCA through the
completion of the sale of the company. Upon closure of the Merger, certain
Thoratec executives stock options accelerated according to their terms. In
exchange for a waiver of their rights to immediately exercise these options and
to sell the related stock, we put in place a bonus plan to serve as
compensation to these executives for that waiver.

The following table reflects the activity in accrued merger costs for 2002
and 2001 (in thousands):

|                      |                                                    |   |             |      |      |   |       |        |  
|--------------------- | -------------------------------------------------- | - | ----------- | ---- | ---- | - | ----- | ------ | -
|                      |                                                    |   | Fiscal Year
|                      |                                                    |   |            
|                      |                                                    |   | 2002        |      | 2001
|                      |                                                    |   |             |      |     
|Accrued Merger Costs: |                                                    |   |             |      |      |   |       |       
|Beginning balance     |                                                    | $ | 472         |      |      | $ | 1,708 |       
|Add:                  |                                                    |   |             |      |      |   |       |       
|                      | Accruals pursuant to executive waiver agreement    |   |             | 337  |      |   |       | 684    |  
|                      | Accruals pursuant to employee severance agreements |   |             |    |      |   |       | 2,825  |  
|Less:                 |                                                    |   |             |      |      |   |       |       
|                      | Payments pursuant to employee severance agreements |   |             |    |      |   |       | (4,533 | )
|                      | Payments pursuant to executive waiver agreement    |   |             | (809 | )    |   |       | (212   | )
|                      |                                                    |   |             |      |      |   |       |       
|Ending balance        |                                                    | $ |           |      |      | $ | 472   |       
|                      |                                                    |   |             |      |      |   |       |       

Certain merger costs were recorded directly to expense and did not pass
through accrued merger costs. These expenses consisted primarily of legal,
audit, consulting and other professional fees related to the Merger and totaled
$19,000 for 2002 and $1,817,000 for 2001. All of these expenses have been
paid.

Restructuring Costs

In June 2001, we initiated a restructuring plan (the Restructuring Plan)
to consolidate all of our VAD manufacturing operations to our facilities in
Pleasanton, California. This plan required the closure of our Chelmsford,
Massachusetts office and research facility and the relocation of the Woburn,
Massachusetts manufacturing operations. We will continue performing some
marketing, research and development, and administrative functions at the Woburn
facility. We notified the affected employees during the second quarter

62



---



##### Table of Contents



of 2001, both through direct personal contact and written notification.
The Chelmsford facility was closed in February 2002 and all relocation
activities were completed in the first quarter of 2003. We expect to receive
FDA approval to begin manufacturing our HeartMate product line in Pleasanton in
the first half of 2003. Through December 28, 2002, we have recorded $1,617,000
of restructuring charges in accordance with Emerging Issues Task Force 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity and Staff Accounting Bulletin 100, Restructuring
and Impairment Charges. These charges represent estimated employee severance
costs and stock option acceleration charges. As of December 28, 2002, we have
paid approximately $741,000 in severance payments to 47 employees related to
the restructuring. All remaining severance under the Restructuring Plan is
expected to be paid by the end of the first quarter of 2003. The following is a
summary of our accrued restructuring costs activity in 2002 and 2001 (in
thousands):

|                             |                                |   |             |      |      |   |     |      |  
|---------------------------- | ------------------------------ | - | ----------- | ---- | ---- | - | --- | ---- | -
|                             |                                |   | Fiscal Year
|                             |                                |   |            
|                             |                                |   | 2002        |      | 2001
|                             |                                |   |             |      |     
|Accrued Restructuring Costs: |                                |   |             |      |      |   |     |     
|Beginning balance            |                                | $ | 863         |      |      | $ |    |     
|                             | Employee severance accrual     |   |             | 425  |      |   |     | 995  |  
|                             | Payments of employee severance |   |             | (609 | )    |   |     | (132 | )
|                             |                                |   |             |      |      |   |     |     
|Ending balance               |                                | $ | 679         |      |      | $ | 863 |     
|                             |                                |   |             |      |      |   |     |     

In addition to the employee severance costs, estimated restructuring costs
includes expense related to the acceleration of stock options granted to
employees who have been or will be terminated under the Restructuring Plan. In
the fiscal years ended 2002 and 2001, $99,000 and $98,000, respectively, of
stock options acceleration expense was recorded.

Other Costs

Other costs of $529,000 were incurred in the fourth quarter of 2002
related to the termination of a European distribution agreement. As of
December 28, 2002 none of these costs have been paid.

Other costs of $715,000 were incurred in the third quarter of 2001 related
to the events of September 11, 2001. As of December 29, 2001, the total amount
of these costs have been paid.

16. Earnings (Loss) Per Share

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

Basic earnings (loss) per share are computed by dividing net income (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 4,165,000, 5,585,000 and 774,000 shares
of common stock were not included in the computations of diluted earnings and
losses per share for 2002, 2001 and 2000, respectively, as their inclusion
would be antidilutive. In addition, the computation of diluted earnings per
share for all years presented excluded the effect of assuming the conversion of
our 4.75% subordinated convertible debentures, convertible at $37.62 per share,
because their effect would have been antidilutive.

Basic and diluted earnings (loss) per share were calculated as follows (in
thousands, except per share data):

|                                                                             |  |      |        |      |  |      |         |   |  |   |        | 
|---------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------- | - |  | - | ------ | 
|                                                                             |  | 2002 |        | 2001 |  | 2000
|                                                                             |  |      |        |      |  |     
|Net income (loss) before extraordinary item                                  |  | $    | 820    |      |  | $    | (87,866 | ) |  | $ | 7,333  | 
|Extraordinary item  net of taxes                                            |  |      | (309   | )    |  |      |        |   |  |   | 191    | 
|                                                                             |  |      |        |      |  |      |         |   |  |   |        | 
|Net income (loss)                                                            |  | $    | 511    |      |  | $    | (87,866 | ) |  | $ | 7,524  | 
|                                                                             |  |      |        |      |  |      |         |   |  |   |        | 
|Weighted average number of common shares-Basic                               |  |      | 56,184 |      |  |      | 52,336  |   |  |   | 32,193 | 
|Dilutive effect of employee stock options                                    |  |      | 578    |      |  |      |        |   |  |   | 16     | 
|                                                                             |  |      |        |      |  |      |         |   |  |   |        | 
|Weighted average number of common shares-Diluted                             |  |      | 56,762 |      |  |      | 52,336  |   |  |   | 32,209 | 
|                                                                             |  |      |        |      |  |      |         |   |  |   |        | 
|Basic and diluted earnings (loss) per common share before extraordinary
item |  | $    | 0.01   |      |  | $    | (1.68   | ) |  | $ | 0.23   | 
|                                                                             |  |      |        |      |  |      |         |   |  |   |        | 
|Basic and diluted earnings (loss) per common share                           |  | $    | 0.01   |      |  | $    | (1.68   | ) |  | $ | 0.23   | 
|                                                                             |  |      |        |      |  |      |         |   |  |   |        | 

63



---



##### Table of Contents



17. Quarterly Results of Operations (Unaudited)

The following is a summary of our unaudited quarterly results of
operations for the fiscal years 2002 and 2001:

|                                            |  |                                       |         |        |  |       |        |        |  |   |        |   |  |   |        | 
|------------------------------------------- |  | ------------------------------------- | ------- | ------ |  | ----- | ------ | ------ |  | - | ------ | - |  | - | ------ | 
|                                            |  | First                                 |         | Second |  | Third |        | Fourth
|                                            |  |                                       |         |        |  |       |        |       
|                                            |  | (In thousands, except per share data)
|Fiscal Year 2002                            |  |                                       |         |        |  |       |        |        |  |   |        |   |  |   |        | 
|Product sales                               |  | $                                     | 29,639  |        |  | $     | 31,034 |        |  | $ | 31,105 |   |  | $ | 39,066 | 
|Gross profit                                |  |                                       | 16,475  |        |  |       | 17,753 |        |  |   | 18,050 |   |  |   | 23,442 | 
|Net income (loss)                           |  |                                       | (1,758  | )      |  |       | (556   | )      |  |   | 237    |   |  |   | 2,588  | 
|Basic and diluted earnings (loss) per share |  | $                                     | (0.03   | )      |  | $     | (0.01  | )      |  | $ | 0.00   |   |  | $ | 0.05   | 
|                                            |  |                                      
|Fiscal Year 2001                            |  |                                       |         |        |  |       |        |        |  |   |        |   |  |   |        | 
|Product sales                               |  | $                                     | 21,480  |        |  | $     | 28,218 |        |  | $ | 28,666 |   |  | $ | 35,020 | 
|Gross profit                                |  |                                       | 11,440  |        |  |       | 15,573 |        |  |   | 15,062 |   |  |   | 18,469 | 
|Net income (loss)                           |  |                                       | (82,180 | )      |  |       | (3,103 | )      |  |   | (2,968 | ) |  |   | 385    | 
|Basic and diluted earnings (loss) per share |  | $                                     | (1.88   | )      |  | $     | (0.06  | )      |  | $ | (0.05  | ) |  | $ | 0.01   | 




Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

64



---



##### Table of Contents






PART III




Item 10.Directors and Executive Officers of the Registrant

The information regarding directors and executive officers required by
Item 10 is incorporated by reference from the information under the captions
Election of Directors, Directors and Executive Officers and Section 16(a)
Beneficial Ownership Reporting Compliance in the definitive proxy statement to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
for our 2003 annual meeting of stockholders.




Item 11.Executive Compensation

The information required by Item 11 is incorporated by reference from the
information under the caption Executive Compensation and Other Information in
the definitive proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A for our 2003 annual meeting of
stockholders.




Item 12.Security Ownership of Certain Beneficial Owners and Management

The information required by Item 12 is incorporated by reference from the
information under the caption Security Ownership of Certain Beneficial Owners
and Management in the definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A for our 2003
annual meeting of stockholders.




Item 13.Certain Relationships and Related Transactions

The information required by Item 13 is incorporated by reference from the
information under the caption Certain Relationships and Related Transactions
in the definitive proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A for our 2003 annual meeting of
stockholders.




Item 14.Controls and Procedures



| | (a) |  | An evaluation was performed under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures within
90 days before the filing date of this annual report. Based on that
evaluation, our management, including the Chief Executive Officer and
Chief Financial Officer, concluded that the Companys disclosure
controls and procedures were effective. There have been no
significant changes in our internal controls or in other factors that
could significantly affect internal controls subsequent to their
evaluation.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | We intend to review and evaluate the design and effectiveness
of our disclosure controls and procedures on an ongoing basis and to
improve our controls and procedures over time and to correct any
deficiencies that we may discover in the future. Our goal is to
ensure that our senior management has timely access to all material
financial and non-financial information concerning our business.
While we believe the present design of our disclosure controls and
procedures is effective to achieve our goal, future events affecting
our business may cause us to significantly modify our disclosure
controls and procedures.                                                   

65



---



##### Table of Contents






PART IV




Item 15.Exhibits, Financial Statement Schedules, and Reports on Form 8-K



| | (a) |  | List of documents filed as part of this report:                                                                                                                              
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 1.  |  | Financial Statements and Independent Auditors Report                                                                                                                         
|
| |     |  | Reference is made to the Index to Financial Statements under Item 8 of Part
II of this report, where these documents are included.                                           
|
| | 2.  |  | Financial Statement Schedules                                                                                                                                                
|
| |     |  | Independent Auditors Report  Deloitte & Touche LLP                                                                                                                         
|
| |     |  | Copy of Previously Issued Report of Independent Public Accountants  Arthur
Andersen LLP                                                                                     
|
| |     |  | Schedule II  Valuation and Qualifying Accounts and Reserves                                                                                                                 
|
| |     |  | Other financial statement schedules are not included either because they
are not required or the information is otherwise shown in the financial
statements or notes thereto.
|
| | 3.  |  | Exhibits filed with Annual Report on Form 10-K (numbered in
accordance with Item 601 of Regulation S-K).                                                                     
|
| | (b) |  | Reports on Form 8-K:                                                                                                                                                         
|
| |     |  | None.                                                                                                                                                                        

66



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

To the Board of Directors and Shareholders of
Thoratec Corporation:

We have audited the financial statements of Thoratec Corporation (the
Company) as of December 28, 2002 and December 29, 2001, and for the years
then ended, and have issued our report thereon dated March 7,
2003 (which report expresses an unqualified opinion and includes an
explanatory paragraph concerning the adoption of a new accounting
principle in 2002); such financial statements and our report are included
elsewhere in this Annual Report on Form 10-K. Our audit also included the 2002
and 2001 financial statement schedules of Thoratec Corporation listed in Item 15(a)(2). These financial
statement schedules are the responsibility of the Companys management. Our
responsibility is to express an opinion based on our audits. In our opinion,
the 2002 and 2001 financial statement schedules, when considered in relation
to the 2002 and 2001 basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein. The financial
statement schedules for the year ended December 30, 2000 were
audited by other auditors who have ceased operations. Those auditors
expressed an opinion, in their report dated February 5, 2001,
that such 2000 financial statement schedules, when considered in
relation to the 2000 basic financial statements taken as a whole,
presented fairly in all material respects the information set forth
therein.

/s/ DELOITTE & TOUCHE LLP



San Francisco, California
March 7, 2003

67



---



##### Table of Contents



THE FOLLOWING REPORT IS A COPY OF THE PREVIOUSLY ISSUED REPORT FROM ARTHUR
ANDERSEN LLP (ANDERSEN). ANDERSEN DID NOT PERFORM ANY PROCEDURES IN CONNECTION
WITH THIS ANNUAL REPORT ON FORM 10-K. ACCORDINGLY, THIS REPORT HAS NOT BEEN
REISSUED BY ANDERSEN.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

Shareholders and Board of Directors of Thoratec Corporation:

We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements as of December 30, 2000 and for the two
years then ended included in this Annual Report on Form 10-K, and have issued
our report thereon dated February 5, 2001. Our audits were made for the purpose
of forming an opinion on those statements taken as a whole. The schedule listed
in Item 14(a)2 is the responsibility of the Companys management and is
presented for purposes of complying with the Securities and Exchange
Commissions rules and is not part of the basic consolidated financial
statements. The schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the consolidated financial data
required to be set forth therein in relation to the basic consolidated
financial statements taken as a whole.

/s/ ARTHUR ANDERSEN LLP



Boston, Massachusetts
February 5, 2001

68



---



##### Table of Contents



THORATEC CORPORATION AND SUBSIDIARIES

SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
For the Three Fiscal Years Ended December 28, 2002

|                              |                                 |  |           |       |           |  |                |     |      |  |   |      |         |  |   |     | 
|----------------------------- | ------------------------------- |  | --------- | ----- | --------- |  | -------------- | --- | ---- |  | - | ---- | ------- |  | - | --- | 
|                              |                                 |  | Balance   |       |           |  |                |     |      |  |   |      | Balance
|                              |                                 |  | Beginning |       |           |  |                |     |      |  |   |      | End of 
|                              |                                 |  | of Year   |       | Additions |  | Deductions     |     | Year
|                              |                                 |  |           |       |           |  |                |     |     
|                              |                                 |  |           |       |           |  | (In thousands) |     |      |  |  
|Year Ended December 28, 2002: |                                 |  |           |       |           |  |                |     |      |  |   |      |         |  |   |    
|                              | Allowance for doubtful accounts |  | $         | 551   |           |  | $              | 154 |      |  | $ | (467 | )(1)    |  | $ | 238 | 
|                              | Accrued product warranty        |  | $         | 910   |           |  | $              | 45  |      |  | $ | (260 | )       |  | $ | 695 | 
|Year Ended December 29, 2001: |                                 |  |           |       |           |  |                |     |      |  |   |      |         |  |   |    
|                              | Allowance for doubtful accounts |  | $         | 939   |           |  | $              | 337 |      |  | $ | (725 | )(1)    |  | $ | 551 | 
|                              | Accrued product warranty        |  | $         | 970   |           |  | $              | 594 |      |  | $ | (654 | )       |  | $ | 910 | 
|Year Ended December 30, 2000: |                                 |  |           |       |           |  |                |     |      |  |   |      |         |  |   |    
|                              | Allowance for doubtful accounts |  | $         | 1,009 |           |  | $              | 24  |      |  | $ | (94  | )(1)    |  | $ | 939 | 
|                              | Accrued product warranty        |  | $         | 1,420 |           |  | $              | 49  |      |  | $ | (499 | )       |  | $ | 970 | 



---

|(1) |  | Accounts written off, net of recoveries.
|--- |  | ----------------------------------------

69



---



##### Table of Contents






EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                
|Number  |  | Exhibit                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                
|3.1     |  | Thoratecs Articles of Incorporation, as amended.                                                                                                                                                              
|3.2     |  | Thoratecs By-Laws, as amended.(1)                                                                                                                                                                             
|4.1     |  | Rights Agreement between Thoratec Corporation and Computershare Trust
Company, Inc. as Rights Agent dated as of May 2, 2002.(2)                                                                                
|10.1    |  | Thoratecs 1984 Incentive Stock Option Plan, as amended.(3)                                                                                                                                                    
|10.2    |  | Sublease dated August 19, 1988, between Thoratec Cardiosystems and Thermedics, as amended by
Amendment No. 1 dated January 1, 1990(4); and as further
amended by Amendment No. 2 dated as of February 14, 2001.
|10.3    |  | Intellectual Property Cross-license Agreement between Thermedics and the Thoratec Cardiosystems
dated August 19, 1988.(5)                                                                                      
|10.4    |  | Form of Indemnification Agreement between Thoratec Cardiosystems and
its officers and directors.(5)                                                                                                            
|10.5    |  | Agreement for the acquisition of Th. Goldschmidt AG of Certain of the Assets of Thoratec dated
March 29, 1989.(6)                                                                                              
|10.6    |  | Thoratecs 1993 Stock Option Plan.(7)                                                                                                                                                                          
|10.7    |  | Agreement dated May 26, 1993, between The Polymer Technology Group Incorporated and the Thoratec
Cardiosystems.(8)                                                                                             
|10.8    |  | Thoratecs 1996 Stock Option Plan.(9)                                                                                                                                                                          
|10.9    |  | Thoratecs 1996 Nonemployee Directors Stock Option Plan, as
amended.(10)                                                                                                                                       
|10.10   |  | Lease Agreement dated July 25, 1996, between Main Street
Associates and Thoratec, as amended.(11)                                                                                                              
|10.11   |  | First Amendment to Lease Agreement originally between Main Street Associates and Thoratec dated
July 25, 1996.(12)                                                                                             
|10.12   |  | Second Amendment to Lease Agreement originally between Main Street Associates and Thoratec dated
July 25, 1996.(13)                                                                                            
|10.13   |  | Thoratecs 1997 Stock Option Plan, as amended.(14)                                                                                                                                                             
|10.14   |  | Amended and Restated Directors Stock Option Plan of Thoratec
Cardiosystems.(15)                                                                                                                                
|10.15   |  | Amended and Restated Nonqualified Stock Option Plan of Thoratec
Cardiosystems.(15)                                                                                                                             
|10.16   |  | Agreement and Plan of Merger by and among Thoratec, Lightning Acquisition Corporation, Thermo
Cardiosystems Inc, and Thermo Electron Corporation dated
October 3, 2000.(16)                                    
|10.17   |  | Registration Rights Agreement by and between Thoratec and Thermo
Electron dated October 3, 2000.(16)                                                                                                           
|10.18   |  | Shareholder Agreement by and between Thoratec and Thermo Electron
dated October 3, 2000.(16)                                                                                                                   
|10.19   |  | Lease agreement dated August 16, 1995, between International
Technidyne and BHBMC, as amended.(17)                                                                                                             
|10.20   |  | Employment Agreement by and between Thoratec and D. Keith Grossman, amended as of December 6,
2001.(17)                                                                                                        
|10.21   |  | Thoratecs 2002 Employee Stock Purchase Plan.(18)                                                                                                                                                              
|21      |  | Subsidiaries of Thoratec.(17)                                                                                                                                                                                  
|23.1    |  | Independent Auditors Consent  Deloitte & Touche LLP.                                                                                                                                                         
|23.2    |  | Notice Regarding Consent of Arthur Andersen LLP.                                                                                                                                                               
|24      |  | Power of Attorney  Reference is made to page 74 hereof.                                                                                                                                                       
|99.1    |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002                                                                                         



---

|(1) |  | Filed as an Exhibit with corresponding exhibit number to Thoratecs
Registration Statement on Form S-1 (Registration No. 2-87293) and
incorporated herein by reference.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Filed as an Exhibit to
Thoratecs Form 8-A12G filed with the SEC on May 3, 2002 (Registration No. 000-49798), and incorporated herein by
reference.                    

70



---



##### Table of Contents



|(3)  |  | Filed as an Exhibit to Thoratecs Annual Report on Form 10-K for the
fiscal year ended December 29, 1990 filed with the SEC on March 28, 1991,
and incorporated herein by reference.          
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(4)  |  | Filed as an Exhibit to Thoratec Cardiosystems Annual Report on Form 10-K
for the fiscal year ended December 30, 1989 and incorporated herein by
reference.                                   
|    
|(5)  |  | Filed as an Exhibit to Thoratec Cardiosystems Registration Statement on
Form S-1 (Registration No. 33-25144) and incorporated herein by reference.                                           
|    
|(6)  |  | Filed as an Exhibit to Thoratecs Annual Report on Form 10-K for the
fiscal year ended December 30, 1989 filed with the SEC on March 30, 1990,
and incorporated herein by reference.          
|    
|(7)  |  | Filed as an Exhibit to Thoratecs Annual Report on Form 10-K for the
fiscal year ended January 1, 1994 filed with the SEC on March 22, 1994,
and incorporated herein by reference.            
|    
|(8)  |  | Filed as an Exhibit to Thoratec Cardiosystems Quarterly Report on Form
10-Q for the fiscal quarter ended July 3, 1993 and incorporated herein by
reference.                                  
|    
|(9)  |  | Filed as an Exhibit to Thoratecs Registration Statement on Form S-8
filed with the SEC on September 12, 1996, (Registration No. 333-11883) and
incorporated herein by reference.             
|    
|(10) |  | Filed as an Exhibit to Thoratecs Registration Statement on Form S-8
filed with the SEC on June 16, 1999 (Registration
No. 333-80807), and
incorporated herein by reference.                  
|    
|(11) |  | Filed as an Exhibit to Thoratecs Quarterly Report on Form 10-Q for the
fiscal quarter ended June 29, 1996, filed with the SEC on August 13, 1996,
and incorporated herein by reference.      
|    
|(12) |  | Filed as an Exhibit to Thoratecs Quarterly Report on Form 10-Q for the
fiscal quarter ended June 28, 1997, filed with the SEC on July 30, 1997,
and incorporated herein by reference.        
|    
|(13) |  | Filed as an Exhibit to Thoratecs Quarterly Report on Form 10-Q for the
fiscal quarter ended September 27, 1997 filed with the SEC on November 12,
1997, and incorporated herein by reference.
|    
|(14) |  | Filed as an Exhibit to Thoratecs Registration Statement on Form S-3
filed with the SEC on January 24, 2002 (Registration No. 333-72128), and
incorporated herein by reference.               
|    
|(15) |  | Filed as an Exhibit to Thoratec Cardiosystems Quarterly Report on Form
10-Q for the fiscal quarter ended July 3, 1999 and incorporated herein by
reference.                                  
|    
|(16) |  | Filed as an Annex to
Thoratecs Registration Statement on Form S-4/A, filed
with the SEC on December 29, 2000 (Registration No. 333-72128), and
incorporated herein by reference.             
|    
|(17) |  | Filed as an Exhibit to Thoratecs Form 10-K405 filed with the SEC on
March 15, 2002 (Registration No. 033-72502), and incorporated herein by
reference.                                       
|    
|(18) |  | Filed as an Exhibit to Thoratecs Form S-8 POS filed with the SEC on July
1, 2002 (Registration No. 333-90768), and incorporated herein by
reference.                                         

71



---



##### Table of Contents



CERTIFICATION

OF CHIEF EXECUTIVE OFFICER

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



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



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



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



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



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

|                     |  |                                                                  
|-------------------- |  | -----------------------------------------------------------------
|Date: March 19, 2003 |  | /s/ D. KEITH GROSSMAN

D. Keith Grossman,
Chief Executive Officer

72



---



##### Table of Contents



CERTIFICATION

OF CHIEF FINANCIAL OFFICER

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



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



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



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



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



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

|                     |  |                                                                                      
|-------------------- |  | -------------------------------------------------------------------------------------
|Date: March 19, 2003 |  | /s/ M. WAYNE BOYLSTON

M. Wayne Boylston,
Sr. Vice President, Chief Financial Officer

73



---



##### Table of Contents






SIGNATURES

In accordance with Section 13 or Section 15(d) of the Exchange Act, as
amended, the Registrant has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized on this 19th day of March
2003.

| |  |                      |  |                                                                
| |  | -------------------- |  | ---------------------------------------------------------------
| |  | THORATEC CORPORATION
| |  |                      |  |                                                                
| |  | By:                  |  | /s/ D. KEITH GROSSMAN

D. Keith GrossmanChief Executive Officer

Date: March 19, 2003

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature
appears below constitutes and appoints D. Keith Grossman and M. Wayne Boylston,
and each of them, his true and lawful attorney-in-fact, with full power of
substitution and resubstitution, to act for him and in his name, place and
stead, in any and all capacities to sign any and all amendments to this annual
report on Form 10-K and to file the same, with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing which they, or any
of them, may deem necessary or advisable to be done in connection with this
annual report as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or any substitute or substitutes for any or all of them,
may lawfully do or cause to be done by virture hereof.

In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Thoratec Corporation and in the
capacities and on the dates indicated.

|                                                     |  |                                                                                                           |  |               
|---------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                            |  | Title                                                                                                     |  | Date          
|                                                     |  |                                                                                                           |  |               
|                                                     |  |                                                                                                           |  |               
|/s/   D. KEITH GROSSMAND. Keith Grossman             |  | Chief Executive Officer, President and Director                                                           |  | March 19, 2003
|                                                    
|/s/   HOWARD E. CHASEHoward E. Chase                 |  | Director                                                                                                  |  | March 19, 2003
|                                                    
|/s/   J. DANIEL COLEJ. Daniel Cole                   |  | Director                                                                                                  |  | March 19, 2003
|                                                    
|/s/   J. DONALD HILLJ. Donald Hill                   |  | Director and Chairman of the Board of Directors                                                           |  | March 19, 2003
|                                                    
|/s/   WILLIAM M. HITCHCOCKWilliam M. Hitchcock       |  | Director                                                                                                  |  | March 19, 2003
|                                                    
|/s/   GEORGE W. HOLBROOK, JR.George W. Holbrook, Jr. |  | Director                                                                                                  |  | March 19, 2003
|                                                    
|/s/   THEO MELAS-KYRIAZITheo Melas-Kyriazi           |  | Director                                                                                                  |  | March 19, 2003
|                                                    
|/s/   DANIEL M. MULVENADaniel M. Mulvena             |  | Director                                                                                                  |  | March 19, 2003
|                                                    
|/s/   M. WAYNE BOYLSTONM. Wayne Boylston             |  | Senior Vice President,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer) |  | March 19, 2003

74