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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 (Mark one)
 þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 29, 2007
 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: 000-49798
 Thoratec Corporation
 (Exact Name of Registrant as Specified in Its Charter)
 California
    
    94-2340464(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    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:
 Title of Each Class
    
    Name of Each Exchange of which RegisteredCommon Stock, no par value per share
    
    NASDAQ Global Select Market
 Securities registered pursuant to Section 12(g) of the Exchange Act: None
 o þ
 o þ
 þ o
 þ
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS
  
 PagePART IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    15Item 1B. Unresolved Staff Comments
    
    
    26Item 2. Properties
    
    
    26Item 3. Legal Proceedings
    
    
    26Item 4. Submission of Matters to a Vote of Security Holders
    
    
    27PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
    
    
    28Item 6. Selected Consolidated Financial Data
    
    
    30Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    30Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    41Item 8. Financial Statements and Supplementary Data
    
    
    42Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    74Item 9A. Controls and Procedures
    
    
    74Item 9B. Other Information
    
    
    75PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    75Item 11. Executive Compensation
    
    
    75Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    75Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    76Item 14. Principal Accounting Fees and Services
    
    
    76PART IVItem 15. Exhibits, Financial Statement Schedules
    
    
    76Exhibit Index
    
    
    78EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I
 OVERVIEW
         3




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OUR PRODUCTS
 Cardiovascular Division
     The Paracorporeal Ventricular Assist Device
   The Implantable Ventricular Assist Device
   The HeartMate XVE
   4




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The HeartMate II
  The CentriMag
  Vascular Graft Products
 Vectra
 ITC Division
  Hospital point-of-care
 The HEMOCHRON Whole Blood Coagulation System
  The IRMA TRUpoint Blood Analysis System
  The AVOXimeter Whole Blood Co-Oximeter/Oximeter System
   5




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Alternate site point-of-care
 The ProTime Microcoagulation System
  The Hgb Pro Professional Hemoglobin Testing System
   Incision Products
   PRODUCT SEGMENTS
  OUR MARKETS
 Cardiovascular Division
   6




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Bridge-to-Transplantation
  Destination Therapy
  Post-Cardiotomy Myocardial Recovery Following Cardiac Surgery
  Cardiac Surgery Support
  ITC Division
 Point-of-Care Diagnostics Products
  7




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Incision Products
  OUR STRATEGY
  Offer a broad range of products.
 Focus on and partner with leading heart centers
 Increase penetration of existing markets
 
    
    Destination Therapy market. In April 2003, we received approval to market the HeartMate
XVE for Destination Therapy in the treatment of late-stage HF patients who are not
candidates for heart transplants. While the initial CMS reimbursement
approval is limited
to sixty-three centers, we estimate the market penetration for this indication could
eventually comprise a meaningful portion of the 100,000 patients diagnosed with late-stage
HF, as we introduce new technologies that increase the useful life of our VADs and improve
clinical outcomes.
 Increase our presence in Cardiovascular and ITC markets
 
    
    Acute HF market.In August 2006, we entered into a distribution agreement with
Levitronix to distribute the CentriMag in the U.S. This agreement allows us to expand more
broadly beyond transplant centers and enables us to better address opportunities in
short-term patient recovery. The CentriMag device currently has FDA 510(k) clearance for use
in patients requiring short-term extracorporeal circulatory support during cardiac surgery.
Levitronix is currently in discussion with the FDA regarding an IDE to begin a pivotal trial
to demonstrate safety and effectiveness of the CentriMag for longer periods of support.
    
    Point-of-Care market. In October 2006, we acquired A-VOX Systems, Inc. (Avox), a
point-of-care company that developed and manufactured portable, bedside AVOXimeter systems
to assist clinicians in assessing a patients oxygenation status. These systems are used in
hospitals in the cardiac catherization lab, the intensive care unit (ICU), the neonatal
intensive care unit (NICU) and the emergency department. We sell these systems along with
our HEMOCHRON and IRMA point-of-care products and our data management system that connects
all of these systems together.
    
    Chronic HF market.In December 2007, we made a nominal
investment in Acorn Cardiovascular, Inc., a
medical device company that has intellectual property rights to the CorCapTMCardiac Support Device (CSD), to support patients with heart failure. The CorCap
CSD is a mesh wrap that is placed around the heart to support and relieve stress on the
heart muscle. The CorCap CSD is intended to improve the hearts size, shape and function. The CorCap CSD received CE
Marking in Europe and is in clinical trials in the United States.
 8




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Obtain approval for new products.
  Develop new products.
 Increase cost effectiveness of the therapies that employ our products
 SALES AND MARKETING
 Mechanical Circulatory Support Products
    9




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Vascular Graft Products
 Vectra
 Point-of-Care Diagnostics
  Incision Products
  COMPETITION
     
    
    New competitors might enter the market with broader test menus. To address this risk, in
the fourth quarter of 2006, we acquired Avox, which has increased our test menu offering,
and also offers us the opportunity to develop the next generation system that combines blood
gas, electrolyte and oxygenation testing in one machine.
 10




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
    
    New drug therapies under development may not require the intense monitoring of a
patients coagulation necessary with the current anticoagulation drug of choice, Heparin. To
try to mitigate this risk, we participate in clinical trials with key pharmaceutical
companies to provide the hemostasis monitoring that will ultimately be required for new drug
therapies.
 PATENTS AND PROPRIETARY RIGHTS
      Our inability to protect our proprietary technologies or an infringement of others
patents could harm our competitive positions
  GOVERNMENT REGULATIONS
  11




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U.S. Regulations
 Vectra
       12




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International Regulations
  Vectra
 Other Regulations
  THIRD PARTY REIMBURSEMENT AND COST CONTAINMENT
    13




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MANUFACTURING
         RESEARCH AND DEVELOPMENT
  14




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MAJOR CUSTOMERS AND FOREIGN SALES
   EMPLOYEE
  ADDITIONAL INFORMATION
  
 Item 1A. Risk Factors
 Our businesses face many risks. The risks described below are what we believe to be the
material risks facing our company, however, they may not be the only risks we face. Additional
risks that we do not yet know of or that we currently believe are immaterial may also impair our
business operations. If any of the events or circumstances described in the following risk factors
actually occur, our business, financial condition or results of operations could suffer, and the
trading price of our common stock could decline significantly. Investors should consider the
following risks, as well as the other information included in this Annual Report on Form 10-K , and
other documents we file from time to time with the SEC, such as our quarterly reports on Form 10-Q ,
our current reports on Form 8-K and any public announcements we make from time to time.
 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 U.S. and in other countries, and if we fail
to adhere to ongoing FDA Quality System Regulations, the FDA may withdraw our market clearance or
take other action.
   15




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If hospitals do not conduct Destination Therapy procedures using our VADs, market opportunities for
our product will be diminished.
   
    
    the number of CMS sites approved for Destination Therapy;
    
    the clinical outcomes of Destination Therapy procedures;
    
    cardiologists and referring physicians education regarding, and their commitment to,
Destination Therapy;
    
    the economics of the Destination Therapy procedure for individual hospitals, which
include the costs of the VAD and related pre- and post-operative procedures and their
reimbursement;
    
    the impact of changes in reimbursement rates on the timing of purchases of VADs for
Destination Therapy; and
    
    the economics for individual hospitals of not conducting a Destination Therapy procedure,
including the costs and related reimbursements of long-term hospitalization.
  Physicians may not accept or continue to accept our current products and products under
development.
  16




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We rely on specialized suppliers for certain components and materials in our products and
alternative suppliers may not be available.
     
    
    pay premium prices to our suppliers to keep their production lines open or to obtain
alternative suppliers;
    
    buy substantial inventory to last through the scheduled end of life of our product, or
through such time that we will have a replacement product developed and approved by the FDA;
or
    
    stop shipping the product in which the legacy component is used once our inventory of the
discontinued component is exhausted.
  We may encounter problems manufacturing our products.
  Identified quality problems can result in substantial costs and write-downs.
    17




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If we fail to successfully introduce new products, our future growth may suffer.
  Our inability to protect our proprietary technologies or an infringement of others patents could
harm our competitive position.
     Our future Cardiovascular product sales will be affected by the number of heart transplants
conducted.
  Our future disposable cuvette test product sales by ITC could be affected by changes in monitoring
requirements for medical procedures.
  18




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Since we depend upon distributors, if we lose a distributor or a distributor fails to perform, our
operations may be harmed.
   If we fail to compete successfully against our existing or potential competitors, our product sales
or operating results may be harmed.
   
    
    develop products;
    
    complete clinical testing;
    
    receive regulatory approvals;
    
    achieve market acceptance; and
    
    manufacture and sell commercial quantities of products.
  
    
    New drug therapies under development may not require the intense monitoring of a
patients coagulation that the current anti-coagulation drug of choice (Heparin) requires.
    
    New competitors might enter the market with broader test menus.
  19




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Our non-U.S. sales present special risks.
  
    
    we sell some of our products at a lower price outside the U.S.;
    
    sales agreements may be difficult to enforce;
    
    receivables may be difficult to collect through a foreign countrys legal system;
    
    foreign customers may have longer payment cycles;
    
    foreign countries may impose additional withholding taxes or otherwise tax our foreign
income, impose tariffs or adopt other restrictions on foreign trade;
    
    U.S. export licenses may be difficult to obtain;
    
    intellectual property rights may be (and often are) more difficult to enforce in foreign
countries;
    
    terrorist activity or war may interrupt distribution channels or adversely impact our
customers or employees; and
    
    fluctuations in exchange rates may affect product demand and adversely affect the
profitability, in U.S. dollars, of products sold in foreign markets where payments are made
in local currencies.
  Fluctuations in foreign currency exchange rates could result in declines in our reported sales and
earnings.
  The long and variable sales and deployment cycles for our VAD systems may cause our product sales
and operating results to vary significantly, which increases the risk of an operating loss for any
given fiscal period.
  20




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Since our physician and hospital customers depend on third party reimbursement, if third party
payors fail to provide appropriate levels of reimbursement for our products, our results of
operations will be harmed.
   Our debt obligations expose us to risks that could adversely affect our business, operating results
and financial condition.
  
    
    make it difficult for us to make payments on our debt;
    
    make it difficult for us to obtain any necessary financing in the future for working
capital, capital expenditures, debt service, acquisitions or general corporate purposes;
    
    limit our flexibility in planning for or reacting to changes in our business;
    
    reduce funds available for use in our operations;
    
    make us more vulnerable in the event of a downturn in our
business or an increase in interest rates;
    
    impair our ability to incur additional debt because of financial and other restrictive
covenants proposed for any such additional debt; or
    
    place us at a possible competitive disadvantage relative to less leveraged competitors
and competitors that have better access to capital resources.
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We may be unable to repay or repurchase our senior subordinated convertible notes or our other
indebtedness.
  Conversion of the senior subordinated convertible notes or other future issuances of our stock will
dilute the ownership interests of existing shareholders.
   Amortization of our intangible assets, which represent a significant portion of our total assets,
will adversely affect our net income and we may never realize the full value of our intangible
assets.
  Product liability claims could damage our reputation and hurt our financial results.
  22




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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.
  The price of our common stock may fluctuate significantly.
  
    
    future announcements concerning us or our competitors;
    
    regulatory developments, enforcement actions bearing on advertising, marketing or sales,
and disclosure regarding completed/ ongoing or future clinical trials;
    
    quarterly variations in operating results, which we have experienced in the past and
expect to experience in the future;
    
    introduction of new products or changes in product pricing policies by us or our
competitors;
    
    acquisition or loss of significant customers, distributors or suppliers;
    
    reaction to estimates of business operations, product development or financial
performance made public by our management;
    
    business acquisitions or divestitures;
    
    changes in earnings estimates by analysts;
    
    changes in third party reimbursement practices;
    
    charges, amortization and other financial effects relating to our merger with TCA; and
    
    fluctuations in the economy, world political events or general market conditions.
   23




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If we make acquisitions or divestitures, we could encounter difficulties that harm our business.
  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 have a history of net losses.
  We have experienced rapid growth and changes in our business, and our failure to manage this and
any future growth could harm our business.
  Revisions to accounting standards, financial reporting and corporate governance requirements and
tax laws could result in changes to our standard practices and could require a significant
expenditure of time, attention and resources, especially by senior management.
   
    
    accounting for stock-based compensation;
    
    fair value measurement;
 24




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
    
    accounting for income taxes; and
    
    accounting for business combinations and related goodwill.
  We are subject to taxation in a number of jurisdictions and changes to the corporate tax rate and
laws of any of these jurisdictions could increase the amount of corporate taxes we have to pay.
    Any claims relating to improper handling, storage or disposal of hazardous chemicals and
biomaterials could be time consuming and costly.
   Anti-takeover defenses in our governing documents could prevent an acquisition of our company or
limit the price that investors might be willing to pay for our common stock.
  
    
    Our Articles of Incorporation allow our Board of Directors to issue, at any time and
without shareholder approval, preferred stock with such terms as it may determine. No shares
of preferred stock are currently outstanding. However, the rights of holders of any of our
preferred stock that may be issued in the future may be superior to the rights of holders of
our common stock.
    
    We have a rights plan, commonly known as a poison pill, which would make it difficult
for someone to acquire us without the approval of our Board of Directors.
 25




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Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
   
    
    Approximately 62,000 square feet of office, manufacturing and research facilities in
Pleasanton, California, expiring in 2011.
    
    Approximately 6,400 square feet of warehouse space in Dublin, California, expiring in
2011.
    
    Approximately 11,000 square feet of office and research facilities in Rancho Cordova,
California, expiring in 2008.
    
    Approximately 45,000 square feet of office, manufacturing, warehouse and research
facilities in Edison, New Jersey, expiring through 2017.
    
    Approximately 38,000 square feet of office and research facilities in Piscataway, New
Jersey, expiring in 2014.
    
    Approximately 35,000 square feet of office, manufacturing and research facilities in
Roseville, Minnesota, expiring in 2008.
    
    Approximately 39,000 square feet of office and research facilities in Burlington,
Massachusetts, expiring in 2011.
    
    Approximately 8,700 square feet of office and warehouse facilities in the United Kingdom
expiring in 2022.
   
 Item 3. Legal Proceedings
  26




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Item 4. Submission of Matters to a Vote of Security Holders
  Our Executive Officers
 Gerhard F. Burbach, 46, President, Chief Executive Officer and Director,
 David V. Smith, 48, Executive Vice President and Chief Financial Officer,
 Lawrence Cohen, 58, President of ITC,
 David A. Lehman, 47, Senior Vice President, General Counsel and Secretary
 27




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PART II
 
 Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
  High
    
    LowFiscal Year 2006First Quarter
    
    $
    25.30
    
    
    $
    18.56Second Quarter
    
    
    18.93
    
    
    
    12.21Third Quarter
    
    
    15.65
    
    
    
    11.79Fourth Quarter
    
    
    17.76
    
    
    
    14.69Fiscal Year 2007First Quarter
    
    $
    21.17
    
    
    $
    17.44Second Quarter
    
    
    21.68
    
    
    
    17.36Third Quarter
    
    
    21.02
    
    
    
    18.67Fourth Quarter
    
    
    21.25
    
    
    
    17.60
   Stock Price Performance Graph
   
 
 
 
 12/02
    
    
    12/03
    
    
    12/04
    
    
    12/05
    
    
    12/06
    
    
    12/07Thoratec Corporation
    
    
    
    100.00
    
    
    
    
    169.46
    
    
    
    
    136.57
    
    
    
    
    271.17
    
    
    
    
    230.41
    
    
    
    
    238.40NASDAQ Composite
    
    
    
    100.00
    
    
    
    
    149.75
    
    
    
    
    164.64
    
    
    
    
    168.60
    
    
    
    
    187.83
    
    
    
    
    205.22NASDAQ Medical Equipment
    
    
    
    100.00
    
    
    
    
    151.86
    
    
    
    
    183.56
    
    
    
    
    210.66
    
    
    
    
    217.12
    
    
    
    
    285.24
 28




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Issuer Purchases of Equity Securities
  Total number
    
    
    Approximateof shares
    
    
    value of sharespurchased
    
    
    authorized to beunder
    
    
    purchased underTotal number
    
    
    
    
    
    
    publicly
    
    
    publiclyof shares
    
    
    Average price
    
    
    announced
    
    
    announcedpurchased
    
    
    paid per share
    
    
    programs(1)
    
    
    programs(in thousands, except per share data)September 30, 2007 through October 27, 2007
    
    
    1.5
    
    
    $
    20.53
    
    
    
    
    
    
    $
    October 28, 2007 through November 24, 2007
    
    
    2.4
    
    
    
    19.13
    
    
    
    
    
    
    
    November 25, 2007 through December 29, 2007
    
    
    3.3
    
    
    
    18.18
    
    
    
    
    
    
    
    Total
    
    
    7.2
    (2)
    
    $
    18.98
    
    
    
    
    
    
    $
    
 
 (1)
    
    Our share repurchase programs, which authorized us to repurchase up to a total of $130
million of the Companys common shares, were announced on February 11, 2004 as a $25 million
program, on May 12, 2004 as a $60 million program, on July 29, 2004 as a $25 million program
and on February 2, 2006 as a $20 million program. These programs authorize us to acquire
shares in the open market or in privately negotiated transactions and do not have an
expiration date. No shares were repurchased under these programs during the three months ended
December 29, 2007.(2)
    
    Shares purchased that were not part of our publicly announced repurchase programs represent
the surrender value of shares of restricted stock used to pay income taxes due upon vesting,
and do not reduce the dollar value that may yet be purchased under our publicly announced
repurchase programs. 29




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Item 6. Selected Consolidated Financial Data
   Fiscal Year2007(1)
    
    2006(1)
    
    2005
    
    2004
    
    2003(In thousands, except per share data)Statement of Operations:Product sales
    
    $
    234,780
    
    
    $
    214,133
    
    
    $
    201,712
    
    
    $
    172,341
    
    
    $
    149,916Gross profit
    
    
    136,264
    
    
    
    125,485
    
    
    
    123,340
    
    
    
    100,222
    
    
    
    88,748Amortization of goodwill and purchased intangible assets
    
    
    12,582
    
    
    
    12,055
    
    
    
    11,204
    
    
    
    11,724
    
    
    
    12,333In-process research and development
    
    
    
    
    
    
    1,120
    
    
    
    
    
    
    
    
    
    
    
    220Impairment of intangible asset
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,987Litigation, merger, restructuring and other costs
    
    
    
    
    
    
    447
    
    
    
    95
    
    
    
    733
    
    
    
    2,132Net income (loss)
    
    $
    3,235
    
    
    $
    3,973
    
    
    $
    13,198
    
    
    $
    3,564
    
    
    $
    (2,182
    )Basic net income (loss) per share
    
    $
    0.06
    
    
    $
    0.08
    
    
    $
    0.27
    
    
    $
    0.07
    
    
    $
    (0.04
    )Diluted net income (loss) per share
    
    $
    0.06
    
    
    $
    0.07
    
    
    $
    0.26
    
    
    $
    0.07
    
    
    $
    (0.04
    )Balance Sheet Data:Cash and cash equivalents and short term
available-for-sale investments
    
    $
    218,350
    
    
    $
    194,478
    
    
    $
    210,936
    
    
    $
    145,859
    
    
    $
    62,020Working capital
    
    
    301,736
    
    
    
    265,691
    
    
    
    269,293
    
    
    
    206,250
    
    
    
    116,430Total assets
    
    
    613,719
    
    
    
    591,135
    
    
    
    573,918
    
    
    
    518,034
    
    
    
    471,335Subordinated convertible debentures
    
    
    143,750
    
    
    
    143,750
    
    
    
    143,750
    
    
    
    143,750
    
    
    
    Long-term deferred tax liability (2)
    
    
    35,953
    
    
    
    46,421
    
    
    
    48,765
    
    
    
    62,016
    
    
    
    65,845Total shareholders equity (2)
    
    $
    398,029
    
    
    $
    365,073
    
    
    $
    348,147
    
    
    $
    292,108
    
    
    $
    386,236
 
 (1)
    
    On January 1, 2006, we adopted SFAS No. 123
(R) and included share-based compensation for employee
stock-based awards in our
results of operation.(2)
    
    On December 31, 2006, we adopted Financial Accounting Standards Board (FASB) Interpretation
No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No.
109and as a result we reported a cumulative effect adjustment of $0.5 million, which
increased our December 31, 2006 accumulated deficit balance in
our balance sheet data. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
  The following presentation of managements discussion and analysis of our financial condition
and results of operations should be read together with our consolidated financial statements
included in this Annual Report on Form 10-K .
 30




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Overview
  Our Business Model
   
    
    Circulatory Support Products.Our mechanical circulatory support products include the
PVAD, IVAD, HeartMate XVE, HeartMate II and CentriMag for acute, intermediate and long-term
mechanical circulatory support for patients with advanced HF. We also manufacture and sell
small diameter grafts using our proprietary materials to address the vascular access market
for hemodialysis.
  
    
    Point-of-Care Diagnostics.Our point-of-care products include diagnostic test systems
that monitor blood coagulation while a patient is being administered certain anticoagulants,
as well as monitor blood gas/electrolytes, oxygenation and chemistry status.
    
    Incision. Our incision products include devices used to obtain a patients blood sample
for diagnostic testing and screening for platelet function.
 Critical Accounting Policies and Estimates
  Revenue Recognition
    31




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Reserves








Income Taxes










Evaluation of Purchased Intangibles and Goodwill for Impairment


Accounting for the
Impairment or Disposal of Long-Lived Assets


Goodwill and Other Intangible Assets




32




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Valuation of Share-Based Awards
  Results of Operations
  For the Fiscal Years Ended2007
    
    2006
    
    2005Product sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of product sales
    
    
    42
    
    
    
    41
    
    
    
    39Gross margin
    
    
    58
    
    
    
    59
    
    
    
    61Operating expenses:Selling, general and administrative
    
    
    35
    
    
    
    35
    
    
    
    30Research and development
    
    
    19
    
    
    
    19
    
    
    
    16Amortization of purchased intangible assets
    
    
    5
    
    
    
    6
    
    
    
    6Purchased in-process research and development
    
    
    
    
    
    
    1
    
    
    
    Total operating expenses
    
    
    59
    
    
    
    61
    
    
    
    52Income (loss) from operations
    
    
    (1
    )
    
    
    (2
    )
    
    
    9Other income and (expense):Interest expense
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )Interest income and other
    
    
    4
    
    
    
    4
    
    
    
    2Income before taxes
    
    
    1
    
    
    
    0
    
    
    
    9Income tax expense (benefit)
    
    
    
    
    
    
    (1
    )
    
    
    2Net income
    
    
    1
    %
    
    
    1
    %
    
    
    7
    %
 33




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##### Table of Contents



For the Fiscal Years 2007 and 2006
 Product Sales
  
    
    Cardiovascular product sales increased by $10.5 million, primarily due to increased sales of
HeartMate II, partially offset by lower sales in our Thoratec product line as a result of
increased usage of short term devices. In addition, a full year of product sales of CentriMag
in 2007 contributed to the overall increase in product sales as compared to the three month of
sales in 2006.
 
    
    ITC product sales increased $10.2 million, primarily due to increased sales of our
hospital point-of-care products along with increased sales of our alternate site and
incision products resulting from market expansion and competitor product recalls. In
addition, product sales of AVOXimeters also contributed to the increase in sales in 2007 as
opposed to only fourth quarter sales in 2006.
  Gross Profit
  
    
    Cardiovascular gross margin decreased by 0.6% due to unfavorable non-pump product mix and
manufacturing variances partially offset by improved foreign currency exchange from our
international operations.
    
    ITC gross margin was the same for 2007 and 2006, due to lower product costs offset by
higher costs from product and geographic mix and the voluntary Pro-time recall
charges.
 Selling, General and Administrative
  
    
    Cardiovascular costs increased by $2.6 million in 2007 as compared to 2006, primarily due
to an increase in personnel expenses in 2007 related to market expansion and preparation for
HeartMate II commercial approval, unfavorable foreign currency exchange and an increase in
share-based compensation costs.
    
    ITC costs increased by $2.6 million in 2007 as compared to 2006, primarily due to higher
personnel costs, consulting fees and increase in reserves for overdue accounts receivable.
In addition, in 2007 we incurred costs related to the AVOXimeter products for the full year
as compared to selling costs incurred in 2006 for the fourth quarter only.
    
    Corporate costs increased by $3.1 million in 2007 as compared to 2006 because of higher
consulting and legal expenses related to the review of our stock option granting practices
conducted during the first quarter of 2007, market research and compliance costs.
 34




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##### Table of Contents



Research and Development
  Amortization of Purchased Intangible Assets
  Purchased In-Process Research and Development
  Litigation Costs
  Interest Expense
  Interest Income and Other
  Income Taxes
  35




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##### Table of Contents



For the Fiscal Years 2006 and 2005
 Product Sales
  
    
    Cardiovascular product sales increased by $8.7 million, primarily due to higher sales of
our HeartMate II product line, partially offset by lower sales of our Thoratec product line.
In addition, Vectraproduct sales decreased by $3.3 million, principally due to the
recognition in 2005 of a payment received related to the modification of our distribution agreement
with C.R. Bard Corporation of $1.9 million.
    
    ITC product sales increased $3.7 million, due primarily to increases in sales of our
ProTime and HEMOCHRON products, as well as sales of AVOXimeter products in the fourth
quarter of 2006. These increases were partially offset by a decrease in sales of our IRMA
product. In addition, incision product sales decreased $0.2 million in 2006 as compared to
2005.
  Gross Profit
  
    
    Cardiovascular gross margin decreased by 1% primarily due to recognition in 2005 of the
payment received from the C.R. Bard Corporation for the modification of our distribution
agreement as well as an unfavorable product mix in 2006. These decreases were partially
offset by increased average selling prices.
    
    ITC gross margin decreased by 5%, due to unfavorable product mix and manufacturing
variances as well as increased freight costs.
    
    Costs related to share-based compensation of $1.0 million were recorded in 2006 and not
in 2005.
 Selling, General and Administrative
  
    
    Costs related to share-based compensation of $5.9 million were recorded in 2006 and none
were recorded in 2005.
    
    Cardiovascular costs increased by $3.7 million in 2006 as compared to 2005, primarily due
to an increase in personnel expenses in 2006 related to the expansion of our sales force and
marketing organization, marketing initiatives and management consulting services.
    
    ITC costs increased by $2.1 million in 2006 as compared to 2005, primarily due to higher
personnel costs, rent, Group Purchasing Organization fees and consulting costs related to
the implementation of a new enterprise resource planning software (ERP) system.
    
    Corporate costs increased by $0.2 million in 2006 as compared to 2005 because of higher
consulting and personnel costs, partially offset by lower CEO transition costs.
 36




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##### Table of Contents



Research and Development
  Amortization of Purchased Intangible Assets
  Purchased In-Process Research and Development
  Litigation Costs
  Interest Expense
  Interest Income and Other
  Income Taxes
  Liquidity and Capital Resources
   37




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##### Table of Contents



Off Balance Sheet Arrangements
 Letter of Credit 
 38




---



##### Table of Contents



Contractual Obligations
  Total
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    ThereafterLong-Term Debt Obligations (a)
    
    $
    258.9
    
    
    $
    3.4
    
    
    $
    3.4
    
    
    $
    3.4
    
    
    $
    3.4
    
    
    $
    3.4
    
    
    $
    241.9Operating Lease Obligations (b)
    
    
    31.4
    
    
    
    3.2
    
    
    
    2.9
    
    
    
    2.9
    
    
    
    2.9
    
    
    
    2.9
    
    
    
    16.6Purchase Obligations (c)
    
    
    36.2
    
    
    
    25.3
    
    
    
    1.8
    
    
    
    1.8
    
    
    
    1.8
    
    
    
    1.8
    
    
    
    3.7Total
    
    $
    326.5
    
    
    $
    31.9
    
    
    $
    8.1
    
    
    $
    8.1
    
    
    $
    8.1
    
    
    $
    8.1
    
    
    $
    262.2
 
 (a)
    
    Includes interest of $10.0 million and original issue
discount of $103.7 million. See note 9
to our consolidated financial statements included in this Annual Report on Form 10-K related
to our long-term debt.(b)
    
    Our operating lease obligations of $31.4 million were comprised of our various leased
facilities and office equipment.(c)
    
    Our purchase obligations include $36.2 million of supply agreements in effect at December 29,
2007.  Accounting Pronouncements
 Fair Value Measurements
 Effective Date of
FASB Statement No. 157
 39




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##### Table of Contents



The Fair Value Option for Financial Assets and
Financial Liabilities
 Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used
in Future Research and Development Activities
 Business Combinations
 40




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##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
    Foreign Currency Rate Fluctuations
   Accounting for
Derivative Instrument and Hedging Activities
 For the Fiscal Years Ended2007
    
    2006(in thousands)Foreign currency exchange losses on foreign currency contracts
    
    $
    (702
    )
    
    $
    (231
    )Foreign currency exchange gains on foreign translation adjustments
    
    
    1,049
    
    
    
    330
  41




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 THORATEC CORPORATION
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageFinancial Statements:Reports of Independent Registered Public Accounting Firm
    
    
    43Consolidated Balance Sheets
    
    
    45Consolidated Statements of Operations
    
    
    46Consolidated Statements of Shareholders Equity
    
    
    47Consolidated Statements of Cash Flows
    
    
    48Notes to Consolidated Financial Statements
    
    
    49
 42




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
     Share-Based-Payments
 Interpretation No.48, Accounting for Uncertainty in Income Taxes, an interpretation of Financial
Accounting Standard No.109
 Internal ControlIntegrated Framework
 
 43




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  Internal
Control  Integrated Framework
    Internal Control
 Integrated Framework
 Accounting
for Uncertainty in Income Taxes Share-Based Payment
 
 44




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##### Table of Contents



THORATEC CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 As of Fiscal Years Ended2007
    
    
    2006(in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    20,689
    
    
    $
    67,453Short-term available-for-sale investments
    
    
    197,661
    
    
    
    127,025Restricted short-term investments
    
    
    
    
    
    
    1,681Receivables, net of allowances of $861 in 2007 and $491 in 2006
    
    
    45,368
    
    
    
    43,718Inventories
    
    
    54,935
    
    
    
    49,666Deferred tax asset
    
    
    6,077
    
    
    
    6,623Prepaid expenses and other assets
    
    
    6,379
    
    
    
    2,986Total current assets
    
    
    331,109
    
    
    
    299,152Property, plant and equipment, net
    
    
    46,477
    
    
    
    45,808Goodwill
    
    
    98,368
    
    
    
    98,494Purchased intangible assets, net
    
    
    121,767
    
    
    
    134,349Other
    
    
    15,998
    
    
    
    13,332Total Assets
    
    $
    613,719
    
    
    $
    591,135LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    9,770
    
    
    $
    13,591Accrued compensation
    
    
    14,314
    
    
    
    12,043Accrued liabilities for legal, audit and warranty
    
    
    2,219
    
    
    
    2,086Accrued income taxes
    
    
    
    
    
    
    3,691Other accrued liabilities
    
    
    3,070
    
    
    
    2,050Total current liabilities
    
    
    29,373
    
    
    
    33,461Senior subordinated convertible notes
    
    
    143,750
    
    
    
    143,750Long-term deferred tax liability
    
    
    35,953
    
    
    
    46,421Other
    
    
    6,614
    
    
    
    2,430Total Liabilities
    
    
    215,690
    
    
    
    226,062Shareholders equity:Common shares: no par, authorized 100,000;
issued and outstanding 54,108 in 2007 and 52,329 in 2006
    
    
    
    
    
    
    Additional paid-in-capital
    
    
    458,383
    
    
    
    427,941Accumulated deficit
    
    
    (61,577
    )
    
    
    (63,675
    )Accumulated other comprehensive income (loss):Unrealized gain (loss) on investments
    
    
    317
    
    
    
    (16
    )Cumulative translation adjustments
    
    
    906
    
    
    
    823Total accumulated other comprehensive income
    
    
    1,223
    
    
    
    807Total Shareholders Equity
    
    
    398,029
    
    
    
    365,073Total Liabilities and Shareholders Equity
    
    $
    613,719
    
    
    $
    591,135
  45




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##### Table of Contents



THORATEC CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Fiscal Years Ended2007
    
    
    2006
    
    
    2005(in thousands, except per share data)Product sales
    
    $
    234,780
    
    
    $
    214,133
    
    
    $
    201,712Cost of product sales
    
    
    98,516
    
    
    
    88,648
    
    
    
    78,372Gross profit
    
    
    136,264
    
    
    
    125,485
    
    
    
    123,340Operating expenses:Selling, general and administrative
    
    
    82,044
    
    
    
    73,687
    
    
    
    61,804Research and development
    
    
    43,835
    
    
    
    39,841
    
    
    
    32,331Amortization of purchased intangible assets
    
    
    12,582
    
    
    
    12,055
    
    
    
    11,204In-process research and development
    
    
    
    
    
    
    1,120
    
    
    
    Litigation costs
    
    
    
    
    
    
    447
    
    
    
    95Total operating expenses
    
    
    138,461
    
    
    
    127,150
    
    
    
    105,434Income (loss) from operations
    
    
    (2,197
    )
    
    
    (1,665
    )
    
    
    17,906Other income and (expense):Interest expense
    
    
    (4,085
    )
    
    
    (4,276
    )
    
    
    (4,090
    )Interest income and other
    
    
    8,624
    
    
    
    8,451
    
    
    
    4,237Income before taxes
    
    
    2,342
    
    
    
    2,510
    
    
    
    18,053Income tax expense (benefit)
    
    
    (893
    )
    
    
    (1,463
    )
    
    
    4,855Net income
    
    $
    3,235
    
    
    $
    3,973
    
    
    $
    13,198Net income per share:Basic
    
    $
    0.06
    
    
    $
    0.08
    
    
    $
    0.27Diluted
    
    $
    0.06
    
    
    $
    0.07
    
    
    $
    0.26Shares used to compute net income per share:Basic
    
    
    53,493
    
    
    
    52,155
    
    
    
    49,359Diluted
    
    
    54,789
    
    
    
    53,270
    
    
    
    51,008
  46




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##### Table of Contents



THORATEC CORPORATION
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 Retained
    
    
    
    
    
    AccumulatedEarnings
    
    
    
    
    
    Other
    
    
    Total
    
    
    TotalCommon
    
    
    Additional
    
    
    (Accumulated
    
    
    Deferred
    
    
    Comprehensive
    
    
    Shareholders
    
    
    ComprehensiveShares
    
    
    Paid-in Capital
    
    

Deficit)
    
    
    Compensation
    
    
    Income (Loss)
    
    
    Equity
    
    
    Income (Loss)(in thousands)BALANCE, JANUARY 1, 2005
    
    
    48,375
    
    
    $
    364,775
    
    
    $
    (71,514
    )
    
    $
    (1,586
    )
    
    $
    433
    
    
    $
    292,108Exercise of common stock options for cash
    
    
    3,509
    
    
    
    36,671
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,671Issuance of common shares under Employee Stock Purchase Plan
    
    
    143
    
    
    
    1,219
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,219Tax benefit related to employees and directors stock plans
    
    
    
    
    
    
    7,346
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,346Repurchase of common stock, net
    
    
    (290
    )
    
    
    (3,012
    )
    
    
    (485
    )
    
    
    
    
    
    
    
    
    
    
    (3,497
    )Amortization of deferred compensation
    
    
    
    
    
    
    357
    
    
    
    
    
    
    
    1,402
    
    
    
    
    
    
    
    1,759Expense of deferred compensation
    
    
    
    
    
    
    175
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    175Comprehensive income:Unrealized loss on available-for-sale investments (net of taxes
of $(75))
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67
    
    
    
    67
    

    
    67Foreign currency translation adjustment (net of taxes of $(256))
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (899
    )
    
    
    (899
    )

    
    (899
    )Net income
    
    
    
    
    
    
    
    
    
    
    13,198
    
    
    
    
    
    
    
    
    
    
    
    13,198
    

    
    13,198Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    $
    12,366BALANCE, DECEMBER 31, 2005
    
    
    51,737
    
    
    $
    407,531
    
    
    $
    (58,801
    )
    
    $
    (184
    )
    
    $
    (399
    )
    
    $
    348,147Exercise of common stock options for cash
    
    
    1,079
    
    
    
    13,380
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,380Issuance of common shares under Employee Stock Purchase Plan
    
    
    118
    
    
    
    1,692
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,692Tax benefit related to employees and directors stock plans
    
    
    
    
    
    
    2,811
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,811Repurchase of common shares, net
    
    
    (605
    )
    
    
    (7,385
    )
    
    
    (8,847
    )
    
    
    
    
    
    
    
    
    
    
    (16,232
    )Share-based compensation
    
    
    
    
    
    
    9,912
    
    
    
    
    
    
    
    184
    
    
    
    
    
    
    
    10,096Comprehensive income:Unrealized loss on available-for-sale investments (net of taxes
of $161)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    242
    

    
    242
    
    
    
    242Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    964
    

    
    964
    
    
    
    964Net income
    
    
    
    
    
    
    
    
    
    
    3,973
    
    
    
    
    
    
    
    
    
    
    
    3,973
    
    
    
    3,973Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,179BALANCE, DECEMBER 30, 2006
    
    
    52,329
    
    
    $
    427,941
    
    
    $
    (63,675
    )
    
    $
    
    
    
    $
    807
    
    
    $
    365,073Cumulative
adoption effect of FIN 48
    
    
    
    
    
    
    
    
    
    
    (534
    )
    
    
    
    
    
    
    
    
    
    
    (534
    )Exercise of common stock options for cash
    
    
    1,178
    
    
    
    14,036
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,036Issuance of common shares under Employee Stock Purchase Plan
    
    
    137
    
    
    
    1,958
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,958Tax benefit related to employees and directors stock plans
    
    
    
    
    
    
    3,327
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,327Repurchase of common shares, net
    
    
    464
    
    
    
    (411
    )
    
    
    (603
    )
    
    
    
    
    
    
    
    
    
    
    (1,014
    )Share-based compensation
    
    
    
    
    
    
    11,532
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,532Comprehensive income:Unrealized loss on available-for-sale investments (net of taxes
of $222)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    333
    
    
    
    333
    
    
    
    333Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83
    
    
    
    83
    
    
    
    83Net income
    
    
    
    
    
    
    
    
    
    
    3,235
    
    
    
    
    
    
    
    
    
    
    
    3,235
    
    
    
    3,235Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,651BALANCE, DECEMBER 29, 2007
    
    
    54,108
    
    
    $
    458,383
    
    
    $
    (61,577
    )
    
    $
    
    
    
    $
    1,223
    
    
    $
    398,029
  47




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THORATEC CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Fiscal Years Ended2007
    
    
    2006
    
    
    2005(in thousands)Cash flows from operating activities:Net income
    
    $
    3,235
    
    
    $
    3,973
    
    
    $
    13,198Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    21,836
    
    
    
    20,292
    
    
    
    18,888In process research and development
    
    
    
    
    
    
    1,120
    
    
    
    Investment premium amortization (net)
    
    
    977
    
    
    
    65
    
    
    
    374Non-cash interest and other expenses
    
    
    634
    
    
    
    986
    
    
    
    588Write-down
of investment
    
    
    500
    
    
    
    
    
    
    
    Write-down of capitalized costs
    
    
    161
    
    
    
    1,588
    
    
    
    Tax benefit related to stock options
    
    
    3,327
    
    
    
    2,812
    
    
    
    7,346Share-based compensation expense
    
    
    11,414
    
    
    
    9,558
    
    
    
    Excess tax benefits from share-based compensation
    
    
    (1,980
    )
    
    
    (1,777
    )
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    1,934Loss on disposal of asset
    
    
    254
    
    
    
    14
    
    
    
    242Change in net deferred tax liability
    
    
    (9,509
    )
    
    
    (6,438
    )
    
    
    (5,862
    )Changes in assets and liabilities:Receivables
    
    
    (3,373
    )
    
    
    (7,389
    )
    
    
    (2,853
    )Inventories
    
    
    (8,804
    )
    
    
    (8,271
    )
    
    
    (3,813
    )Prepaid expenses and other assets
    
    
    (1,124
    )
    
    
    (388
    )
    
    
    (257
    )Accounts
payable and other accrued liabilities
    
    
    (74
    )
    
    
    2,476
    
    
    
    1,951Accrued
income taxes
    
    
    (2,976
    )
    
    
    (1,463
    )
    
    
    4,855Other
    
    
    (134
    )
    
    
    (358
    )
    
    
    73Net cash provided by operating activities
    
    
    14,364
    
    
    
    16,800
    
    
    
    36,664Cash flows from investing activities:Purchases of available-for-sale investments
    
    
    (257,668
    )
    
    
    (354,970
    )
    
    
    (181,500
    )Sales of available-for-sale investments
    
    
    175,475
    
    
    
    340,379
    
    
    
    94,016Maturities of available-for-sale and restricted investments
    
    
    12,803
    
    
    
    66,990
    
    
    
    44,385Investment in convertible debentures and preferred shares
    
    
    (2,000
    )
    
    
    (5,000
    )
    
    
    Purchases of property, plant and equipment, net
    
    
    (6,651
    )
    
    
    (24,498
    )
    
    
    (7,967
    )Acquisition of Avox, net of cash acquired
    
    
    
    
    
    
    (8,786
    )
    
    
    Other
    
    
    
    
    
    
    (152
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    (78,041
    )
    
    
    13,963
    
    
    
    (51,066
    )Cash flows from financing activities:Proceeds from stock option exercises, net
    
    
    14,036
    
    
    
    13,380
    
    
    
    36,671Proceeds from stock issued under employee stock purchase plan
    
    
    1,958
    
    
    
    1,692
    
    
    
    1,219Excess tax benefits from share-based compensation
    
    
    1,980
    
    
    
    1,777
    
    
    
    Repurchase and retirement of common shares
    
    
    (1,014
    )
    
    
    (16,232
    )
    
    
    (3,497
    )Net cash provided by financing activities
    
    
    16,960
    
    
    
    617
    
    
    
    34,393Effect of exchange rate changes on cash and cash equivalents
    
    
    (47
    )
    
    
    964
    
    
    
    (899
    )Net increase (decrease) in cash and cash equivalents
    
    
    (46,764
    )
    
    
    32,344
    
    
    
    19,092Cash and cash equivalents at beginning of fiscal year
    
    
    67,453
    
    
    
    35,109
    
    
    
    16,017Cash and cash equivalents at end of fiscal year
    
    $
    20,689
    
    
    $
    67,453
    
    
    $
    35,109Supplemental disclosure of cash flow information:Cash paid for taxes
    
    $
    9,345
    
    
    $
    2,053
    
    
    $
    3,176Cash paid for interest
    
    $
    3,414
    
    
    $
    3,414
    
    
    $
    3,485Supplemental disclosure of non-cash investing and financing activities:Transfers of equipment from inventory to property, plant and equipment
    
    $
    3,698
    
    
    $
    1,917
    
    
    $
    1,283
  48




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##### Table of Contents



THORATEC CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Operations and Significant Accounting Policies
 The Company and Basis of Presentation
   Principles of Consolidation
  Use of Estimates
  Major Customers and Concentration of Credit Risk
    Certain Risks and Uncertainties
  49




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##### Table of Contents



Cash and Cash Equivalents
  Investments
    Fair Value of Financial Instruments
  Inventories
  Property, Plant and Equipment
   50




---



##### Table of Contents



Capitalized Software Costs for Internal Use
 Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use
 Valuation of Long-Lived Assets
 Accounting
for the Impairment or Disposal of Long-Lived Assets
 Goodwill
 Goodwill and Other Intangible Assets
 Deferred Compensation Plan
  Sick Leave Accruals
  Debt Issuance Costs
  Foreign Currency Translation
  51




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##### Table of Contents



Repurchases of Common Stock
  Revenue Recognition and Product Warranty
 Revenue Recognition when Right of Return Exists
    Balance
    
    Charges to
    
    
    
    
    
    BalanceBeginning
    
    Costs and
    
    Warranty
    
    Endof Year
    
    Expenses
    
    Expenditures
    
    of Year( in thousands)Fiscal year ended 2007
    
    $
    1,032
    
    
    $
    634
    
    
    $
    (660
    )
    
    $
    1,006Fiscal year ended 2006
    
    $
    1,073
    
    
    $
    756
    
    
    $
    (797
    )
    
    $
    1,032Fiscal year ended 2005
    
    $
    618
    
    
    $
    772
    
    
    $
    (317
    )
    
    $
    1,073
 52




---



##### Table of Contents



Research and Development Expense
 Accounting for Research and
Development Costs
   Purchased In-Process Research and Development
   Share-Based Compensation
 Share-Based Payment
 Accounting for Stock-Based Compensation
   Share-Based Compensation
 53




---



##### Table of Contents



Income Taxes
  for Uncertainty in Income Taxes,
an interpretation of SFAS No. 109
    Net Income Per Share
  Other Comprehensive Income
  Letter of Credit
  54




---



##### Table of Contents



Recently Issued Accounting Standards
 Fair Value Measurements
 Effective Date of
FASB Statement No. 157
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used
in Future Research and Development Activities
 Business Combinations
 55




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##### Table of Contents



2. Investments
    GrossAmortized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains (Losses)
    
    
    Value(in thousands)As of Fiscal Year End 2007:Short-term investments:Municipal bonds and auction rate securities
    
    $
    197,144
    
    
    $
    517
    
    
    $
    197,661As of Fiscal Year End 2006:Short-term investments:Municipal bonds and auction rate securities
    
    $
    122,047
    
    
    $
    (13
    )
    
    $
    122,034Commercial paper
    
    
    4,991
    
    
    
    
    
    
    
    4,991Restricted investments in U.S. Government obligations
    
    
    1,694
    
    
    
    (13
    )
    
    
    1,681$
    128,732
    
    
    $
    (26
    )
    
    $
    128,706
  Amortized
    
    
    FairCost
    
    
    Value(in thousands)As of Fiscal Year End 2007:Maturing within one year
    
    $
    146,207
    
    
    $
    146,361Due after one year through two years
    
    
    50,937
    
    
    
    51,300$
    197,144
    
    
    $
    197,661As of Fiscal Year End 2006:Maturing within one year
    
    $
    111,761
    
    
    $
    111,748Due after one year through two years
    
    
    16,971
    
    
    
    16,958$
    128,732
    
    
    $
    128,706
    56




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##### Table of Contents



3. Financial Instruments
   Accounting for
Derivative Instrument and Hedging Activities
 For the Fiscal Years Ended2007
    
    2006(in thousands)Foreign currency exchange losses on foreign currency contracts
    
    $
    (702
    )
    
    $
    (231
    )Foreign currency exchange gains on foreign translation adjustments
    
    
    1,049
    
    
    
    330
  
 4. Inventories
  As of Fiscal Years Ended2007
    
    
    2006(in thousands)Finished goods
    
    $
    20,732
    
    
    $
    22,527Work-in-process
    
    
    10,053
    
    
    
    7,008Raw materials
    
    
    24,150
    
    
    
    20,131Total
    
    $
    54,935
    
    
    $
    49,666
 57




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##### Table of Contents



5. Purchased Intangible Assets and Goodwill
  For
the Fiscal Years Ended2007
    
    
    2006(in thousands)Balance at the beginning of the fiscal year
    
    $
    98,494
    
    
    $
    94,097Adjustment for Avox acquisition
    
    
    (126
    )
    
    
    4,397Balance as of the end of the fiscal year
    
    $
    98,368
    
    
    $
    98,494
   Amortization(in thousands)
    
    
    PeriodPurchase price allocation:Tangible assets acquired
    
    $
    2,460Liabilities assumed
    
    
    (1,109
    )Deferred tax liability
    
    
    (1,894
    )Intangible assets acquired:Patents and trademarks
    
    
    700
    
    
    6-11 yrsDeveloped technology
    
    
    2,960
    
    
    6-12 yrsCustomer and distribution relationships and other
    
    
    820
    
    
    8-16 yrsNon-compete agreements
    
    
    90
    
    
    3 yrsIn-process research and development
    
    
    1,120
    
    
    ExpensedInventory backlog
    
    
    100
    
    
    ExpensedGoodwill
    
    
    4,271
    
    
    IndefiniteTotal purchase consideration
    
    $
    9,518
 58




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##### Table of Contents



As of Fiscal Year Ended 2007Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net Carrying Amount(in thousands)Patents and trademarks
    
    $
    38,515
    
    
    $
    (25,086
    )
    
    $
    13,429Core technology
    
    
    37,485
    
    
    
    (11,793
    )
    
    
    25,692Developed technology
    
    
    125,742
    
    
    
    (43,748
    )
    
    
    81,994Customer and distributor relationships and other
    
    
    897
    
    
    
    (245
    )
    
    
    652Total purchased intangible assets
    
    $
    202,639
    
    
    $
    (80,872
    )
    
    $
    121,767
 As of Fiscal Year Ended 2006Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net Carrying Amount(in thousands)Patents and trademarks
    
    $
    38,515
    
    
    $
    (21,350
    )
    
    $
    17,165Core technology
    
    
    37,485
    
    
    
    (10,275
    )
    
    
    27,210Developed technology
    
    
    125,742
    
    
    
    (36,564
    )
    
    
    89,178Customer and distributor relationships and other
    
    
    897
    
    
    
    (101
    )
    
    
    796Total purchased intangible assets
    
    $
    202,639
    
    
    $
    (68,290
    )
    
    $
    134,349
   6. Property, Plant and Equipment
  As of Fiscal Years Ended2007
    
    
    2006(in thousands)Land, building and improvements
    
    $
    16,135
    
    
    $
    16,134Equipment and capitalized software
    
    
    61,886
    
    
    
    53,860Furniture and leasehold improvements
    
    
    22,804
    
    
    
    21,199Total
    
    
    100,825
    
    
    
    91,193Less accumulated depreciation
    
    
    (54,348
    )
    
    
    (45,385
    )$
    46,477
    
    
    $
    45,808
  59




---



##### Table of Contents



7. Other Assets
   8. Commitments and Contingencies
 Leases
  Fiscal year:
    
    (in thousands)2008
    
    $
    3,1922009
    
    
    2,8862010
    
    
    2,8802011
    
    
    2,9242012
    
    
    2,974Thereafter
    
    
    16,551Total
    
    $
    31,407
  Commitments
  9. Long-Term Debt
  60




---



##### Table of Contents



61




---



##### Table of Contents



10. Share-Based Compensation
       62




---



##### Table of Contents



2005(in thousands,except per sharedata)Net income :As reported
    
    $
    13,198Add: Share-based compensation expense included
in reported net income, net of related tax
effects
    
    
    1,412Deduct: Total share-based compensation expense
determined under fair value based method for
all awards, net of related tax effects
    
    
    (6,793
    )Pro forma net income
    
    $
    7,817Basic and Diluted net income per share:As reportedBasic
    
    $
    0.27Diluted
    
    $
    0.26Pro formaBasic
    
    $
    0.16Diluted
    
    $
    0.15
 Equity Plans
     63




---



##### Table of Contents



Stock Options
    For the Fiscal Years Ended2007
    
    2006
    
    2005Risk-free interest rate
    
    
    4.79
    %
    
    
    4.54
    %
    
    
    4.20
    %Expected volatility
    
    
    40
    %
    
    
    40
    %
    
    
    45
    %Expected option life
    
    5.08-6.05 years
    
    3.85-5.24 years
    
    3.74 yearsDividends
    
    None
    
    None
    
    None
   Number of
    
    
    Weighted
    
    
    Weighted AverageOptions
    
    
    Average Exercise
    
    
    Remaining Contract(in thousands)
    
    
    Price Per Share
    
    
    Life (years)Outstanding at
fiscal year end 2004
(5,111 exercisable at
$11.38 weighted average
price per share)
    
    
    10,276
    
    
    $
    11.97
    
    
    
    5.26Granted
($5.45 weighted average grant date fair value per share)
    
    
    609
    
    
    
    14.65Cancelled and expired
    
    
    (931
    )
    
    
    13.77Exercised
    
    
    (3,509
    )
    
    
    10.44Outstanding at fiscal
year end 2005 (3,574
exercisable at $12.64
weighted average price
per share)
    
    
    6,445
    
    
    $
    12.80
    
    
    
    5.91Granted
($8.12 weighted average grant date fair value per share)
    
    
    1,625
    
    
    
    20.72Cancelled and expired
    
    
    (406
    )
    
    
    15.50Exercised
    
    
    (1,079
    )
    
    
    12.46Outstanding at fiscal
year end 2006 (4,064
exercisable at $12.75
weighted average price
per share)
    
    
    6,585
    
    
    $
    14.65
    
    
    
    6.74Granted
($8.12 weighted average grant date fair value per share)
    
    
    583
    
    
    
    18.32Cancelled and expired
    
    
    (242
    )
    
    
    17.70Exercised
    
    
    (1,178
    )
    
    
    11.91Outstanding at fiscal
year end 2007 (3,940
exercisable at $13.72
weighted average price
per share)
    
    
    5,748
    
    
    $
    15.46
    
    
    
    6.19
 64




---



##### Table of Contents



Options Outstanding(in thousands, except contractual life and exercise price)Weighted
    
    
    
    
    
    Options ExercisableAverage
    
    Weighted
    
    
    
    
    
    WeightedExercise
    
    
    
    
    
    Remaining
    
    Average
    
    
    
    
    
    AveragePrice
    
    Number
    
    Contractual Life
    
    Exercise
    
    Number
    
    ExerciseRange
    
    Outstanding
    
    (In Years)
    
    Price
    
    Outstanding
    
    Price$
    5.50 - $
    9.38
    
    
    597
    
    
    
    3.52
    
    
    $
    8.49
    
    
    
    595
    
    
    $
    8.499.40 -
    11.97
    
    
    482
    
    
    
    5.05
    
    
    
    10.62
    
    
    
    400
    
    
    
    10.6611.98 -
    12.45
    
    
    1,028
    
    
    
    6.23
    
    
    
    12.44
    
    
    
    1,016
    
    
    
    12.4412.61 -
    14.70
    
    
    626
    
    
    
    5.49
    
    
    
    13.91
    
    
    
    561
    
    
    
    13.9114.74 -
    15.51
    
    
    136
    
    
    
    5.99
    
    
    
    15.26
    
    
    
    86
    
    
    
    15.1915.55 -
    15.75
    
    
    612
    
    
    
    4.12
    
    
    
    15.75
    
    
    
    612
    
    
    
    15.7515.88 -
    17.91
    
    
    833
    
    
    
    7.99
    
    
    
    17.33
    
    
    
    245
    
    
    
    16.4418.01 -
    20.17
    
    
    139
    
    
    
    6.80
    
    
    
    19.35
    
    
    
    75
    
    
    
    19.3820.34 -
    20.34
    
    
    645
    
    
    
    8.10
    
    
    
    20.34
    
    
    
    161
    
    
    
    20.3420.60 -
    33.05
    
    
    650
    
    
    
    7.79
    
    
    
    23.40
    
    
    
    189
    
    
    
    24.395,748
    
    
    
    6.19
    
    
    
    15.46
    
    
    
    3,940
    
    
    
    13.72
 Restricted Stock
    Number of
    
    
    Weighted AverageShares
    
    
    Grant Date Fair(in thousands)
    
    
    ValueOutstanding unvested restricted stock at December 31, 2005
    
    
    150
    
    
    
    14.89Granted
    
    
    448
    
    
    
    18.03Vested
    
    
    (157
    )
    
    
    15.89Forfeited or expired
    
    
    (19
    )
    
    
    19.90Outstanding unvested restricted stock at December 30, 2006
    
    
    422
    
    
    $
    17.63Granted
    
    
    570
    
    
    
    18.39Vested
    
    
    (165
    )
    
    
    16.93Forfeited or expired
    
    
    (59
    )
    
    
    18.31Outstanding unvested restricted stock at December 29, 2007
    
    
    768
    
    
    $
    18.29
 65




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##### Table of Contents



Restricted Stock Units
   Number of
    
    
    Weighted Average
    
    
    Weighted AverageUnits
    
    
    Grant Date Fair
    
    
    Remaining Contract(in thousands)
    
    
    Value
    
    
    (in years)Outstanding units at December 31, 2005
    
    
    
    
    
    $
    Granted
    
    
    10
    
    
    
    19.08Released
    
    
    
    
    
    
    Forfeited or expired
    
    
    
    
    
    
    Outstanding units at December 30, 2006
    
    
    10
    
    
    $
    19.08
    
    
    
    1.74Granted
    
    
    15
    
    
    
    18.27Released
    
    
    (3
    )
    
    
    19.10Forfeited or expired
    
    
    (1
    )
    
    
    18.14Outstanding units at December 29, 2007
    
    
    21
    
    
    $
    18.58
    
    
    
    2.82
 Employee Stock Purchase Plan
   For the Fiscal Years Ended2007
    
    2006
    
    2005Risk-free interest rate
    
    
    4.80
    %
    
    
    4.83
    %
    
    
    3.09
    %Expected volatility
    
    
    40
    %
    
    
    40
    %
    
    
    48
    %Expected option life
    
    0.50 years
    
    0.50 years
    
    0.50 yearsDividends
    
    None
    
    None
    
    None
  11. Common and Preferred Stock
    66




---



##### Table of Contents



12. Retirement Savings Plan
   13. Taxes on Income
  For the Fiscal Years Ended2007
    
    
    2006
    
    
    2005(in thousands)Current:Federal
    
    $
    5,284
    
    
    $
    116
    
    
    $
    2,647State
    
    
    1,968
    
    
    
    747
    
    
    
    1,687Foreign
    
    
    1,179
    
    
    
    1,069
    
    
    
    9808,431
    
    
    
    1,932
    
    
    
    5,314Deferred:Federal
    
    
    (8,146
    )
    
    
    (2,095
    )
    
    
    1,631State
    
    
    (1,300
    )
    
    
    (1,350
    )
    
    
    (2,090
    )Foreign
    
    
    122
    
    
    
    50
    
    
    
    (9,324
    )
    
    
    (3,395
    )
    
    
    (459
    )Total income tax provision (benefit)
    
    $
    (893
    )
    
    $
    (1,463
    )
    
    $
    4,855
 67




---



##### Table of Contents



For the Fiscal Years Ended2007
    
    
    2006
    
    
    2005(in thousands)Domestic
    
    $
    (1,619
    )
    
    $
    (2,072
    )
    
    $
    14,857Foreign
    
    
    3,961
    
    
    
    4,582
    
    
    
    3,196Income before income taxes
    
    $
    2,342
    
    
    $
    2,510
    
    
    $
    18,053
  For the Fiscal Years Ended2007
    
    
    2006
    
    
    2005(in thousands, except percentages)U.S. federal statutory income tax expense
    
    $
    820
    
    
    
    35.0
    %
    
    $
    878
    
    
    
    35.0
    %
    
    $
    6,318
    
    
    
    35.0
    %State income tax expense/(benefit), net
of federal tax expense or benefit
    
    
    (415
    )
    
    
    (17.7
    )
    
    
    (258
    )
    
    
    (10.3
    )
    
    
    (421
    )
    
    
    (2.3
    )Share-based compensation
    
    
    910
    
    
    
    38.9
    
    
    
    1,657
    
    
    
    66.0
    
    
    
    341
    
    
    
    1.8Non-deductible expenses
    
    
    291
    
    
    
    12.5
    
    
    
    258
    
    
    
    10.3
    
    
    
    253
    
    
    
    1.4Research and development and other
credit carryforwards
    
    
    (436
    )
    
    
    (18.6
    )
    
    
    (399
    )
    
    
    (15.9
    )
    
    
    (432
    )
    
    
    (2.3
    )Foreign earnings permanently reinvested
    
    
    (58
    )
    
    
    (2.5
    )
    
    
    (483
    )
    
    
    (19.2
    )
    
    
    
    
    
    
    Tax advantaged investment income
    
    
    (2,560
    )
    
    
    (109.3
    )
    
    
    (1,606
    )
    
    
    (64.0
    )
    
    
    (1,204
    )
    
    
    (6.7
    )Return-to-provision true-up
    
    
    552
    
    
    
    23.6
    
    
    
    (1,059
    )
    
    
    (42.2
    )
    
    
    
    
    
    
    ARB 51 true-up
    
    
    
    
    
    
    
    
    
    
    (336
    )
    
    
    (13.4
    )
    
    
    
    
    
    
    In process research and development
    
    
    
    
    
    
    
    
    
    
    392
    
    
    
    15.6
    
    
    
    
    
    
    
    Extraterritorial income exclusion
    
    
    
    
    
    
    
    
    
    
    (315
    )
    
    
    (12.5
    )
    
    
    
    
    
    
    Domestic production activities
    
    
    (123
    )
    
    
    (5.3
    )
    
    
    (50
    )
    
    
    (2.1
    )
    
    
    
    
    
    
    Tax reserves
    
    
    126
    
    
    
    5.4
    
    
    
    (142
    )
    
    
    (5.6
    )
    
    
    
    
    
    
    $
    (893
    )
    
    
    (38.0
    )%
    
    $
    (1,463
    )
    
    
    (58.3
    )%
    
    $
    4,855
    
    
    
    26.9
    %
   As of Fiscal Year Ended2007
    
    
    2006(in thousands)Deferred tax assets:Write-off of acquired technology
    
    $
    506
    
    
    $
    628Reserves and accruals
    
    
    3,964
    
    
    
    1,334Depreciation and amortization
    
    
    1,543
    
    
    
    1,066Inventory basis difference
    
    
    3,023
    
    
    
    2,721Share based compensation
    
    
    3,651
    
    
    
    1,656Research and development and other credit carryforwards
    
    
    5,697
    
    
    
    6,501Other, net
    
    
    110
    
    
    
    117Total deferred tax assets
    
    
    18,494
    
    
    
    14,023Deferred tax liabilities:Purchased intangibles
    
    
    (48,100
    )
    
    
    (52,765
    )Other, net
    
    
    (211
    )
    
    
    (50
    )Total deferred tax liabilities
    
    
    (48,311
    )
    
    
    (52,815
    )Net deferred tax liabilities
    
    $
    (29,817
    )
    
    $
    (38,792
    )
 68




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##### Table of Contents




    
    Federal alternative minimum tax credits of approximately $1.0 million which may be
carried forward indefinitely; and
    
    Research and development tax credits for federal and state income tax purposes of
approximately $4.0 million and $6.0 million, respectively. Federal research and development
tax credit carryforwards expire from 2010 through 2027. State research and development tax
credits generally carry-over indefinitely.
        (in thousands)Balance at December 31, 2006
    
    $
    9,300Additions based on tax positions related to the current year
    
    
    445Additions for tax positions
    
    
    264Reductions for tax positions
    
    
    (2,627
    )Settlements
    
    
    (527
    )Reductions for statute of limitations lapses
    
    
    (2
    )Balance at December 29, 2007
    
    $
    6,853
    69




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##### Table of Contents



14. Enterprise and Related Geographic Information
  70




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##### Table of Contents



Business segments:
 For the Fiscal Years Ended2007
    
    
    2006
    
    
    2005(in thousands)Product sales:Cardiovascular
    
    $
    144,220
    
    
    $
    133,710
    
    
    $
    125,181ITC
    
    
    90,560
    
    
    
    80,423
    
    
    
    76,531Total product sales
    
    $
    234,780
    
    
    $
    214,133
    
    
    $
    201,712Income (loss) before taxes:Cardiovascular(a) (d)
    
    $
    5,188
    
    
    $
    5,326
    
    
    $
    15,103ITC(a)(b)(d)
    
    
    6,787
    
    
    
    5,733
    
    
    
    13,657Corporate (c) (d)
    
    
    (14,172
    )
    
    
    (12,277
    )
    
    
    (10,759
    )Litigation costs (e)
    
    
    
    
    
    
    (447
    )
    
    
    (95
    )Total operating income (loss)
    
    
    (2,197
    )
    
    
    (1,665
    )
    
    
    17,906Other income and (expense):Interest expense
    
    
    (4,085
    )
    
    
    (4,276
    )
    
    
    (4,090
    )Interest income and other
    
    
    8,624
    
    
    
    8,451
    
    
    
    4,237Total income before taxes
    
    $
    2,342
    
    
    $
    2,510
    
    
    $
    18,053Total assets:Cardiovascular
    
    $
    312,691
    
    
    $
    319,604
    
    
    $
    307,043ITC
    
    
    62,642
    
    
    
    58,030
    
    
    
    41,701Corporate (c)
    
    
    238,386
    
    
    
    213,501
    
    
    
    225,174Total assets
    
    $
    613,719
    
    
    $
    591,135
    
    
    $
    573,918Depreciation and amortization(f):Cardiovascular
    
    $
    17,218
    
    
    $
    17,051
    
    
    $
    16,728ITC
    
    
    4,174
    
    
    
    2,991
    
    
    
    2,160Corporate (c)
    
    
    444
    
    
    
    250
    
    
    
    Total depreciation and amortization
    
    $
    21,836
    
    
    $
    20,292
    
    
    $
    18,888Capital expenditures (f):Cardiovascular
    
    $
    5,654
    
    
    $
    15,911
    
    
    $
    5,692ITC(d)
    
    
    4,435
    
    
    
    3,976
    
    
    
    3,724Corporate (c)
    
    
    99
    
    
    
    6,554
    
    
    
    Total capital expenditures
    
    $
    10,188
    
    
    $
    26,441
    
    
    $
    9,416
 
 (a)
    
    Amortization expense of $11.7 million, $11.8 million and $11.0 million for the fiscal years
ended 2007, 2006 and 2005 respectively, related to the Cardiovascular division. The ITC
division had amortization expense of $0.9 million, $0.3 million and $0.2 million for 2007,
2006 and 2005, respectively.(b)
    
    ITC includes in-process research and development expenses of $1.1 million in 2006.(c)
    
    Represents unallocated items, not specifically identified to any particular business segment.(d)
    
    Includes additional share-based compensation expense of $6.9 million, $3.0 million and $1.5
million for Cardiovascular, ITC and Corporate, respectively, for the fiscal year ended 2007
and $5.5 million, $2.7 million and $1.4 million for Cardiovascular, ITC and Corporate,
respectively, for the fiscal year ended 2006.(e)
    
    Relates to litigation expenses not specifically identified to a particular business segment.(f)
    
    Capital expenditures include inventory transfers of $3.7 million, $1.9 million and $1.3
million for fiscal 2007, 2006 and 2005 respectively. 71




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##### Table of Contents



Geographic Areas:
 For the Fiscal Years Ended2007
    
    
    2006
    
    
    2005(in thousands)Product sales:Domestic
    
    $
    169,786
    
    
    $
    162,089
    
    
    $
    154,711International
    
    
    64,994
    
    
    
    52,044
    
    
    
    47,001Total
    
    $
    234,780
    
    
    $
    214,133
    
    
    $
    201,712
 15. Litigation
  For the Fiscal Years Ended2007
    
    
    2006
    
    
    2005(in thousands)Litigation
    
    $
    
    
    
    $
    447
    
    
    $
    95
 Johnson v. Thoratec
Corporation, et al. Johnson In re
Thoratec Corp. Securities Litigation
 Wong v. Grossman
    72




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##### Table of Contents



16. Net Income Per Share
   For the Fiscal Years Ended2007
    
    
    2006
    
    
    2005(in thousands, except per share data)Net income
    
    $
    3,235
    
    
    $
    3,973
    
    
    $
    13,198Weighted average number of common shares-Basic
    
    
    53,493
    
    
    
    52,155
    
    
    
    49,359Dilutive effect of stock-based compensation plans
    
    
    1,296
    
    
    
    1,115
    
    
    
    1,649Weighted average number of common shares-Diluted
    
    
    54,789
    
    
    
    53,270
    
    
    
    51,008Net income per shareBasic
    
    $
    0.06
    
    
    $
    0.08
    
    
    $
    0.27Diluted
    
    $
    0.06
    
    
    $
    0.07
    
    
    $
    0.26
 17. Quarterly Results of Operations (Unaudited)
  First
    
    Second
    
    Third
    
    Fourth(in thousands, except per share data)Fiscal Year 2007Product sales
    
    $
    57,310
    
    
    $
    57,333
    
    
    $
    56,055
    
    
    $
    64,082Gross profit
    
    
    34,513
    
    
    
    33,685
    
    
    
    32,348
    
    
    
    35,718Net income (loss)
    
    
    (275
    )
    
    
    1,253
    
    
    
    (1,408
    )
    
    
    3,665Net income (loss) per shareBasic
    
    $
    (0.01
    )
    
    $
    0.02
    
    
    $
    (0.03
    )
    
    $
    0.07Diluted
    
    $
    (0.01
    )
    
    $
    0.02
    
    
    $
    (0.03
    )
    
    $
    0.07Fiscal Year 2006Product sales
    
    $
    48,755
    
    
    $
    54,783
    
    
    $
    51,747
    
    
    $
    58,848Gross profit
    
    
    28,647
    
    
    
    32,129
    
    
    
    29,669
    
    
    
    35,040Net income (loss)
    
    
    (930
    )
    
    
    337
    
    
    
    1,490
    
    
    
    3,076Net income (loss) per shareBasic
    
    $
    (0.02
    )
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    0.06Diluted
    
    $
    (0.02
    )
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    0.05
 73




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##### Table of Contents



Item 9. Changes in
and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
  Disclosure Controls and Procedures
   Managements Report on Internal Control Over Financial Reporting
  
   74




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##### Table of Contents





Changes to Internal Controls




Inherent Limitations on Controls and Procedures









Item 9B. Other Information







PART III





Item 10. Directors, Executive Officers and Corporate Governance







Item 11. Executive Compensation







Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders
Matters




75




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##### Table of Contents



Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accounting Fees and Services
  
 PART IV
 
 Item 15. Exhibit and Financial Statement Schedules
        76




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##### Table of Contents



THORATEC CORPORATION
 SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For Each of the Three Fiscal Years in the Period Ended December 29, 2007
 Balance
    
    Additions
    
    
    
    
    
    BalanceBeginning
    
    (charges
    
    
    
    
    
    End ofof Year
    
    to expense)
    
    Deductions
    
    Year(in thousands)Year Ended December 29, 2007:Allowance for doubtful accounts
    
    $
    491
    
    
    $
    690
    
    
    $
    (320
    )(1)
    
    $
    861Year Ended December 30, 2006:Allowance for doubtful accounts
    
    $
    634
    
    
    $
    14
    
    
    $
    (157
    )(1)
    
    $
    491Year Ended December 31, 2005:Allowance for doubtful accounts
    
    $
    708
    
    
    $
    96
    
    
    $
    (170
    )(1)
    
    $
    634
 
 (1)
    
    Accounts written off. 77




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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Exhibit3.1
    
    Thoratecs Articles of Incorporation, as amended.(1)3.2
    
    Thoratecs By-Laws, as amended February 25, 2005.(2)4.1
    
    Rights Agreement between Thoratec Corporation and Computershare Trust Company, Inc. as Rights Agent dated as
of May 2, 2002.(3)4.2
    
    Indenture, dated as of May 24, 2004, by and between Thoratec Corporation and U.S. Bank, National Association,
as 
Trustee. (4)4.3
    
    Form of Senior Subordinated Convertible Note due 2034.(5)4.4
    
    Pledge Agreement, dated as of May 24, 2004, between Thoratec Corporation and U.S. Bank, National Association,
and Pledge Agreement Supplement, dated as of June 7, 2004.(4)4.5
    
    Control Agreement, dated as of May 24, 2004, between Thoratec Corporation and U.S. Bank, National Association,
and Control Agreement Amendment, dated as of June 7, 2004.(4)4.6
    
    Registration Rights Agreement, dated May 24, 2004, by and among Thoratec Corporation and Merrill Lynch Pierce
Fenner & Smith Incorporated as Initial Purchaser of the Senior Subordinated Convertible Notes due 2034.
(4)10.1
    
    Intellectual Property Cross-license Agreement between Thermedics and the Thoratec Cardiosystems dated August
19, 1988.(6)10.2
    
    Form of Indemnification Agreement between Thoratec Cardiosystems and its officers and directors.(6)10.3
    
    Thoratecs 1993 Stock Option Plan.(7)10.4
    
    Agreement dated May 26, 1993, between The Polymer Technology Group Incorporated and the Thoratec
Cardiosystems.(8)10.5
    
    Thoratecs 1996 Stock Option Plan.(9)10.6
    
    Thoratecs 1996 Nonemployee Directors Stock Option Plan, as amended.(10)10.7
    
    Lease Agreement dated July 25, 1996, between Main Street Associates and Thoratec, as amended.(11)10.8
    
    First Amendment to Lease Agreement originally between Main Street Associates and Thoratec dated July 25,
1996.(12)10.9
    
    Second Amendment to Lease Agreement originally between Main Street Associates and Thoratec dated July 25,
1996.(13)10.10
    
    Thoratecs 1997 Stock Option Plan, as amended.(14)10.11
    
    Lease agreement dated August 16, 1995, between International Technidyne Corporation and BHBMC, as
amended.(15)10.12
    
    Thoratecs 2002 Employee Stock Purchase Plan.(16)10.13
    
    Grantor Trust Agreement between Thoratec and Wachovia Bank, National Association effective as of November 21,
2003.(10)10.14
    
    Commercial Lease between International Technidyne Corporation and Roseville Properties Management Company
dated September 26, 2003. (10)10.15
    
    Lease Agreement between International Technidyne Corporation and NJ Mortgage Association dated February 21,
2003. (18)10.16
    
    Description of the Executive Disability Income Protection Program.(17)10.17
    
    Purchase and Sale Agreement and Escrow Instructions dated September 2, 2005, by and between Thoratec and Aegis
I, 
LLC.(19)
 78




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##### Table of Contents



Exhibit Number
    
    Exhibit10.18
    
    Amended and Restated Thoratec Corporation 2006 Incentive Stock Plan.(20)10.19
    
    Offer Letter Agreement by and between Thoratec and David V. Smith dated November 22, 2006.(21)*10.20
    
    Amended and Restated Employment Agreement by and between Thoratec and Gerhard F. Burbach, dated April 23,
2007. (22)*10.21
    
    Amended and Restated Employment Agreement by and between Thoratec and Lawrence Cohen, dated April 23, 2007.
(22)*10.22
    
    Amended and Restated Separation Benefits Agreement by and between Thoratec and David A. Lehman, dated 
April
23, 2007. (22)*10.23
    
    Amended and Restated Separation Benefits Agreement by and between Thoratec and David V. Smith, dated 
April 23,
2007. (22)*10.24
    
    Thoratec Corporation Amended and Restated Deferred Compensation Plan Effective January 1, 2005. (23)21
    
    Subsidiaries of Thoratec.(17)23.1
    
    Consent of Independent Registered
Public Accounting Firm.24
    
    Power of Attorney  Reference is made to page 80 hereof.31.1
    
    Section 302 Certification of Chief Executive Officer31.2
    
    Section 302 Certification of Chief Financial Officer32.1
    
    Section 906 Certification of Chief Executive Officer32.2
    
    Section 906 Certification of Chief Financial Officer
 
 (1)
    
    Filed as an Exhibit to Thoratecs Annual Report on Form 10-K for the fiscal year ended
December 28, 2002 filed with the SEC on March 20, 2003 and incorporated herein by reference.(2)
    
    Filed as an Exhibit to Thoratecs Form 8-K filed with the SEC on March 3, 2005.(3)
    
    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.(4)
    
    Filed as an Exhibit to Thoratecs Quarterly Report on Form 10-Q for the fiscal quarter ended
July 3, 2004 filed with the SEC on August 12, 2004, and incorporated herein by reference.(5)
    
    Included as an exhibit to Exhibit 4.2.(6)
    
    Filed as an Exhibit to Thoratec Cardiosystems Registration Statement on Form S-1
(Registration No. 33-25144) 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. 79




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##### Table of Contents



(10)
    
    Filed as an Exhibit to Thoratecs Annual Report on Form 10-K for the fiscal year ended
January 3, 2004 filed with the SEC on March 17, 2004 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-8 filed with the SEC on
June 18, 2003 (Registration No. 333-106238), and incorporated herein by reference.(15)
    
    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.(16)
    
    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.(17)
    
    Filed as an Exhibit to Thoratecs Annual Report on Form 10-K for the fiscal year ended
January 1, 2005 filed with the SEC on March 16, 2005 and incorporated herein by reference.(18)
    
    Filed as an Exhibit to Thoratecs Quarterly Report on Form 10-Q for the fiscal quarter ended
March 29, 2003 filed with the SEC on May 13, 2003, and incorporated herein by reference.(19)
    
    Filed as an Exhibit to Thoratecs Form 8-K filed with the SEC on September 8, 2005.(20)
    
    Filed as an Exhibit to Thoratecs Form 8-K filed with the SEC on June 1, 2006.(21)
    
    Filed as an Exhibit to Thoratecs form 8-K filed with the SEC on December 4, 2006.(22)
    
    Filed as an Exhibit to Thoratecs Form 8-K filed with the SEC on April 27, 2007.(23)
    
    Filed as an Exhibit to Thoratecs Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 2007 filed with the SEC on August 9, 2007 and incorporated herein by reference.*
    
    Indicates a management contract or compensatory plan. 80




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##### Table of Contents



SIGNATURES
  THORATEC CORPORATIONBy:
    /s/ Gerhard F. BurbachGerhard F. BurbachPresident and Chief Executive Officer  81




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##### Table of Contents



POWER OF ATTORNEY
   Signature
    
    Title
    
    Date/s/ Gerhard F. Burbach

Gerhard F. Burbach
    
    Chief Executive Officer, President
and Director
    
    February 27, 2008/s/ David V. Smith

David V. Smith
    
    Executive Vice President and Chief
Financial Officer
    
    February 27, 2008/s/ Neil F. Dimick

Neil F. Dimick
    
    Director and Chairman of the Board of Directors
    
    February 27, 2008/s/ J. Donald Hill

J. Donald Hill
    
    Director and Vice Chairman of the Board of Directors
    
    February 27, 2008/s/ Howard E. Chase

Howard E. Chase
    
    Director
    
    February 27, 2008/s/ J. Daniel Cole

J. Daniel Cole
    
    Director
    
    February 27, 2008/s/ Steven H. Collis

Steven H. Collis
    
    Director
    
    February 27, 2008/s/
Elisha W. Finney

Elisha W. Finney
    
    Director
    
    February 27, 2008/s/ D. Keith Grossman

D. Keith Grossman
    
    Director
    
    February 27, 2008/s/ Daniel M. Mulvena

Daniel M. Mulvena
    
    Director
    
    February 27, 2008
 82