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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                            ------------------------
 
                                   FORM 10-K
 
(MARK ONE)
 
  /X/    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES
         EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
 
                                    OR
  / /    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES
         EXCHANGE ACT OF 1934
 
     FOR THE TRANSITION PERIOD FROM _________________ TO _________________
 
                         COMMISSION FILE NUMBER 0-28266
 
                            ------------------------
 
                                HEARTPORT, INC.
             (Exact Name of Registrant as Specified in Its Charter)
 
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                  DELAWARE                                      94-3222307
       (State or Other Jurisdiction of                       (I.R.S. Employer
       Incorporation or Organization)                     Identification Number)
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                      700 BAY ROAD, REDWOOD CITY, CA 94063
              (Address of Principal Executive Offices) (Zip Code)
 
                                 (650) 306-7900
              (Registrant's Telephone Number, Including Area Code)
 
        Securities registered pursuant to Section 12(b) of the Act: NONE
    Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK
                                (Title of Class)
 
                            ------------------------
 
    Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/  No / /
 
    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / / Yes  /X/ No
 
    The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 19, 1999: approximately $81,696,000 (based on the last
reported sale price of $5.56 per share on March 19, 1999 on The Nasdaq Stock
Market).
 
    The number of shares of Common Stock outstanding as of March 19, 1999 was
25,333,622.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
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                               DOCUMENT                                  FORM 10-K REFERENCE
-----------------------------------------------------------------------  -------------------
 Proxy Statement for Registrant's Annual Meeting to be held on May 7,      Part III, Items
                                 1999                                           11-13
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                               TABLE OF CONTENTS
 
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Part I
           Item 1.       Business............................................................................          1
           Item 2.       Properties..........................................................................         26
           Item 3.       Legal Proceedings...................................................................         26
           Item 4.       Submission of Matters to a Vote of Security Holders.................................         26
 
Part II
           Item 5.       Market for Registrant's Common Equity and Related Stockholder Matters...............         27
           Item 6.       Selected Financial Data.............................................................         28
           Item 7.       Management's Discussion and Analysis of Financial Condition and Results of                   29
                           Operations........................................................................
           Item 7a.      Quantitative and Qualitative Disclosures About Market Risks.........................         33
           Item 8.       Financial Statements and Supplementary Data.........................................        F-1
           Item 9.       Changes in and Disagreements with Accountants on Accounting and Financial                 III-1
                           Disclosure........................................................................
 
Part III
           Item 10.      Directors and Executive Officers of the Registrant..................................      III-1
           Item 11.      Executive Compensation..............................................................      III-3
           Item 12.      Security Ownership of Certain Beneficial Owners and Management......................      III-3
           Item 13.      Certain Relationships and Related Transactions......................................      III-3
 
Part IV
           Item 14.      Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................       IV-1
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------------------------
 
    Heartport, the Heartport logo, EndoCPB and EndoVent are registered
trademarks of the Company. Port-Access, EndoDirect, EndoClamp, QuickDraw,
EndoReturn, DirectFlow and EndoPlege are trademarks of the Company. Port-Access
Partnership is a service mark of the Company.
 
                                       i
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                                     PART I
 
ITEM 1.  BUSINESS.
 
    The discussion in this Item and elsewhere in this Annual Report on Form 10-K
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Risk Factors."
 
INTRODUCTION
 
    Heartport, Inc. ("Heartport" or the "Company") has developed and is
marketing proprietary systems that are designed to enable cardiac surgeons to
perform a wide range of heart surgeries in a minimally invasive manner through
small incisions, or "ports," between the ribs without the need to crack open the
chest as required in conventional heart surgery. Although fundamentally changing
the means of providing access to the heart, procedures performed with the
Company's Port-Access-TM- products closely parallel the conventional procedures
that have been used in heart surgery since the mid-1950s. The Company believes,
based on the limited clinical experience to date, that its products have the
potential to offer efficacy equal to that of conventional heart surgery, but
with the benefits of reduced trauma and complications, reduced pain and
suffering, shorter hospital stays and reduced convalescence time. The Company
believes that its Port-Access products will have a significant impact on the
field of heart surgery in the same way that minimally invasive surgical
procedures such as laparoscopy impacted general surgery and arthroscopy impacted
orthopedic surgery.
 
    In 1998, the Company implemented a plan to significantly reduce expenses and
restructure its business operations to improve operating efficiency. As a result
of the restructuring plan, the Company has scaled back manufacturing capacity,
reduced research and development expenses, and reduced selling, general and
administrative expenses in several areas, including marketing and physician
training. The research and development department has focused its resources on
enhancing current products and completing the development of new products that
are intended to make Port-Access procedures easier and faster to learn to
perform. The Company has closed its Utah training facility and has augmented its
sales organization by moving more clinical training specialists into the field
to work directly with surgical teams at the hospitals. The restructuring plan
resulted in a charge of $12.2 million in 1998, and included reducing headcount
by approximately 140 employees, vacating leased facilities, and disposing of
assets.
 
BACKGROUND
 
    Cardiovascular disease is the leading cause of death in the United States
and many other developed countries. Two of the principal types of cardiovascular
disease are coronary artery disease ("CAD") and valvular heart disease ("VHD").
In CAD, one or more coronary arteries are narrowed, resulting in the risk of
insufficient blood flow to the heart muscle. In VHD, one or more heart valves
are dysfunctional, resulting in suboptimal pumping of blood. Conventional
open-chest heart surgery (commonly referred to as "open-heart" surgery) is one
of the leading methods of treating CAD, VHD, and other types of cardiovascular
disease.
 
    Heart surgery is widely regarded as one of the most important medical
advances of the twentieth century. This field of surgery was made possible
during the 1950s by the development of technology that enabled physicians to
perform cardiopulmonary bypass ("CPB") and stop the heart during surgery. CPB
protects the patient by taking over the function of the heart in circulating
oxygenated blood throughout the patient's organs and tissues, thereby permitting
the heart to be safely stopped. The procedure of placing the patient on CPB and
stopping the heart is the standard of care in heart surgery because it offers
several critical advantages. First, stopping the heart allows the surgeon to
achieve a high degree of surgical accuracy and precision, which is directly
related to the length and quality of the patient's life following surgery.
Second, stopping the heart protects the heart muscle during surgery. The stopped
heart requires
 
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virtually no blood flow, whereas the beating heart requires a constant supply of
oxygenated blood and will sustain damage if that supply is interrupted. Third,
the majority of cardiac surgery procedures are extremely difficult to perform if
the heart is not stopped. In valve repair and replacement, the heart itself must
be opened to repair or replace the diseased valve since the valves are located
inside the heart. Opening a beating heart poses a high risk of death. Thus,
placing the patient on CPB and stopping the heart is necessary to enable
surgeons to safely and accurately perform the full range of surgical procedures
anywhere on the surface or the interior of the heart.
 
    Since heart surgery was pioneered in the mid-1950s, remarkable advances have
occurred in the surgical treatment of cardiovascular disease. CAD is most
effectively treated by CABG procedures, in which an artery or vein is used to
bypass the narrowing in a coronary artery and restore blood flow downstream of
the narrowing. The treatment for VHD involves either repairing the diseased
heart valve, most commonly with the implantation of a prosthetic annuloplasty
ring, or replacing it with a prosthetic mechanical or tissue valve. Until the
introduction of Heartport's technology, CABG and valve repair and replacement
procedures were virtually always performed in a highly invasive surgery in which
the patient's chest is opened widely to gain access to the heart, the patient is
placed on CPB, and the patient's heart is stopped. Worldwide, approximately
800,000 CABG and valve procedures are performed each year in this manner.
 
    Although highly efficacious, open-chest heart surgery is extremely traumatic
and painful, typically requires a lengthy period of convalescence, and is
expensive. The heart sits in the middle of the chest, protected by skeletal
armor consisting of the sternum or "breast bone," the rib cage, and the spine.
In conventional heart surgery, the heart is accessed by means of a sternotomy,
whereby a surgeon makes an incision of approximately 12 inches in the patient's
chest, the sternum is cut in half with a bone saw, and the rib cage is then
spread open with a steel retractor. The procedure is highly traumatic, resulting
in a lengthy and painful recovery period. In 1995, open-chest heart surgery
patients in the United States remained in the hospital for an average of ten
days and required a significant period of convalescence following discharge.
Conventional cardiac surgery is also expensive, and per-patient charges on
average for a CABG procedure are approximately $45,000 per patient and for a
valve procedure are approximately $55,000 per patient. In addition, substantial
costs are incurred during convalescence. With approximately 500,000 open-chest
heart surgeries performed in the United States each year, the total cost to the
U.S. healthcare system is substantial.
 
    The development and widespread adoption of minimally invasive surgical
approaches have revolutionized many surgical fields, including general surgery,
orthopedics, gynecology, urology, and neurosurgery. Notable examples include
laparoscopic procedures in the field of general surgery and arthroscopic
procedures in the field of orthopedic surgery. Such procedures are designed to
be as efficacious as conventional surgery, but with substantially reduced
trauma, thereby decreasing complications, reducing pain and suffering, speeding
recovery, and decreasing costs associated with many aspects of patient care.
This movement toward minimally invasive surgery has been driven by advances in
both device technology and surgical technique. A minimally invasive approach is
most advantageous in cases in which significant trauma results from gaining
surgical access to an affected organ or site. Cardiac surgery represents a
particularly significant opportunity for a minimally invasive approach due to
the extreme trauma associated with opening the chest. Heartport has demonstrated
that its Port-Access minimally invasive surgical approach has the potential to
significantly reduce complications, pain and suffering, convalescence, and
expense, while maintaining the high efficacy of conventional open-chest surgery.
 
    Less-invasive alternatives to conventional heart surgery began to emerge in
the early 1980s. For example, percutaneous transluminal coronary angioplasty
("PTCA"), or balloon angioplasty, was developed as an alternative to CABG
surgery. In a PTCA procedure, the cardiologist inserts a small balloon catheter
into the narrowed coronary artery and inflates the balloon to expand the
narrowed section, thereby increasing the internal diameter of the vessel to
increase blood flow. A PTCA procedure is less traumatic, requires less time in
the hospital, and involves a shorter recuperation period than a conventional
 
                                       2
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open-chest CABG procedure. As a result, a PTCA procedure in the United States is
less expensive on a per-procedure basis, with costs of approximately $20,000 in
1995. In 1996, approximately 480,000 PTCA procedures were performed in the
United States.
 
    Although PTCA is less invasive than conventional CABG, a major drawback of
PTCA is the high rate of restenosis, or renarrowing of the blood vessel at the
treatment site. Restenosis within six months following a PTCA procedure occurs
at rates ranging from 15% to 50%. The majority of PTCA patients eventually
undergo another PTCA procedure or require CABG surgery. Although the cost of a
single PTCA procedure may be substantially less than a conventional CABG
procedure, a recent study indicated that three years after the procedure, PTCA
has no cost advantage over conventional open-chest CABG due to the need for
subsequent interventions. Furthermore, another recent study concluded that the
quality of life, post intervention, is higher for conventional open-heart
surgery patients because of the follow-up interventions required in PTCA. The
Company believes that the reduction in trauma associated with the Port-Access
approach will magnify this advantage. More recently, clinicians have begun to
employ mechanical coronary artery stents, metal prostheses designed to hold open
arteries, as a means of preventing restenosis. Although long-term clinical data
is not yet available, stents appear to reduce but not eliminate the problem of
restenosis associated with non-surgical treatment of CAD.
 
    Restenosis rates for conventional open-chest CABG are significantly lower
than those for non-surgical approaches. Studies indicate that open-chest
coronary artery bypass grafts have 17-year patency rates (the maintenance of
sufficient blood flow through the affected artery) of 92% when the left internal
mammary artery ("IMA") graft is used, 85% when the right IMA graft is used, and
10-year patency rates of approximately 60% when a saphenous vein graft from the
patient's leg is used. In addition, a Duke University study suggests that
patients with three-vessel CAD and patients with severe two-vessel CAD have
improved survival after conventional open-chest CABG surgery in comparison to
PTCA and other medical treatments. Thus, conventional open-chest CABG remains
the preferred treatment for severe CAD because of these higher long-term success
rates.
 
    Another less-invasive alternative to conventional open-chest CABG surgery is
the use of low-technology surgical tools to perform minimally invasive CABG
surgery on the beating heart. Such beating heart surgery, whether open-chest or
minimally invasive, has generally been limited to those cases in which the heart
does not need to be opened and in which the patient is able to tolerate the
stress of undergoing heart surgery without the support of CPB and the benefits
resulting from stopping the heart.
 
THE HEARTPORT SOLUTION
 
    Heartport has developed proprietary systems for performing several different
types of minimally invasive heart surgery. These systems and devices have been
cleared or exempted by the Food and Drug Administration ("FDA") for commercial
sale in the United States and by a Notified Body in Europe. Heartport's core
platforms are an endovascular cardiopulmonary bypass ("EndoCPB") system and a
direct cannulation cardiopulmonary bypass ("EndoDirect") system. Each platform
allows surgeons to place the patient on CPB and stop and protect the patient's
heart without the need for a sternotomy. Using the Company's EndoCPB or
EndoDirect platform and procedure-specific systems, the surgeon is able to
perform cardiac surgery by accessing the heart through one or more small
incisions, or "ports," placed between the patient's ribs. The Company's first
systems comprise reusable and disposable devices for Port-Access CABG and for
Port-Access mitral valve repair and mitral valve replacement (collectively,
"MVR") surgeries. Systems for performing additional cardiac surgery procedures,
including Port-Access aortic valve replacement ("AVR"), are also under
development. These future systems will require regulatory clearances or
exemptions prior to commercial distribution. Although fundamentally changing the
means of providing access to the heart, the Port-Access surgical procedures
closely parallel the conventional procedures that have been used in heart
surgery since the mid-1950s. The Company believes that its products have the
potential to offer efficacy equal to that of conventional open-chest surgery,
but with the benefits of
 
                                       3
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reduced trauma and complications, reduced pain and suffering, shorter hospital
stays, reduced convalescence time, and lower overall cost. See "Risk Factors--No
Assurance of Market Acceptance" and "--No Assurance of Regulatory Clearance or
Approval; Significant Domestic and International Regulation."
 
MARKETS AND APPLICATIONS
 
    Cardiovascular disease is the leading cause of death in the United States
and other developed countries. In the United States, it causes approximately one
million deaths per year, which represents over 40% of all deaths. CAD is one of
the most common forms of cardiovascular disease, affecting approximately 12
million people in the United States. If untreated, CAD can cause a myocardial
infarction or "heart attack." Each year, approximately 1.0 million people
experience heart attacks in the United States, and each year approximately
500,000 deaths result from CAD. Each year on a worldwide basis, approximately
600,000 CAD patients undergo conventional open-chest CABG surgery, over 800,000
CAD patients undergo PTCA or other non-surgical interventions, and approximately
200,000 VHD patients undergo open-chest valve repair or replacement procedures.
MVRs represent approximately 40% and AVRs represent approximately 60% of valve
surgery procedures. Per-patient charges of these heart surgery procedures in the
United States averages approximately $20,000 for PTCA, $45,000 for conventional
CABG, and $55,000 for conventional valve surgery. The Company has demonstrated
that its Port-Access products provide a minimally invasive surgical alternative
for CABG and MVR procedures.
 
    CORONARY ARTERY BYPASS GRAFTING--CABG
 
    Currently, the most efficacious treatment for CAD is conventional open-chest
CABG surgery. In a conventional open-chest CABG, an incision of approximately 12
inches is made in the patient's chest, the patient's sternum is cut in half with
a bone saw, and the rib cage is spread open with a steel retractor. Blood is
re-routed past a narrowing in one or more coronary arteries by either grafting
an artery from the chest wall to the coronary artery below the narrowing, or
grafting a section of artery or vein from another part of the body both to the
aorta (which serves as a source of oxygenated blood) and to a point below the
narrowed segment on the affected coronary artery, or both. Using the internal
mammary artery ("IMA") from the chest wall is the most efficacious procedure
given its long term patency in such open-chest procedures. The IMA is dissected
free from the chest wall and prepared for grafting to the coronary artery. Large
tubes, or cannulae, are inserted directly through the walls of the heart and the
aorta in order to place the patient on CPB, the aorta is compressed closed with
an external cross-clamp, and a catheter is used to administer the cardioplegic
solution that stops the heart. The IMA is then sutured in place on the affected
coronary artery, which sits motionless atop the stopped heart, enabling the
highest degree of surgical accuracy and precision. The patient's chest is closed
and the sternum is held together with steel wire. Afterward, the patient has a
long and painful recovery. In the United States, open-chest CABG patients spend
an average of eight days in the hospital, and the Company estimates that up to
two or more days are spent in the intensive care unit ("ICU"). For some period
following surgery, a ventilator breathes for the patient because the trauma to
the rib cage and sternum makes unassisted breathing extremely painful.
 
    Each step in the Company's Port-Access CABG procedure parallels a
corresponding step in conventional CABG. Instead of accessing the heart through
a large opening in the chest, however, the procedure is accomplished through
small incisions, or "ports" between the patient's ribs. During the procedure,
the Company's EndoCPB system or EndoDirect system, a series of proprietary
catheters inserted via certain of the patient's vessels, circulates oxygenated
blood throughout the body and stops and protects the heart. The Company's
Port-Access CABG system is designed to enable the surgeon to access the heart
and its associated vessels, visualize the interior of the thoracic cavity,
access and prepare the arterial or venous grafts, attach the grafts to the
diseased coronary arteries resting motionless atop the stopped heart, and do
various other supporting activities. Upon completion of the surgical procedure,
the heart is allowed to spontaneously resume normal activity and CPB is
discontinued. The patient leaves the operating room
 
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with the heart revascularized in the same manner as in a conventional open-chest
CABG procedure, but with the port incisions sutured closed rather than with the
chest held together with steel wire.
 
    VALVE REPAIR AND REPLACEMENT
 
    A leading treatment for VHD is the surgical replacement or repair of the
diseased heart valve. In conventional open-chest MVR surgery, the heart is
accessed via a sternotomy, the patient is placed on CPB, the patient's heart is
stopped, and the heart is drained of blood. The diseased valve is then accessed
through an incision in the left atrium, one of the upper chambers of the heart,
and the valve is either repaired, most commonly with the implantation of a
prosthetic annuloplasty ring, or is removed and replaced with a mechanical or
tissue prosthetic valve.
 
    Similar to Port-Access CABG, each step in a Port-Access MVR procedure
closely parallels the corresponding step in a conventional MVR procedure, but no
sternotomy is required. The Company's Port-Access MVR system utilizes the
EndoCPB system or the EndoDirect system to place the patient on CPB, stop and
protect the heart, and empty the heart of blood. The Company's Port-Access MVR
system is designed to permit the surgeon to visualize the interior of the
thoracic cavity, open the left atrium of the heart to gain access to the mitral
valve, visualize the interior of the heart, assess valve function, repair or
remove the diseased valve, size the prosthesis (either a prosthetic heart valve
or annuloplasty ring), deliver and attach the prosthesis, close the heart, allow
the heart to spontaneously resume normal activity, and then discontinue CPB. The
patient leaves the operating room with the heart valve repaired or replaced in
the same manner as in a conventional, open-chest MVR procedure, but with the
port incisions sutured closed rather than the chest held together with steel
wire.
 
STRATEGY
 
    The Company's objective is to become the global leader in research,
development, and commercialization of systems for minimally invasive cardiac
surgery. Key elements of the Company's strategy include:
 
    ESTABLISH PORT-ACCESS MINIMALLY INVASIVE CARDIAC SURGERY AS A STANDARD OF
CARE FOR CAD AND VHD. The Company believes that it is the first to design,
develop, and receive FDA-clearance of products for the minimally invasive
surgical treatment of CAD and VHD. The Company is currently introducing its
products to leading cardiac surgery centers in the United States and Europe.
Approximately 100 centers are presently performing cases on a regular basis. In
addition, the Company intends to support clinically driven research efforts to
prove the efficacy and benefits of Port-Access minimally invasive cardiac
surgery. In this regard, in 1997 the Company established the Port-Access
International Registry, a multi-center registry designed to improve patient
outcomes and advance Port-Access minimally invasive cardiac surgery by sharing
aggregate knowledge maintained in the registry database.
 
    MARKET TO HIGH VOLUME CARDIAC SURGERY CENTERS WITH DIRECT SALES FORCE.  The
cardiac surgery market in the United States and Europe is highly concentrated,
with 300 centers responsible for over 50% of the more than 500,000 open-chest
surgeries performed annually in the two geographies. The Company has targeted
many of these centers with its direct sales force. As of March 19, 1999 the
Company has 19 field sales specialists in the United States and 4 field sales
specialists in Europe with extensive experience selling cardiac surgery and
cardiology products. As of March 19, 1999 the Company also had 9 clinical
education specialists in the United States and 2 clinical education specialists
in Europe who work closely with the field sales specialists.
 
    PROMOTE PORT-ACCESS PARTNERSHIPS.  The Company has developed a procedural
selling approach to market its products and systems to cardiac surgeons, called
the Port-Access Partnership(SM). In the partnership, the Company trains a
center's surgical team, supplies patient and referring physician educational
materials, supports local market media efforts and furnishes proprietary
reusable devices for Port-Access procedures in exchange for a purchase order for
Port-Access disposable products necessary to perform Port-Access cardiac
surgery.
 
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    PROTECT AND ENHANCE PROPRIETARY POSITION.  The Company currently holds
issued and allowed patents covering a number of fundamental aspects of the
Company's EndoCPB system, EndoDirect system and procedure-specific Port-Access
products. As of March 19, 1999, the Company owns 95 issued or allowed United
States patents, and 13 issued foreign patents. In addition, as of March 19,
1999, the Company has 66 pending United States patent applications and has filed
39 patent applications that are currently pending in Europe, Japan, Australia,
and Canada. The Company intends to continue to pursue its patent filing strategy
and to vigorously defend its intellectual property position against
infringement. See "Risk Factors--Uncertainty Regarding Patents and Protection of
Proprietary Technology; Risks of Future Litigation."
 
    TARGET INTERNATIONAL MARKETS.  The Company intends to continue to devote
resources to penetrate international markets. The Company has received the
necessary regulatory approvals in Europe, and is pursuing approvals in Canada,
Australia, and Asia to market its EndoCPB, EndoDirect and Port-Access systems.
In addition, the Company has trained surgical teams from centers in England,
Scotland, Germany, France, Spain, Belgium, Sweden, Canada, Australia, India,
Japan and Malaysia in the use of Port-Access techniques. In December 1997 the
Company entered into a distribution, training and supply agreement with Getz
Bros. Co., Ltd. ("Getz") under which Getz will be the Company's exclusive
distributor of Port-Access minimally invasive cardiac surgery systems in Japan.
See "Strategic Relationships."
 
    COMPLEMENT INTERNAL PRODUCT DEVELOPMENT WITH STRATEGIC ALLIANCES.  The
Company intends to leverage its technology platform through strategic alliances
with corporate partners. In September 1995, the Company formed a strategic
relationship with St. Jude Medical, Inc. ("St. Jude Medical"), the world's
leading producer of prosthetic heart valves, for the joint development of
prosthetic valve and annuloplasty ring delivery systems for Port-Access
delivery. The Company expects to pursue additional strategic relationships with
corporations and research institutions with respect to the research,
development, regulatory approval, manufacturing and marketing of certain of its
potential products and procedures. See "Strategic Relationships."
 
TECHNOLOGY
 
    The Company's systems for minimally invasive cardiac surgery consist of a
common platform, either the EndoCPB system or the EndoDirect system, and
procedure-specific systems comprising proprietary reusable and disposable
devices.
 
    ENDOVASCULAR CARDIOPULMONARY BYPASS.  The EndoCPB system and the EndoDirect
system are a series of proprietary catheters used to place the patient on CPB
and to stop and protect the heart during cardiac surgery, without performing a
sternotomy. There are five key components:
 
    - the EndoClamp-TM- aortic occlusion catheter, a saline-filled balloon
      catheter, occludes the ascending aorta, stops and cools the heart via
      delivery of cardioplegic solution, monitors aortic root pressures, and
      drains excess blood from the heart;
 
    - the QuickDraw-TM-* venous drainage cannula removes deoxygenated blood from
      the body;
 
    - the EndoReturn-TM- arterial return cannula and the DirectFlow-TM- arterial
      return cannula return oxygenated blood to the body;
 
    - the EndoVent-Registered Trademark- pulmonary venting catheter drains
      excess blood from the heart via the pulmonary artery; and
 
    - the EndoPlege-TM- sinus catheter provides an alternative route for
      delivery of cardioplegic solution.
 
------------------------
 
*   Pending 510(k), not available for sale within the United States.
 
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    Each component of the EndoCPB system is positioned within the vascular
system via peripheral vascular access. Each component of the EndoDirect system
also is positioned within the vascular system via peripheral vascular access
except the arterial return cannula and the aortic occlusion catheter, which
access the aorta directly through a separate port in the chest.
 
    PORT-ACCESS CORONARY ARTERY BYPASS GRAFTING.  The Port-Access CABG system
currently consists of 25-30 reusable and disposable devices designed to perform
the entire CABG procedure in a minimally invasive manner. The system includes
devices for accessing the heart and its associated vessels, visualizing the
interior of the thoracic cavity, accessing and preparing the arterial and venous
grafts, attaching the grafts to the diseased coronary artery, and various other
supporting activities. The devices are designed to permit the surgeon to operate
through ports with the same surgical precision and accuracy as is possible using
conventional cardiac surgical instruments through a sternotomy.
 
    PORT-ACCESS MITRAL VALVE REPAIR AND MITRAL VALVE REPLACEMENT.  The
Port-Access MVR system currently consists of 25-30 reusable and disposable
devices. This system is designed to be compatible with existing implantable
prosthetic heart valves and prosthetic annuloplasty rings. They permit the
surgeon to perform mitral valve surgery in a minimally invasive manner, and
offer the surgeon the ability to visualize the interior of the thoracic cavity,
open the left atrium of the heart to gain access to the mitral valve, visualize
the interior of the heart, assess valve function, repair or remove the diseased
valve, size the prosthesis (either a prosthetic heart valve or annuloplasty
ring), deliver and attach the prosthesis and close the heart. The Port-Access
MVR system is designed to permit precise and accurate surgery to be performed
through small ports.
 
    PORT-ACCESS AORTIC VALVE REPLACEMENT OTHER PROCEDURES.  The Company is in
the process of developing a Port-Access AVR system and the Company currently
plans to begin marketing this system in 1999. There can be no assurance,
however, that this system will be successfully developed or achieve any
significant level of market acceptance.
 
REGULATORY STATUS
 
    UNITED STATES
 
    In October 1996, the Company received 510(k) clearance from the FDA to
market its EndoCPB system and several proprietary Class II disposable surgical
devices for its Port-Access surgery systems. In addition, the Company received
premarket notification exemptions clearing its core reusable and disposable
surgical devices to be labeled and used for minimally invasive cardiovascular
surgery. These clearances and exemptions allowed the Company to commercially
launch its Port-Access CABG System and Port-Access MVR System in early 1997.
Since that time the Company has received additional clearances and exemptions
from the FDA for other devices and enhancements to its systems. In July 1998,
the Company received 510(k) clearance to market its EndoDirect system.
 
    The Company continues to submit 510(k) notifications for additional
enhancements to its EndoCPB system, EndoDirect system and for additional
specialty disposable devices to further enhance performance of the Port-Access
CABG and MVR procedures. There can be no assurance that the FDA will act
favorably or quickly on the Company's 510(k) submissions, and significant
difficulties and costs may be encountered by the Company in its efforts to
obtain these additional FDA clearances that could delay or preclude the Company
from marketing and selling products for additional procedures. See "Risk
Factors-- No Assurance of Regulatory Clearance or Approval; Significant Domestic
and International Regulations," and "Government Regulation."
 
    INTERNATIONAL
 
    In January 1997, the Company received CE Mark clearance for its EndoCPB
system which allows the sale of its Port-Access CABG and MVR systems in all
countries of the European Union. The Company has
 
                                       7
<PAGE>
also submitted amendments to its Product Dossiers for enhancements to its
EndoCPB system to further enhance performance of the Port-Access CABG and MVR
procedures. In March 1999, the Company received CE Mark clearance for its
EndoDirect System. See "Risk Factors--No Assurance of Regulatory Clearance or
Approval; Significant Domestic and International Regulations," and "Government
Regulation."
 
STRATEGIC RELATIONSHIPS
 
    The Company intends to pursue strategic relationships with corporations and
research institutions with respect to the research, development, regulatory
approval, manufacturing, and marketing of certain of its potential products and
procedures.
 
    GETZ BROS. CO., LTD.
 
    In December 1997, the Company entered into a distribution, training and
supply agreement with Getz Bros. Co., Ltd. ("Getz") under which Getz will be the
Company's exclusive distributor of Port-Access minimally invasive cardiac
surgery systems in Japan. Pursuant to the agreement, Getz is responsible for
obtaining regulatory approvals and government reimbursement in Japan for the
Company's products. Getz is also responsible for marketing and sales, which will
be overseen by a committee of Heartport and Getz representatives.
 
    ST. JUDE MEDICAL, INC.
 
    The Company has formed a strategic relationship with St. Jude Medical, the
world's leading producer of prosthetic heart valves, for the joint development
of prosthetic valve and annuloplasty ring delivery systems for Port-Access MVR
and a prosthetic valve system for Port-Access AVR. Under the terms of an
agreement entered into in September 1995 and amended in January 1997, the
Company granted St. Jude Medical a non-exclusive, worldwide, royalty bearing
license to make, use, and sell a minimally invasive prosthetic valve system
incorporating a Port-Access delivery system and a St. Jude Medical valve or
annuloplasty ring prosthesis for use in Port-Access heart valve repair and
replacement procedures. St. Jude Medical has no minimum purchase obligations
under the agreement and, to date, there has been minimal business activity in
connection with this relationship. In addition, the Company borrowed $3.0
million from St. Jude Medical. As of December 31, 1996, the entire amount of the
loan had been converted to prepaid royalty payments.
 
    Although the Company intends to pursue additional strategic relationships in
the future, there can be no assurance that the Company will be successful in
establishing or maintaining any such relationships or that any such relationship
will be successful. See "Risk Factors--Reliance on Strategic Relationships."
 
RESEARCH AND DEVELOPMENT
 
    The Company believes that its future success will depend in large part on
its ability to develop and introduce clinically advanced Port-Access minimally
invasive cardiac surgery products that are effective, easy to use, safe, and
reliable. The Company's research and development department focuses upon the
continued development and refinement of its existing Port-Access products as
well as upon the development of new products for treating other cardiac
diseases.
 
    To date, the Company has developed systems for Port-Access CABG and
Port-Access MVR surgery. A system for Port-Access aortic valve replacement is
under development and the Company currently plans to begin marketing this system
in 1999. The Company is continuing development of products to further refine
current Port-Access procedures. There can be no assurance, however, that the
Company will be successful in developing such products or that such products, if
any, will be granted required regulatory clearances or approvals, or achieve any
significant level of market acceptance. See "Risk Factors--No Assurance of
Market Acceptance" and "--Significant Competition; Rapid Technological Change."
 
                                       8
<PAGE>
MANUFACTURING
 
    The Company manufactures its products at its Redwood City, California,
facility. The Company believes that its facility has sufficient capacity to meet
the Company's anticipated manufacturing needs through at least the end of 1999.
See "Item 2 Properties."
 
    The Company manufactures its products based on forecasted product orders,
and purchases subassemblies and components prior to receipt of purchase orders
from customers. Lead times for materials and components ordered by the Company
vary significantly, and depend on factors such as the business practices of the
specific supplier, contract terms, and general demand for a component at a given
time. Certain components used in the Company's products have long lead times or
must be ordered on non-cancelable terms. As a result, there is a risk of excess
or inadequate inventory if orders do not match forecasts, as well as potential
costs from non-cancelable orders.
 
    To meet anticipated demand, the Company must increase the rate by which it
manufactures its products. To date, the Company's manufacturing activities have
consisted primarily of manufacturing low volume quantities for initial
commercial sales. The manufacture of the Company's products is complex,
involving a number of separate processes and components. The Company has limited
experience in manufacturing its products in higher volume commercial quantities,
and there can be no assurance that it will be able to successfully scale-up its
production to meet commercial demand for its products in a timely manner. In
addition, the Company believes that cost reductions in its manufacturing
operations will be required for it to commercialize its systems on a profitable
basis. Certain manufacturing processes are labor-intensive, and achieving
significant cost reductions will depend, in part, upon reducing the time
required to complete these processes. Medical device manufacturers often
encounter difficulties in scaling up manufacturing of new products, including
problems involving product yields, quality control and assurance, component and
service availability, adequacy of control policies and procedures, lack of
qualified personnel, compliance with FDA regulations, and the need for further
FDA approval of new manufacturing processes and facilities. To date, the Company
has experienced variable yields in scaling up manufacturing of certain of its
product components, and there can be no assurance that such variability will not
continue or will not adversely impact the Company's ability to meet demand for
its products. The Company has considered and will continue to consider as
appropriate the internal manufacture of components currently provided by third
parties, as well as the implementation of new production processes. There can be
no assurance that manufacturing yields or costs will not be adversely affected
by the transition to in-house production or to new production processes when
such efforts are undertaken, and that such a transition would not materially and
adversely affect the Company's business, financial condition, and results of
operations. The Company has received ISO 9001 certification, and in 1998 the
Company passed a FDA inspection of its compliance with Quality System Regulation
("QSR") requirements, which include testing, control, and documentation
requirements. There can be no assurance that the Company will continue to meet
ISO 9001 requirements or that FDA QSR requirements will continue to be met.
 
    The Company uses or relies on certain components and services used in its
devices that are provided by sole source suppliers. The qualification of
additional or replacement vendors for certain components or services is a
lengthy process. Any significant supply interruption would have a material
adverse effect on the Company's ability to manufacture its products and,
therefore, a material adverse effect on its business, financial condition, and
results of operations. See "Risk Factors--Limited Manufacturing Experience;
Dependence on Key Suppliers."
 
    The regulatory clearances received to date by the Company require compliance
with FDA regulations for QSR. Even after the FDA has cleared or approved a
device, it will periodically inspect the manufacturing facilities and processes
for compliance with QSR. In addition, in the event that additional manufacturing
sites are added or manufacturing processes are changed, such new facilities and
processes are also subject to FDA inspection for compliance with QSR. The
Company's new manufacturing facility has not
 
                                       9
<PAGE>
yet been inspected by the FDA for compliance with QSR. See "Risk Factors--No
Assurance of Regulatory Clearance or Approval; Significant Domestic and
International Regulation."
 
SALES, MARKETING, TRAINING, AND DISTRIBUTION
 
    In the United States and Europe the Company's products are marketed both to
cardiac surgeons and to cardiac surgery centers. In the United States, there are
approximately 900 cardiac surgery centers and approximately 2,500 cardiac
surgeons. Outside the United States, there are approximately 2,500 cardiac
surgeons. The Company believes it can market its products in the United States
and Europe with a moderately sized direct sales organization. In Japan, the
Company intends to market and sell its products through its exclusive
distribution, training and supply agreement with Getz. In other geographic
regions the Company will evaluate direct and indirect sales channels as
appropriate.
 
    The Company has developed a procedural selling approach to market its
products to cardiac surgeons, called the Port-Access Partnership. In the
partnership, Heartport trains a center's surgical team, supplies patient and
referring physicians educational materials, supports local market media efforts
and furnishes proprietary reusable devices for Port-Access procedures in
exchange for a purchase order for Port-Access disposable products necessary to
perform Port-Access cardiac surgery.
 
    As a result of the restructuring plan implemented in 1998, the Company
closed its Utah training facility and established a field-based training program
designed to educate surgical teams in the use of Heartport's systems at their
own hospitals. The Company also plans to work with selected cardiac surgery
centers to enhance the Company's technology and broaden its applicability to
treat CAD, VHD, and other cardiovascular diseases. In addition, the Company
intends to support rigorous, clinically driven research efforts to prove the
efficacy and benefits of Port-Access minimally invasive cardiac surgery. In this
regard, in 1997 the Company established the Port-Access International Registry,
a multi-center registry designed to improve patient outcomes and advance
Port-Access minimally invasive cardiac surgery by sharing aggregate knowledge
maintained in the registry database. In its December 1998 Clinical Report, the
registry reported that data for 2,386 patients were submitted to the registry
from 113 centers between June 1997 and December 1998. Clinical outcomes data,
for events occurring postoperatively, were collected for all patients. The
December 1998 Clinical Report concluded that the data demonstrate broad
applicability of the Port-Access platform to patients undergoing a variety of
cardiac surgery procedures.
 
    The Company's sales and marketing strategy includes developing and
maintaining a close working relationship with its customers in order to assess
and satisfy their needs for products and services. The Company meets with
clinicians periodically to share ideas regarding the marketplace, existing
products, products under development, and existing or proposed research
projects.
 
COMPETITION
 
    The Company expects that the market for minimally invasive cardiac surgery,
which is currently in the early stages of development, will become intensely
competitive. Competitors are likely to include a variety of different companies
that currently specialize in devices for conventional cardiac surgery, as well
as those that specialize in non-cardiac minimally invasive surgery. The Company
believes that a number of large companies, including Baxter International Inc.,
the Ethicon Endosurgery division of Johnson & Johnson, Genzyme Corporation,
Guidant Corporation, Medtronic, Inc., United States Surgical Corporation, and
others with significantly greater financial, manufacturing, marketing,
distribution, and technical resources and experience than the Company, may be
focusing on the development of minimally invasive cardiac surgery technology. In
addition, new companies have been and are likely to continue to be formed to
pursue opportunities in the minimally invasive cardiac surgery field.
 
    Cardiovascular diseases that can be treated with the Company's Port-Access
products can also be treated by pharmaceuticals or other medical devices and
procedures, including PTCA, intravascular stents, atherectomy catheters and
lasers. Many of these alternative treatments are widely accepted in the medical
 
                                       10
<PAGE>
community and have a long history of use. In addition, technological advances
with other therapies for heart disease such as drugs or future innovations in
cardiac surgery techniques could make such other therapies more effective or
lower in cost than the Company's Port-Access procedures and could render the
Company's technology obsolete. There can be no assurance that physicians will
use Port-Access procedures to replace or supplement established treatments, such
as conventional open-chest heart surgery and PTCA, or that the Company's
Port-Access products will be competitive with current or future technologies.
Such competition could have a material adverse effect on the Company's business,
financial condition, and results of operations. Any product developed by the
Company that gains regulatory approval will have to compete for market
acceptance and market share. An important factor in such competition may be the
timing of market introduction of competitive products. Accordingly, the relative
speed with which the Company can develop products, complete clinical testing and
regulatory approval processes, train physicians in the use of its products, gain
reimbursement acceptance, and supply commercial quantities of the product to the
market are expected to be important competitive factors. In addition, the
Company believes that the primary competitive factors in the market for
Port-Access products will be safety, efficacy, ease of use, quality and
reliability, cost-effectiveness, training support, innovation, breadth of
product line, and price. The Company also believes that physician relationships
and customer support are important competitive factors. The Company has
experienced delays in completing the development and introduction of new
products, product variations and product features, and there can be no assurance
that such delays will not continue or recur in the future. Such delays could
result in a loss of market acceptance and market share. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors. Failure to do so would have a material adverse effect
upon the Company's business, financial condition, and results of operations. See
"Risk Factors--Significant Competition; Rapid Technological Change."
 
GOVERNMENT REGULATION
 
    UNITED STATES
 
    The Company's Port-Access products are regulated in the United States as
medical devices. As such, the Company is subject to extensive regulation by the
FDA. Pursuant to the Federal Food, Drug, and Cosmetic Act of 1938, as amended,
and the regulations promulgated thereunder (the "FDC Act"), the FDA regulates
the clinical testing, manufacture, labeling, distribution and promotion of
medical devices. Noncompliance with applicable requirements can result in, among
other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure of the government
to grant premarket clearance or premarket approval for devices, withdrawal of
marketing approvals, a recommendation by the FDA that the Company not be
permitted to enter into government contracts and criminal prosecution. The FDA
also has the authority to request repair, replacement or refund of the cost of
any device manufactured or distributed by the Company.
 
    In the United States, medical devices are classified into one of three
classes, Class I, II, or III, on the basis of the controls deemed by the FDA to
be necessary to reasonably ensure their safety and effectiveness. Class I
devices are subject to general controls (e.g., labeling, adherence to QSRs, and
premarket notification for non-exempt devices). Class II devices are subject to
general controls and to special controls (e.g., performance standards,
postmarket surveillance, patient registries, and FDA guidelines). Generally,
Class III devices are those that must receive premarket approval by the FDA to
ensure their safety and effectiveness (e.g., life-sustaining, life-supporting
and implantable devices, or new devices which have not been found substantially
equivalent to legally marketed devices), and require clinical testing to ensure
safety and effectiveness and FDA approval prior to marketing and distribution. A
premarket approval ("PMA") application usually must be filed if the proposed
device is not substantially equivalent to a legally marketed predicate device or
if it is a Class III device (or a pre-1976 Class III device for which the FDA
has called for such applications).
 
                                       11
<PAGE>
    Before a new device can be introduced into the market, the manufacturer must
generally obtain marketing clearance through a premarket notification under
Section 510(k) of the FDC Act or a PMA application under Section 515 of the FDC
Act. A 510(k) clearance typically will be granted if the submitted information
establishes that the device is "substantially equivalent" to a legally marketed
Class I or II medical device or to a Class III medical device for which the FDA
has not called for PMAs. A 510(k) notification must contain information to
support a claim of substantial equivalence, which may include laboratory test
results or the results of clinical studies of the device in humans. Commercial
distribution of a device for which a 510(k) notification is required can begin
only after the FDA issues an order finding the device to be "substantially
equivalent" to a predicate device. Generally, devices will be considered
"substantially equivalent" if they have the same intended use, and they have
either the same technological characteristics or different technological
characteristics but the new device does not present different questions of
safety or effectiveness. The FDA has recently been requiring a more rigorous
demonstration of substantial equivalence than in the past and is more likely to
require the submission of human clinical trial data. It generally takes from
four to twelve months from the date of submission to obtain FDA clearance of a
510(k) notification, but it may take longer. The FDA may determine that a
proposed device is not substantially equivalent to a legally marketed device, or
that additional information is needed before a substantial equivalence
determination can be made. A PMA application usually must be filed for new Class
III devices, or if a proposed device is not substantially equivalent to a
legally marketed Class I or Class II device. A PMA application must be supported
by valid scientific evidence that typically includes extensive data, including
preclinical and human clinical trial data to demonstrate the safety and efficacy
of the device. Under recent amendments to the FDC Act, a person who obtains a
"not substantially equivalent" determination after submitting a 510(k)
notification has the option of requesting a review of that automatic Class III
classification, and must provide data and information to the FDA to support the
requested classification of the device into Class I or Class II. If the FDA
determines the device should remain in Class III, a PMA will be required. A "not
substantially equivalent" determination, or a request for additional
information, could delay the market introduction of new products that fall into
this category. See "Risk Factors--No Assurance of Regulatory Clearance or
Approval; Significant Domestic and International Regulation."
 
    If human clinical trials of a device are required in support of either a
510(k) notification or a PMA application, and the device presents a "significant
risk," the sponsor of the trial (usually the manufacturer or the distributor of
the device) is required to file an investigational device exception ("IDE")
application with the FDA prior to commencing human clinical trials. A
"significant risk" device is defined to include a device that is an implant, is
life-supporting or life-sustaining, or is of substantial importance in
diagnosing or treating disease or preventing impairment of human health, and
that presents a potential for serious risk to the health, safety, or welfare of
the patient. The IDE application must be supported by data, typically including
the results of animal and laboratory testing. If the IDE application is approved
by the FDA and one or more appropriate institutional review boards ("IRBs"),
human clinical trials may begin at a specific number of investigational sites
with a specific number of patients, as approved by the FDA. If the device
presents a "nonsignificant risk" to the patient, a sponsor may begin the
clinical trial after obtaining approval for the study by one or more appropriate
IRBs, but not the FDA. Sponsors of clinical trials are permitted to charge for
those devices distributed in the course of the study provided such compensation
does not exceed recovery of the costs of manufacture, research, development and
handling. An IDE supplement must be submitted to and approved by the FDA before
a sponsor or an investigator may make a change to the investigational plan that
may affect its scientific soundness or the rights, safety or welfare of human
subjects.
 
    A PMA application must also contain the results of all relevant bench tests,
laboratory and animal studies, a complete description of the device and its
components, and a detailed description of the methods, facilities and controls
used to manufacture the device. In addition, the submission must include the
proposed labeling, advertising literature and training methods (if required).
Upon receipt of a PMA application, the FDA makes a threshold determination as to
whether the application is sufficiently
 
                                       12
<PAGE>
complete to permit a substantive review. If the FDA determines that the PMA
application is sufficiently complete to permit a substantive review, the FDA
will accept the application for filing. Once the submission is accepted for
filing, the FDA begins an in-depth review of the PMA application. An FDA review
of a PMA application generally takes one to three years from the date the PMA
application is accepted for filing, but may take significantly longer. The
review time is often significantly extended by the FDA asking for more
information or clarification of information already provided in the submission.
During the review period, an advisory committee, typically a panel of
clinicians, will likely be convened to review and evaluate the application and
provide recommendations to the FDA as to whether the device should be approved.
The FDA is not bound by the recommendations of the advisory panel. Toward the
end of the PMA application review process, the FDA generally will conduct an
inspection of the manufacturer's facilities to ensure that the facilities are in
compliance with the applicable QSR requirements.
 
    If the FDA's evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA will either issue an approval letter or an
"approvable letter" containing a number of conditions which must be met in order
to secure final approval of the PMA application. When and if those conditions
have been fulfilled to the satisfaction of the FDA, the agency will issue an
approval of the PMA application, authorizing commercial marketing of the device
for certain indications. If the FDA's evaluation of the PMA application or
manufacturing facilities is not favorable, the FDA will deny approval of the PMA
application or issue a "not approvable letter." The FDA may also determine that
additional clinical trials are necessary, in which case the PMA could be delayed
for several years while additional clinical trials are conducted and submitted
in an amendment to the PMA application. The PMA process can be expensive,
uncertain, and lengthy, and a number of devices for which FDA approval has been
sought by other companies have never been approved for marketing.
 
    Use of a medical device for applications not covered in a 510(k)
notification or a PMA, or modifications to a device that has been cleared to
market through a 510(k) notification or an approved PMA, its labeling, or its
manufacturing process, may require submission of a new 510(k) notification, a
new PMA application, or a PMA application supplement. New 510(k) notifications,
PMA applications, or PMA supplements often require the submission of the same
type of information required for the original submission except that it is
generally limited to that information needed to support the proposed change from
the product covered by the original submission.
 
    Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA, including record-keeping requirements and reporting of adverse
experiences with the use of the device. Device manufacturers are required to
register their establishments and list their devices with the FDA and certain
state agencies, and are subject to periodic inspections by the FDA and certain
state agencies. The FDC Act requires devices to be manufactured in accordance
with QSRs that impose certain procedural and documentation requirements upon the
Company with respect to manufacturing and quality assurance activities. Toward
the end of the clearance or approval process, the FDA generally will conduct an
inspection of the manufacturer's facilities to ensure that the facilities are in
compliance with the applicable QSR requirements.
 
    Labeling and promotion activities are subject to scrutiny by the FDA and in
certain instances, by the Federal Trade Commission. The FDA actively enforces
regulations prohibiting marketing of products for unapproved uses. The Company
and its products are also subject to a variety of state laws and regulations in
those states or localities where its products are or will be marketed. Any
applicable state or local regulations may hinder the Company's ability to market
its products in those states or localities. The Company is also subject to
numerous federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control, and disposal of hazardous or potentially hazardous substances. There
can be no assurance that the Company will not be required to incur significant
costs to comply with such laws and regulations now or in the future.
 
                                       13
<PAGE>
    Changes in existing requirements or adoption of new requirements or policies
could adversely affect the ability of the Company to comply with regulatory
requirements. Failure to comply with regulatory requirements could have a
material adverse effect on the Company's business, financial condition, and
results of operations. There can be no assurance that the Company will not be
required to incur significant costs to comply with laws and regulations in the
future. See "Risk Factors--No Assurance of Regulatory Clearance or Approval;
Significant Domestic and International Regulation."
 
    INTERNATIONAL
 
    In order for the Company to market Port-Access systems in Europe, Japan and
certain other foreign jurisdictions, the Company must obtain required regulatory
approvals and clearances and otherwise comply with extensive regulations
regarding safety and manufacturing processes and quality. These regulations,
including the requirements for approvals or clearance to market and the time
required for regulatory review, vary from country to country. There can be no
assurance that the Company will obtain regulatory approvals in such countries or
that it will not be required to incur significant costs in obtaining or
maintaining its foreign regulatory approvals. Delays in receipt of approvals to
market the Company's products, failure to receive these approvals or future loss
of previously received approvals could have a material adverse effect on the
Company's business, financial condition, and results of operations.
 
    The time required to obtain approval for sale in foreign countries may be
longer or shorter than that required for FDA approval, and the requirements may
differ. In addition, there may be foreign regulatory barriers other than
premarket approval, and the FDA generally must approve exports of devices that
require a PMA but are not yet approved domestically. To obtain FDA export
approval, the Company must provide the FDA with documentation from the medical
device regulatory authority of the importing country stating that the import of
the device is not a violation of that country's medical device laws.
 
    The European Community requires that a medical product receive the right to
affix the CE Mark, an international symbol of adherence to quality assurance
standards and compliance with applicable European medical device directives, as
a condition to selling such product in member countries of the European Union.
In January 1997, the Company received the CE Mark for its EndoCPB system,
Port-Access CABG system and Port-Access MVR system. The Company received the CE
Mark in March 1999 for its EndoDirect system. Although the European directives
are intended to insure free movement within the European Union of medical
devices that bear the CE Mark, some European countries have imposed additional
requirements for approvals or premarket notifications. In addition, regulatory
authorities in European countries can demand evidence on which conformity
assessments for CE-Marked devices are based and in certain circumstances can
prohibit the marketing of products that bear the CE Mark. Many European
countries maintain systems to control the purchase and reimbursement of medical
equipment under national health care programs, and the CE Mark does not affect
these systems.
 
    The Company's products have not received regulatory approval in Japan, nor
have they been approved for government reimbursement in Japan.
 
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
 
    The Company believes that its competitive position will be dependent in
significant part on its ability to protect its intellectual property. The
Company's policy is to seek to protect its proprietary position by, among other
methods, filing United States and foreign patent applications related to its
technology, inventions and improvements that are important to the development of
its business. As of March 19, 1999, the Company owns 95 issued or allowed United
States patents, and 13 issued foreign patents. In addition, as of March 19, 1999
the Company has 66 pending United States patent applications, and has filed 39
patent applications that are currently pending in Europe, Japan, Australia, and
Canada. There can be no assurance that the Company's issued patents, or any
patents that may be issued in the future, will effectively protect the Company's
technology or provide a competitive advantage. There can be no
 
                                       14
<PAGE>
assurance that any of the Company's patents or patent applications will not be
challenged, invalidated, or circumvented in the future. In addition, there can
be no assurance that competitors, many of which have substantially more
resources than the Company and have made substantial investments in competing
technologies, will not seek to apply for and obtain patents that will prevent,
limit or interfere with the Company's ability to make, use, or sell its products
either in the United States or internationally.
 
    The Company also relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants, and
advisors to execute confidentiality and assignment of inventions agreements in
connection with their employment, consulting, or advisory relationships with the
Company. There can be no assurance, however, that these agreements will not be
breached or that the Company will have adequate remedies for any breach.
Furthermore, no assurance can be given that competitors will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's proprietary technology, or that the
Company can meaningfully protect its rights in unpatented proprietary
technology.
 
    Patent applications in the United States are maintained in secrecy until
patents issue, and patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Patents issued and patent applications filed
relating to medical devices are numerous and there can be no assurance that
current and potential competitors and other third parties have not filed or in
the future will not file applications for, or have not received or in the future
will not receive, patents or obtain additional proprietary rights relating to
products or processes used or proposed to be used by the Company. The Company is
aware of patents issued to third parties that contain subject matter related to
the Company's technology. Based, in part, on advice of its patent counsel, the
Company believes that the technologies employed by the Company in its devices
and systems do not infringe the claims of any such patents. There can be no
assurance, however, that third parties will not seek to assert that the
Company's devices and systems infringe their patents or seek to expand their
patent claims to cover aspects of the Company's technology.
 
    The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular, has
been characterized by substantial competition and litigation regarding patent
and other intellectual property rights. Any such claims, whether with or without
merit, could be time-consuming and expensive to respond to and could divert the
Company's technical and management personnel. The Company may be involved in
litigation to defend against claims of infringement by other patent holders, to
enforce patents issued to the Company, or to protect trade secrets of the
Company. If any relevant claims of third-party patents are upheld as valid and
enforceable in any litigation or administrative proceeding, the Company could be
prevented from practicing the subject matter claimed in such patents, or would
be required to obtain licenses from the patent owners of each such patent, or to
redesign its products or processes to avoid infringement. There can be no
assurance that such licenses would be available or, if available, would be
available on terms acceptable to the Company or that the Company would be
successful in any attempt to redesign its products or processes to avoid
infringement. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
the Company from manufacturing and selling its products, which would have a
material adverse effect on the Company's business, financial condition, and
results of operations. The Company intends to vigorously protect and defend its
intellectual property. Costly and time-consuming litigation brought by the
Company may be necessary to enforce patents issued to the Company, to protect
trade secrets or know-how owned by the Company or to determine the
enforceability, scope and validity of the proprietary rights of others. See
"Risk Factors--Uncertainty Regarding Patents and Protection of Proprietary
Technology; Risks of Future Litigation."
 
                                       15
<PAGE>
THIRD-PARTY REIMBURSEMENT
 
    The Company expects that sales volumes and prices of the Company's products
will be heavily dependent on the availability of reimbursement from third-party
payors and that individuals seldom, if ever, will be willing or able to pay
directly for the costs associated with the use of the Company's products. The
Company's products typically are purchased by clinics, hospitals, and other
users, which bill various third-party payors, such as governmental programs and
private insurance plans, for the healthcare services provided to their patients.
Third-party payors carefully review and increasingly challenge the prices
charged for medical products and services. Reimbursement rates from private
companies vary depending on the procedure performed, the third-party payor, the
insurance plan, and other factors. Medicare reimburses hospitals a prospectively
determined fixed amount for the costs associated with an in-patient
hospitalization based on the patient's discharge diagnosis, and reimburses
physicians a prospectively determined fixed amount based on the procedure
performed, regardless of the actual costs incurred by the hospital or physician
in furnishing the care and unrelated to the specific devices used in that
procedure. Medicare and other third-party payors are increasingly scrutinizing
whether to cover new products and the level of reimbursement for covered
products.
 
    In foreign markets, reimbursement is obtained from a variety of sources,
including governmental authorities, private health insurance plans, and labor
unions. In most foreign countries, there are also private insurance systems that
may offer payments for alternative therapies. Although not as prevalent as in
the United States, health maintenance organizations are emerging in certain
European countries. The Company may need to seek international reimbursement
approvals, although there can be no assurance that any such approvals will be
obtained in a timely manner or at all. Failure to receive international
reimbursement approvals could have an adverse effect on market acceptance of the
Company's products in the international markets in which such approvals are
sought.
 
    The Company believes that reimbursement in the future will be subject to
increased restrictions such as those described above, both in the United States
and in foreign markets. The Company believes that the overall escalating cost of
medical products and services has led to and will continue to lead to increased
pressures on the health care industry, both foreign and domestic, to reduce the
cost of products and services, including products offered by the Company. The
Company is aware that certain third-party payors, including Medicare
administrative authorities in North Carolina and Texas, have challenged or
refused to provide reimbursement for Port-Access procedures. There can be no
assurance as to either United States or foreign markets that third-party
reimbursement and coverage will be available or adequate, that current
reimbursement amounts will not be decreased in the future or that future
legislation, regulation, or reimbursement policies of third-party payors will
not otherwise adversely affect the demand for the Company's products or its
ability to sell its products on a profitable basis, particularly if the
Company's systems are more expensive than competing cardiac surgery procedures.
If third-party payor coverage or reimbursement is unavailable or inadequate, the
Company's business, financial condition, and results of operations could be
materially adversely affected. See "Risk Factors--Limitations on Third-Party
Reimbursement."
 
EMPLOYEES
 
    As of December 31, 1998, the Company had approximately 200 employees. The
Company maintains compensation, benefit, equity participation, and work
environment policies intended to assist in attracting and retaining qualified
personnel. The Company believes that the success of its business will depend, in
significant part, on its ability to attract and retain such personnel. None of
the Company's employees is represented by a collective bargaining agreement, nor
has the Company experienced any work stoppage. The Company considers its
relations with its employees to be good.
 
                                       16
<PAGE>
RISK FACTORS
 
    This Annual Report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from those discussed in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, the following:
 
    RESTRUCTURING OF OPERATIONS
 
    In May 1998, the Company began implementing a plan to significantly reduce
expenses and restructure its business operations to improve operating
efficiency. Implementation of this restructuring involves several risks,
including the risk that there will be further attrition of key personnel beyond
that which occurred in the reduction in force. Since May 1998, the Company has
experienced attrition beyond that planned in the restructuring. Although the
Company believes that the actions taken in connection with the restructuring
aligned the Company's expense structure with its business prospects, there can
be no assurance that the Company will be able to continue to achieve its
objectives of reducing costs and reducing its net losses.
 
    EARLY STAGE OF UTILIZATION; NO ASSURANCE OF SAFETY AND EFFICACY
 
    The Company's EndoCPB system, EndoDirect system and related devices are at
an early stage of clinical utilization, and there can be no assurance as to
their clinical safety and efficacy. Port-Access minimally invasive cardiac
surgery has many of the risks of open-chest heart surgery, including bleeding
from the wound or internal organs, irregular heartbeat, formation of blood clots
and related complications, infection, heart attack, heart failure, stroke, and
death. Port-Access minimally invasive cardiac surgery also has additional risks
compared to open-chest surgery, including tearing or splitting of major blood
vessels. Although there can be no assurance in this regard, the Company
believes, based on the limited clinical experience to date, that mortality and
morbidity rates associated with Port-Access surgical procedures are comparable
to mortality and morbidity rates experienced with conventional open-chest
procedures. If, with further experience, any of the Company's products do not
prove to be safe and effective or if the Company is otherwise unable to
commercialize them successfully, the Company's business, financial condition,
and results of operations will be materially adversely affected and the
Company's business could cease.
 
    NO ASSURANCE OF MARKET ACCEPTANCE
 
    There can be no assurance that the Company's products will gain any
significant degree of market acceptance among physicians, patients, and health
care payors. The Company believes that physicians' acceptance and healthcare
payors' reimbursement of Port-Access procedures will be essential for market
acceptance of its systems, and there can be no assurance that any such
recommendations or approvals will be obtained. Physicians will not recommend
Port-Access procedures unless they conclude, based on clinical data, ease of
use, operative time and other factors, that Port-Access procedures are an
attractive alternative to other treatments for cardiovascular disease. Most
patients with cardiovascular disease first consult with a cardiologist, who may
treat the patient with pharmaceuticals or non-surgical interventions such as
percutaneous transluminal coronary angioplasty ("PTCA") and intravascular
stents, or may refer the patient to a cardiac surgeon for open-chest surgery.
Cardiologists may not recommend Port-Access procedures until such time, if any,
as Port-Access procedures can be successfully demonstrated to be as safe and
cost-effective as other accepted treatments. In addition, cardiac surgeons may
elect not to recommend Port-Access procedures until such time, if any, as the
efficacy of the Company's Port-Access procedures can be successfully
demonstrated as compared to conventional, open-chest surgery methods, which have
become widely adopted by cardiac surgeons since the initial use of such surgery
in the mid-1950s. Even if the clinical efficacy of Port-Access procedures is
established, cardiologists, cardiac surgeons, and other physicians may elect not
to recommend the procedures for any number of other reasons. The Company
believes that procedure volume by trained cardiac surgery teams has been
negatively impacted by ease of
 
                                       17
<PAGE>
use issues, the significant physician learning curve, and longer procedure times
associated with Port-Access surgery. Although the Company is focusing its
training and sales efforts on addressing these issues, there can be no assurance
that it will be successful in increasing procedure volume or that the products
will obtain any significant degree of market acceptance. Failure of the Company
to increase procedural volume by trained teams or failure of the Company's
products to achieve significant market acceptance would have a material adverse
effect on the Company's business, financial condition, and results of
operations.
 
    FLUCTUATIONS IN OPERATING RESULTS
 
    Results of operations may vary significantly from quarter to quarter and
year to year depending upon numerous factors, including the following: demand
for the Company's products; the number of cardiac surgery teams trained in the
use of the Company's systems and the number of procedures performed by those
teams; the number of hospitals that begin using the Company's products; the
ability of the Company to manufacture, test and deliver its products in
commercial volumes; health care reform and reimbursement policies; delays
associated with the FDA and other regulatory approval processes; changes in
pricing policies by the Company or its competitors; the number, timing, and
significance of product enhancements and new product announcements by the
Company and its competitors; the ability of the Company to develop, introduce,
and market new products and enhanced versions of the Company's existing products
on a timely basis; customer order deferrals in anticipation of enhancements or
new products offered by the Company or its competitors; product quality
problems; personnel changes; and the level of international sales. In addition,
the Company's operating results are affected by seasonality, principally during
the third and fourth quarters due to summer vacation, reduced surgical activity
during the summer months (particularly in Europe), fewer operating days during
the holidays and fewer elective cardiovascular surgeries scheduled over the
holidays.
 
    Operating results have been and will continue to be difficult to forecast.
Future revenue, if any, is also difficult to forecast because the market for
minimally invasive cardiac surgery systems is rapidly evolving, because of the
inherent risks associated with new medical device technology, and due to the
uncertainty as to whether the Company's efforts to increase procedure volume by
trained cardiac surgery teams will be successful. Accordingly, the Company
believes that period-to-period comparisons of its operating results are not
necessarily meaningful and should not be relied upon as indications of future
performance. Failure by the Company, for any reason, to increase revenue from
sales of its products would have a material adverse effect on the Company's
business, operating results, and financial condition. Due to the foregoing
factors, it is likely that in some future quarter the Company's operating
results will be below the expectations of public market analysts and investors.
In such event, the price of the Company's Common Stock would likely be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Research and Development,"
"Manufacturing," "Competition," "Government Regulation," and "Third-Party
Reimbursement."
 
    CUSTOMER CONCENTRATION
 
    Approximately 46% of the Company's net sales in 1998 were derived from sales
to twenty customers. The Company believes that during 1999 this customer
concentration will continue as the Company focuses on strengthening its
relationships with active, higher volume customers. There can be no assurance
that the Company's principal customers will continue to purchase products from
the Company at current levels, if at all. The loss of, or a significant adverse
change in, the relationship between the Company and any major customer would
have a material adverse effect on the Company's business, financial condition
and results of operations.
 
    RISKS ASSOCIATED WITH NEW SURGICAL PROCEDURE; EXTENSIVE TRAINING
     REQUIREMENTS
 
    Use of the Company's products to date has shown that, as with any novel
surgical procedure, there is a substantial learning process involved for
surgeons and other members of the cardiac surgery team.
 
                                       18
<PAGE>
Typically, a significant amount of time and effort spent in training as well as
completion of a number of Port-Access procedures is required before a cardiac
surgery team becomes proficient with the Company's products. In addition,
certain patients requiring heart surgery cannot be treated with the present
Port-Access systems, depending upon their anatomy, what kind of condition they
have and how severe it is. These patients include people with a poorly
functioning aortic valve or certain types of chest scarring. Broad use of the
Company's systems will require extensive training of numerous physicians, and
the time required to begin and complete such training could adversely affect
market acceptance. As part of the restructuring plan implemented in 1998, the
Company has closed its Utah training facility and is implementing a field-based
training program. There can be no assurance that the Company will be able to
train physicians in numbers sufficient to generate adequate demand for the
Company's products and systems. Any delay in training or delay in trained
surgical teams' ability to become proficient with the Company's products would
have a material adverse effect on the demand for the Company's products and
systems and, therefore, a material adverse effect on its business, financial
condition, and results of operations.
 
    LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON KEY SUPPLIERS
 
    To date, the Company's manufacturing activities have consisted primarily of
manufacturing low volume quantities for initial commercial sales. The
manufacture of the Company's products is complex, involving a number of separate
processes and components. The Company has limited experience in manufacturing
its products in higher volume commercial quantities, and there can be no
assurance that it will be able to successfully scale-up its production to meet
commercial demand for its products in a timely manner. In addition, the Company
believes that cost reductions in its manufacturing operations will be required
for it to commercialize its systems on a profitable basis. Certain manufacturing
processes are labor-intensive, and achieving significant cost reductions will
depend, in part, upon reducing the time required to complete these processes.
Medical device manufacturers often encounter difficulties in scaling up
manufacturing of new products, including problems involving product yields,
quality control and assurance, component and service availability, adequacy of
control policies and procedures, lack of qualified personnel, compliance with
FDA regulations, and the need for further FDA approval of new manufacturing
processes and facilities. To date, the Company has experienced variable yields
in scaling up manufacturing of certain of its product components, and there can
be no assurance that such variability will not continue or will not adversely
impact the Company's ability to meet demand for its products. The Company has
considered and will continue to consider as appropriate the internal manufacture
of components currently provided by third parties, as well as the implementation
of new production processes. There can be no assurance that manufacturing yields
or costs will not be adversely affected by the transition to in-house production
or to new production processes when such efforts are undertaken, and that such a
transition would not materially and adversely affect the Company's business,
financial condition, and results of operations. The Company has received ISO
9001 certification and in 1998 the Company passed a FDA inspection of its
compliance with QSR requirements, which include testing, control, and
documentation requirements. There can be no assurance that the Company will
continue to meet ISO 9001 requirements or FDA QSR requirements. See
"Manufacturing."
 
    The Company uses or relies on a number of components and services used in
its devices that are provided by sole source suppliers. The qualification of
additional or replacement vendors for certain components or services is a
lengthy process. Any significant supply interruption would have a material
adverse effect on the Company's ability to manufacture its products and,
therefore, a material adverse effect on its business, financial condition, and
results of operations.
 
    The Company manufactures its products based on forecasted product orders,
and purchases subassemblies and components prior to receipt of purchase orders
from customers. Lead times for materials and components ordered by the Company
vary significantly, and depend on factors such as the business practices of the
specific supplier, contract terms, and general demand for a component at a given
time.
 
                                       19
<PAGE>
Certain components used in the Company's products have long lead times or must
be ordered on non-cancelable terms. As a result, there is a risk of excess or
inadequate inventory if orders do not match forecasts, as well as potential
costs from non-cancelable orders.
 
    SIGNIFICANT COMPETITION; RAPID TECHNOLOGICAL CHANGE
 
    The Company expects that the market for minimally invasive cardiac surgery,
which is currently in the early stages of development, will be intensely
competitive. Competitors are likely to include a variety of different companies
that currently specialize in devices for conventional cardiac surgery, as well
as those that specialize in non-cardiac minimally invasive surgery. The Company
believes that a number of large companies, including Baxter International Inc.,
the Ethicon Endosurgery division of Johnson & Johnson, Genzyme Corporation,
Guidant Corporation, Medtronic, Inc., United States Surgical Corporation and
others with significantly greater financial, manufacturing, marketing,
distribution, and technical resources and experience than the Company, may be
focusing on the development of minimally invasive cardiac surgery technology. In
addition, new companies have been and will continue to be formed to pursue
opportunities in the minimally invasive cardiac surgery field.
 
    Cardiovascular diseases that can be treated with the Company's Port-Access
systems can also be treated by pharmaceuticals or other medical devices and
procedures including PTCA, intravascular stents, atherectomy catheters and
lasers. Many of these alternative treatments are widely accepted in the medical
community and have a long history of use. In addition, technological advances
with other therapies for heart disease such as drugs or future innovations in
cardiac surgery techniques could make such other therapies more effective or
lower in cost than the Company's Port-Access procedures and could render the
Company's technology obsolete. There can be no assurance that physicians will
use Port-Access procedures to replace or supplement established treatments, such
as conventional open-chest heart surgery, PTCA, or intravascular stents, or that
the Company's Port-Access systems will be competitive with current or future
technologies. Such competition could have a material adverse effect on the
Company's business, financial condition, and results of operations.
 
    The Company's current products and any future products developed by the
Company that gain regulatory clearance or approval will have to compete for
market acceptance and market share. An important factor in such competition may
be the timing of market introduction of competitive products. Accordingly, the
relative speeds with which the Company can develop products, complete clinical
testing and regulatory approval processes, train physicians in the use of its
products, gain reimbursement acceptance, and supply commercial quantities of the
product to the market are expected to be important competitive factors. The
Company has experienced delays in completing the development and introduction of
new products, product variations and product features, and there can be no
assurance that such delays will not continue or recur in the future. Such delays
could result in a loss of market acceptance and market share. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors. Failure to do so would have a material adverse effect
upon the Company's business, financial condition, and results of operations. See
"Competition."
 
    SUBSTANTIAL FUTURE LOSSES AND FUTURE CAPITAL REQUIREMENTS
 
    The Company has been generating revenue from the sale of products since
December 1996, and it has never had a profit from operations since inception.
For the period from inception to December 31, 1998, the Company has incurred
cumulative net losses of approximately $142.6 million. For at least the next
twelve months, the Company expects to continue to incur losses. There can be no
assurance that the Company will achieve or sustain profitability in the future.
Failure to achieve significant commercial revenues or profitability would have a
material adverse effect on the Company's business, financial condition, and
results of operations.
 
                                       20
<PAGE>
    The Company believes that it may require additional debt and/or equity
financing. The Company's future liquidity and capital requirements will depend
upon numerous factors, including but not limited to the following: the extent to
which the Company's products gain market acceptance; the timing and costs of
future product introductions; the extent of the Company's ongoing research and
development programs; the costs of training physicians to become proficient in
the use of the Company's products and procedures; the costs of expanding
manufacturing capacity; the costs of developing marketing and distribution
capabilities; the progress and scope of clinical trails required for any future
products; the timing and costs of filing future regulatory submissions; the
timing and costs required to receive both domestic and international
governmental approvals for any future products; and the costs of protecting and
defending its intellectual property. Issuance of additional equity or
convertible debt securities could result in dilution to stockholders. There can
be no assurance that additional financing will be available on terms acceptable
to the Company, or at all. The Company's inability to fund its capital
requirements would have a material adverse effect on the Company's business,
financial condition, and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
 
    UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY;
     RISKS OF FUTURE LITIGATION
 
    The Company believes that its competitive position will be dependent in
significant part on its ability to protect its intellectual property. The
Company's policy is to seek to protect its proprietary position by, among other
methods, filing United States and foreign patent applications related to its
technology, inventions, and improvements that are important to the development
of its business. As of March 19, 1999, the Company owns 95 issued or allowed
United States patents, and 13 issued foreign patents. In addition, as of March
19, 1999, the Company has 66 pending United States patent applications and has
filed 39 patent applications that are currently pending in Europe, Japan,
Australia, and Canada. There can be no assurance that the Company's issued
patents, or any patents that may be issued in the future, will effectively
protect the Company's technology or provide a competitive advantage. There can
be no assurance that any of the Company's patents or patent applications will
not be challenged, invalidated, or circumvented in the future. In addition,
there can be no assurance that competitors, many of which have substantially
more resources than the Company and have made substantial investments in
competing technologies, will not seek to apply for and obtain patents that will
prevent, limit, or interfere with the Company's ability to make, use, or sell
its products either in the United States or internationally.
 
    The Company also relies upon trade secrets, technical know-how, and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants, and
advisors to execute confidentiality and assignment of inventions agreements in
connection with their employment, consulting, or advisory relationships with the
Company. There can be no assurance, however, that these agreements will not be
breached or that the Company will have adequate remedies for any breach.
Furthermore, no assurance can be given that competitors will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's proprietary technology, or that the
Company can meaningfully protect its rights in unpatented proprietary
technology.
 
    Patent applications in the United States are maintained in secrecy until
patents issue, and patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Patents issued and patent applications filed
relating to medical devices are numerous and there can be no assurance that
current and potential competitors and other third parties have not filed or in
the future will not file applications for, or have not received or in the future
will not receive, patents or obtain additional proprietary rights relating to
products or processes used or proposed to be used by the Company. The Company is
aware of patents issued to third parties that contain subject matter related to
the Company's technology. Based, in part, on advice of its patent counsel, the
Company believes that the technologies employed by the Company in its devices
and systems do not infringe the
 
                                       21
<PAGE>
claims of any such patents. There can be no assurance, however, that third
parties will not seek to assert that the Company's devices and systems infringe
their patents or seek to expand their patent claims to cover aspects of the
Company's technology.
 
    The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular, has
been characterized by substantial competition and litigation regarding patent
and other intellectual property rights. Any such claims, whether with or without
merit, could be time-consuming and expensive to respond to and could divert the
Company's technical and management personnel. The Company may be involved in
litigation to defend against claims of infringement by other patent holders, to
enforce patents issued to the Company, or to protect trade secrets of the
Company. If any relevant claims of third-party patents are upheld as valid and
enforceable in any litigation or administrative proceeding, the Company could be
prevented from practicing the subject matter claimed in such patents, or would
be required to obtain licenses from the patent owners of each such patent, or to
redesign its products or processes to avoid infringement. There can be no
assurance that such licenses would be available or, if available, would be
available on terms acceptable to the Company or that the Company would be
successful in any attempt to redesign its products or processes to avoid
infringement. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
the Company from manufacturing and selling its products, which would have a
material adverse effect on the Company's business, financial condition, and
results of operations. The Company intends to vigorously protect and defend its
intellectual property. Costly and time-consuming litigation brought by the
Company may be necessary to enforce patents issued to the Company, to protect
trade secrets or know-how owned by the Company, or to determine the
enforceability, scope, and validity of the proprietary rights of others. There
can be no assurance that such litigation if commenced by the Company, would be
successful. See "Intellectual Property and Other Proprietary Rights" and
"Competition."
 
    RISK OF PRODUCT LIABILITY
 
    The Company faces an inherent and significant business risk of exposure to
product liability claims in the event that the use of its products results in
personal injury or death. Claims related to product liability are a regular and
ongoing aspect of the medical device industry, and at any one time the Company
is subject to claims asserted against it and is involved in product liability
litigation. There can be no assurance that the Company will not experience any
material product liability losses in the future. The Company maintains limited
insurance against certain product liability claims, but there can be no
assurance that such coverage will continue to be available on terms acceptable
to the Company or that such coverage will be adequate for any liabilities
actually incurred. Also, in the event that any of the Company's products prove
to be defective, the Company may be required to recall or redesign such
products. A successful claim brought against the Company in excess of available
insurance coverage, or any claim or product recall that results in significant
adverse publicity against the Company, may have a material adverse effect on the
Company's business, financial condition, and results of operations.
 
    DEPENDENCE ON KEY PERSONNEL
 
    The Company's future business and operating results depend in significant
part upon the continued contributions of its key sales, technical and senior
management personnel, many of whom would be difficult to replace and certain of
whom perform important functions for the Company beyond those functions
suggested by their respective job titles or descriptions. The Company's business
and future operating results also depend in significant part upon its ability to
attract and retain qualified management, manufacturing, technical, marketing,
and sales and support personnel for its operations. Competition for such
personnel is intense, particularly in the geographic region of California where
the Company's principal office is located, and there can be no assurance that
the Company will be successful in attracting or retaining such personnel. Since
May 1998 the Company has experienced attrition beyond that planned
 
                                       22
<PAGE>
in the restructuring. The loss of any key employee, the failure of any key
employee to perform in his or her current position, or the Company's inability
to attract and retain skilled employees, as needed, could materially adversely
affect the Company's business, financial condition, and results of operations.
 
    NO ASSURANCE OF REGULATORY CLEARANCE OR APPROVAL; SIGNIFICANT DOMESTIC AND
     INTERNATIONAL REGULATION
 
    The Company's individual devices are subject to regulatory clearances or
approvals by the FDA. The Company believes that most of its devices and systems
will be subject to United States regulatory clearance through the 510(k)
premarket notification process rather than a more extensive PMA submission.
Although the Company has received clearance from the FDA to market the EndoCPB
system and several proprietary Class II disposable surgical devices for its
Port-Access CABG and MVR surgery systems in the United States, securing FDA
approvals and clearances for additional Port-Access devices and other products
under development by the Company will require submission to the FDA of extensive
technical information and may require submission of extensive clinical data.
There can be no assurance that the FDA will act favorably or quickly on the
Company's 510(k) or other submissions, and significant difficulties and costs
may be encountered by the Company in its efforts to obtain FDA clearance that
could delay or preclude the Company from marketing and selling its products in
the United States. Furthermore, there can be no assurance that the FDA will not
request additional data, require that the Company conduct further clinical
studies, or require a more extensive PMA submission, causing the Company to
incur substantial costs and delays. The Company's business, financial condition,
and results of operations are critically dependent upon FDA clearance or
approval of the Company's systems. Failure to obtain such clearances or
approvals, or to obtain such clearances or approvals on a timely basis, would
have a material adverse effect on the Company's business, financial condition,
and results of operations, and could result in postponement of the
commercialization of the Company's products or even cessation of the Company's
business in the United States.
 
    Sales of medical devices outside of the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approval for sale in foreign countries may be longer or
shorter than that required for FDA clearance or approval, and the requirements
may differ. Although the Company's EndoCPB system, EndoDirect system and
Port-Access CABG and MVR systems bear the CE Mark under the European Community
medical device directive, some European countries may impose additional
requirements for commercialization of those products. Other products under
development by the Company will require additional approvals or assessments, and
there can be no assurance that these approvals or assessments will be received
on a timely basis, if at all. Most other countries in which the Company intends
to operate either do not currently regulate medical systems or have minimal
regulatory requirements, although these countries may adopt more extensive
regulations in the future that could impact the Company's ability to market its
systems. In addition, significant costs and requests for additional information
may be encountered by the Company in its efforts to obtain regulatory approvals.
Any such events could substantially delay or preclude the Company from marketing
its systems internationally.
 
    In addition, the FDA and certain foreign regulatory authorities impose
numerous other requirements with which medical device manufacturers must comply.
Product approvals can be withdrawn for failure to comply with regulatory
standards or because of the occurrence of unforeseen problems following initial
marketing. The Company will also be required to adhere to applicable FDA
regulations setting forth current QSR requirements, which include testing,
control, and documentation requirements. Ongoing compliance with QSR and other
applicable regulatory requirements is monitored through periodic inspections by
state and federal agencies, including the FDA, and by comparable agencies in
other countries. Failure to comply with applicable regulatory requirements can
result in fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, denial or withdrawal of premarket
clearance or premarket approval for devices, and criminal prosecution.
Furthermore, changes in existing regulations or adoption of new regulations or
policies could delay or even prevent the Company
 
                                       23
<PAGE>
from obtaining future regulatory approvals or clearances. Such revisions could
have a material adverse effect on the Company's business, financial condition,
and results of operations. See "Government Regulation."
 
    LIMITATIONS ON THIRD-PARTY REIMBURSEMENT
 
    The Company expects that sales volumes and prices of the Company's products
will be heavily dependent on the availability of reimbursement from third-party
payors and that individuals seldom, if ever, will be willing or able to pay
directly for the costs associated with the use of the Company's products. The
Company's products are typically purchased by clinics, hospitals, and other
users, which bill various third-party payors, such as governmental programs and
private insurance plans, for the healthcare services provided to their patients.
Third-party payors carefully review and increasingly challenge the prices
charged for medical products and services. Reimbursement rates from private
companies vary depending on the procedure performed, the third-party payor, the
insurance plan, and other factors. Medicare reimburses hospitals a prospectively
determined fixed amount for the costs associated with an in-patient
hospitalization based on the patient's discharge diagnosis, and reimburses
physicians a prospectively determined fixed amount based on the procedure
performed, regardless of the actual costs incurred by the hospital or physician
in furnishing the care and unrelated to the specific devices used in that
procedure. Medicare and other third-party payors are increasingly scrutinizing
whether to cover new products and the level of reimbursement for covered
products.
 
    In foreign markets, reimbursement is obtained from a variety of sources,
including governmental authorities, private health insurance plans, and labor
unions. In most foreign countries, there are also private insurance systems that
may offer payments for alternative therapies. Although not as prevalent as in
the United States, health maintenance organizations are emerging in certain
European countries. The Company may need to seek international reimbursement
approvals, although there can be no assurance that any such approvals will be
obtained in a timely manner or at all. Failure to receive international
reimbursement approvals could have an adverse effect on market acceptance of the
Company's products in the international markets in which such approvals are
sought.
 
    The Company believes that reimbursement in the future will be subject to
increased restrictions such as those described above, both in the United States
and in foreign markets. The Company believes that the overall escalating cost of
medical products and services has led to and will continue to lead to increased
pressures on the health care industry, both foreign and domestic, to reduce the
cost of products and services, including products offered by the Company. The
Company is aware that certain third-party payors, including Medicare
administrative authorities in North Carolina and Texas, have challenged or
refused to provide reimbursement for Port-Access procedures. There can be no
assurance as to either United States or foreign markets that third-party
reimbursement and coverage will be available or adequate, that current
reimbursement amounts will not be decreased in the future or that future
legislation, regulation, or reimbursement policies of third-party payors will
not otherwise adversely affect the demand for the Company's products or its
ability to sell its products on a profitable basis, particularly if the
Company's systems are more expensive than competing cardiac surgery procedures.
If third-party payor coverage or reimbursement is unavailable or inadequate, the
Company's business, financial condition, and results of operations could be
materially adversely affected. See "Third-Party Reimbursement."
 
    PRICE VOLATILITY OF COMMON STOCK
 
    The Company's stock price has been, and is likely to continue to be, highly
volatile. The market price of the Company's Common Stock has fluctuated
substantially, rising from $21.00 at the Company's initial public offering on
April 25, 1996 to a high of $43.75 on May 15, 1996 and to a low of $2.94 on
October 1, 1998. On March 19, 1999 the price of the Company's Common Stock was
$5.56. The market price of the shares of Common Stock may be significantly
affected by factors such as actual or anticipated fluctuations in the Company's
operating results, announcements of technological innovations, new products or
new
 
                                       24
<PAGE>
contracts by the Company or its competitors, developments with respect to
patents or proprietary rights, conditions and trends in the medical device and
other technology industries, adoption of new accounting standards affecting the
medical device industry, changes in financial estimates by securities analysts,
general market conditions, and other factors. In addition, the stock market has
experienced extreme price and volume fluctuations that have particularly
affected the market price for many high technology companies and that have often
been unrelated to the operating performance of these companies. These broad
market fluctuations may adversely affect the market price of the Company's
Common Stock, and there can be no assurance that the market price of the Common
Stock will not decline. In the past, following periods of volatility in the
market price of a particular company's securities, securities class action
litigation has often been brought against that company. Such litigation, if
brought against the Company, could result in substantial costs and a diversion
of management's attention and resources.
 
    POSSIBLE ACQUISITIONS
 
    The Company may make acquisitions of complementary businesses, products and
technology in the future, and regularly evaluates such opportunities. Product
and technology acquisitions entail numerous risks, including difficulties in the
assimilation of acquired operations and products, diversion of management's
attention to other business concerns, amortization of acquired intangible assets
and potential loss of key employees of acquired companies. The Company's
management has had limited experience in assimilating acquired organizations and
products into the Company's operations. No assurance can be given as to the
ability of the Company to integrate successfully any operations, personnel or
products that might be acquired in the future, and the failure of the Company to
do so could have a material adverse effect on the Company's results of
operations.
 
    RELIANCE ON STRATEGIC RELATIONSHIPS
 
    The Company intends to pursue strategic relationships with corporations and
research institutions with respect to the research, development, regulatory
approval, and marketing of certain of its potential products and procedures. The
Company's future success may depend, in part, on its relationships with third
parties, including, for example, the Company's relationship with Getz Bros. Co.,
Ltd., and its success in marketing such products or procedures or willingness to
purchase any such products. The Company anticipates that these third parties may
have the unilateral right to terminate any such relationship without significant
penalty. There can be no assurance that the Company will be successful in
establishing or maintaining any such strategic relationships in the future or
that any such relationships will be successful.
 
    CONTROL BY PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS
 
    The present directors, executive officers, and principal stockholders of the
Company and their affiliates beneficially own approximately 42% of the
outstanding Common Stock. As a result, these stockholders will be able to
continue to exert significant influence over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. Such concentration of ownership may have the effect of
delaying or preventing a change in control of the Company.
 
    EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF RIGHTS PLAN,
     CERTIFICATE OF INCORPORATION, BYLAWS, AND DELAWARE LAW
 
    The Company's Board of Directors has the authority to issue up to 20,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting and conversion rights of such
shares, without any further vote or action by the Company's stockholders. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. The issuance of Preferred Stock could have the effect of making
it more difficult for a third party to acquire a majority of the outstanding
voting
 
                                       25
<PAGE>
stock of the Company. Other than the Series A Preferred Stock issuable under the
stockholder rights plan, the Company has no current plans to issue shares of
Preferred Stock. In addition, the Company's Certificate of Incorporation
provides for a classified Board of Directors such that approximately only one-
third of the members of the Board are elected at each annual meeting of
stockholders. Classified Boards may have the effect of delaying, deferring, or
discouraging changes in control of the Company. Further, the Company has adopted
a stockholder rights plan that, in conjunction with certain provisions of the
Company's Certificate of Incorporation and Bylaws and of Delaware law, could
delay or make more difficult a merger, tender offer, or proxy contest involving
the Company.
 
ITEM 2.  PROPERTIES.
 
    The Company's administrative, sales, manufacturing, and research and
development facility occupies approximately 133,000 square feet in Redwood City,
California pursuant to a lease that expires in 2010. The Company has subleased
approximately 35,000 square feet of this space to other entities and intends to
sublease an additional 20,000 square feet to other subtenants. The Company has
terminated the lease of its training facility in Salt Lake City effective April
30, 1999.
 
ITEM 3.  LEGAL PROCEEDINGS.
 
    Claims related to product liability are a regular and ongoing aspect of the
medical device industry. At any one time, the Company is subject to claims
asserted against it and is involved in product liability litigation. The Company
maintains limited insurance against certain product liability claims. This
insurance is subject to certain limits, exclusions and deductibles. See "Risk
Factors--Risk of Product Liability."
 
    In addition, in the ordinary course of its business the Company experiences
various types of claims which sometimes result in litigation or other legal
proceedings. The Company does not anticipate that any of these proceedings will
have a material adverse affect on its business, financial condition or results
of operations.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
    None.
 
                                       26
<PAGE>
                                    PART II
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
 
    The Company's Common Stock has traded publicly on The Nasdaq Stock Market
under the symbol "HPRT" since April 26, 1996. The Company's initial public
offering price was $21.00 per share. The following table sets forth, for the
periods indicated, the high and low closing sale prices for the Company's Common
Stock as reported by The Nasdaq Stock Market.
 
<TABLE>
<CAPTION>
                                                                                           HIGH        LOW
                                                                                         ---------  ---------
<S>                                                                                      <C>        <C>
YEAR ENDED DECEMBER 31, 1997:
  First Quarter........................................................................      31.88      21.38
  Second Quarter.......................................................................      26.00      17.63
  Third Quarter........................................................................      25.13      16.63
  Fourth Quarter.......................................................................      29.75      18.38
 
YEAR-ENDED DECEMBER 31, 1998:
  First Quarter........................................................................      23.75      11.00
  Second Quarter.......................................................................      13.50       5.25
  Third Quarter........................................................................       6.50       3.00
  Fourth Quarter.......................................................................       7.38       2.94
</TABLE>
 
    On March 19, 1999, the last sale price of the Company's Common Stock as
reported by The Nasdaq Stock Market was $5.56 per share. There were 342 holders
of record of the Company's Common Stock as of March 19, 1999. See "Risk
Factors--Price Volatility of Common Stock."
 
    The Company has never declared or paid cash dividends on its Common Stock
and currently does not anticipate paying cash dividends in the foreseeable
future. In addition, the Company's debt facility restricts the ability to pay
cash dividends.
 
                                       27
<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA.
 
    The following selected financial data should be read in conjunction with the
Company's financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein. The statement of operations data for the three years
in the period ended December 31, 1998, and the balance sheet data at December
31, 1998 and 1997 are derived from the audited financial statements included
elsewhere herein. The statement of operations data for the years ended December
31, 1995 and 1994, and the balance sheet data at December 31, 1996, 1995 and
1994 are derived from audited financial statements not included herein.
 
<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31,
                                                       -----------------------------------------------------------
<S>                                                    <C>          <C>          <C>         <C>         <C>
                                                          1998         1997         1996        1995       1994
                                                       -----------  -----------  ----------  ----------  ---------
                                                                  (IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales............................................  $    18,611  $    23,421  $      624  $       --  $      --
Cost of sales........................................       16,846       15,395         561          --         --
                                                       -----------  -----------  ----------  ----------  ---------
Gross profit.........................................        1,765        8,026          63          --         --
Operating expenses:
  Research and development...........................       10,985       18,005      21,059       8,477      4,207
  Selling, general and administrative................       33,151       43,005      11,223       1,229        734
  Patent acquisition.................................           --           --       5,216          --         --
  Restructuring charge...............................       12,158           --          --          --         --
                                                       -----------  -----------  ----------  ----------  ---------
Loss from operations.................................      (54,529)     (52,984)    (37,435)     (9,706)    (4,941)
Interest and other, net..............................       (1,692)       1,653       3,381         353        120
                                                       -----------  -----------  ----------  ----------  ---------
Loss before extraordinary item.......................      (56,221)     (51,331)    (34,054)     (9,353)    (4,821)
Extraordinary item--gain on repurchase of debt.......       15,563           --          --          --         --
                                                       -----------  -----------  ----------  ----------  ---------
Net loss.............................................  $   (40,658) $   (51,331) $  (34,054) $   (9,353) $  (4,821)
                                                       -----------  -----------  ----------  ----------  ---------
                                                       -----------  -----------  ----------  ----------  ---------
Basic and diluted net loss per share.................  $     (1.73) $     (2.29) $    (2.11) $    (2.52) $   (1.25)
                                                       -----------  -----------  ----------  ----------  ---------
                                                       -----------  -----------  ----------  ----------  ---------
Extraordinary income per share.......................  $      0.66
                                                       -----------
                                                       -----------
</TABLE>
 
<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                       -----------------------------------------------------------
<S>                                                    <C>          <C>          <C>         <C>         <C>
                                                          1998         1997         1996        1995       1994
                                                       -----------  -----------  ----------  ----------  ---------
                                                                             (IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Current assets.......................................  $    74,761  $   124,848  $   94,226  $   12,692  $   1,721
Working capital......................................       46,170      113,923      87,561      11,234      1,089
Total assets.........................................       87,537      142,810     101,852      14,266      2,621
Long-term obligations, less current portion..........       56,098       89,868       4,717       4,034         61
Accumulated deficit..................................     (142,588)    (101,930)    (50,599)    (16,545)    (7,192)
Total stockholders' equity...........................        2,848       42,017      90,470       8,775      1,928
</TABLE>
 
                                       28
<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.
 
OVERVIEW
 
    Since its inception in May 1991, the Company has been engaged in the
research and development of Port-Access minimally invasive cardiac surgery
systems and related technology. In December 1996, the Company commercially
introduced its Port-Access systems and is now engaged in extensive marketing and
selling activities as well as continued research and development. Through its
"Port-Access Partnership" program, the Company has adopted a procedural sales
model in which the Company trains a center's surgical team, supplies patient and
referring physician educational materials, supports local market media efforts
and furnishes proprietary reusable devices for Port-Access procedures in
exchange for a purchase order for Port-Access disposable products necessary to
perform Port-Access cardiac surgery. During the third quarter of 1998 the
Company began selling its new EndoDirect system, a direct aortic cannulation
system for minimally invasive cardiac surgery. The Company is currently
implementing a controlled release of this new system.
 
    The Company has been generating revenue from the sale of products since
December 1996, and it has been unprofitable since inception. For the period from
inception to December 31, 1998, the Company has incurred cumulative net losses
of approximately $142.6 million. For at least the next 12 months, the Company
expects to continue to incur losses.
 
    During 1997, the Company expanded its manufacturing capacity and general and
administrative structure in anticipation of higher procedure volume and net
sales. In early 1998, the Company determined that procedure volume by trained
cardiac surgery teams had been negatively impacted by ease of use issues, the
significant physician learning curve, and longer procedure times associated with
Port-Access surgery.
 
    In May 1998, the Company implemented a plan to significantly reduce expenses
and restructure its business operations to improve operating efficiency. As a
result of the restructuring plan, the Company scaled back manufacturing
capacity, reduced research and development expenses, and reduced selling,
general and administrative expenses in several areas, including marketing and
physician training. The research and development department has focused its
resources on enhancing current products and completing the development of new
products that are intended to make Port-Access procedures easier and faster to
learn to perform. The Company has closed its Utah training facility and has
augmented its sales organization by moving more clinical training specialists
into the field to work directly with surgical teams at the hospitals. The
restructuring plan resulted in a charge of $12.2 million for the year ended
December 31, 1998, and included reducing headcount by approximately 140
employees, vacating leased facilities, and disposing of assets.
 
    The foregoing and the discussion appearing elsewhere in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contain forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Risk Factors--Early Stage of
Utilization; No Assurance of Safety and Efficacy," "--No Assurance of Market
Acceptance," "--Risks Associated with New Surgical Procedure; Extensive Training
Requirements," "--Customer Concentration," "--Fluctuations in Operating
Results," and "--Limited Manufacturing Experience; Dependence on Key Suppliers."
 
RESULTS OF OPERATIONS
 
    NET SALES.  Net sales were $18.6 million, $23.4 million and $0.6 million in
1998, 1997 and 1996, respectively. Included in net sales for 1997 is a $1.0
million fee received from Getz Bros. Co., Ltd., who acts as the exclusive
distributor of the Company's products in Japan. The decrease in net sales in
1998 compared with 1997 is due to the Company's efforts to reduce customer
inventories of its Port-Access
 
                                       29
<PAGE>
minimally invasive cardiac surgery systems. In the six months ended December 31,
1998, estimated product usage exceeded net sales by approximately $2.1 million.
 
    Net sales consist primarily of sales of the Company's disposable devices in
its EndoCPB and EndoDirect systems. Revenue from product sales is recognized
upon product shipment. International net sales represented approximately 13% and
12% of net sales in 1998 and 1997, respectively.
 
    COST OF SALES.  Cost of sales was $16.8 million, $15.4 million, and $0.6
million in 1998, 1997, and 1996, respectively. Cost of sales consists primarily
of material, labor and overhead costs associated with manufacturing the
Company's disposable devices in its EndoCPB and EndoDirect systems and related
reusable devices.
 
    Gross margin was 9%, 34% and 10% in 1998, 1997 and 1996, respectively. The
gross margin in 1998 was adversely impacted by excess manufacturing capacity
from decreased net sales, the effect of inventory and asset write-downs as a
result of product design changes and revised production forecasts, and increased
reserves relating to product expiration risks. The increase in gross margin in
1997 from 1996 reflects efficiencies obtained as a result of higher production
volume in the first full year of product sales. The Company's gross margin may
be adversely affected by excess manufacturing capacity as a result of the
unpredictable nature of product shipments and production schedules in this early
stage of adoption.
 
    RESEARCH AND DEVELOPMENT EXPENSES.  Research and development expenses were
$11.0 million, $18.0 million and $21.1 million in 1998, 1997 and 1996,
respectively. The decrease in expenses between 1998 and 1997 was primarily due
to a reduction in headcount and the cancellation of several projects. Current
research and development efforts are focused on specific product enhancements
and new product developments that are intended to make Port-Access procedures
easier and faster to learn to perform. The decrease in 1997 from 1996 was
primarily due to manufacturing development costs incurred in 1996 for the
design, construction and testing of pre-production prototypes and models and
other related pre-launch costs. The Company has maintained a significant level
of research and development spending to facilitate product improvements and new
product development, and anticipates that it will continue to devote substantial
resources to research and development activities.
 
    Research and development expenses consist primarily of personnel and other
costs in support of product development, clinical evaluations, and regulatory
submissions, as well as costs incurred in producing products for research and
development activities, the cost of acquiring patents in the normal course of
business, and the cost of prosecuting United States and foreign patent
applications relating to the Company's technology.
 
    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and
administrative expenses were $33.2 million, $43.0 million, and $11.2 million in
1998, 1997, and 1996, respectively. The decrease in 1998 from 1997 was primarily
due to the restructuring plan that was implemented starting in May 1998. The
increase from 1996 to 1997 was primarily due to the hiring of additional sales,
marketing and administrative personnel, higher physician training costs,
increased expenses necessary to support the Company's product launch and ongoing
sales activities, and higher expenses necessary to manage and support the
Company's increased scale of operations.
 
    Selling, general and administrative expenses consist primarily of costs for
sales, marketing and administrative personnel, as well as physician training
costs, legal and other professional fees.
 
    PATENT ACQUISITION EXPENSES.  Patent acquisition expenses consist of the
cost to acquire a United States patent, several pending U.S. Patent
applications, and related rights from Endosurgical Development Corporation in
July 1996 in exchange for shares of Common Stock and cash. Patent and other
intellectual property acquisitions deemed to be in the normal course of business
are accounted for as research and development expenses.
 
                                       30
<PAGE>
    RESTRUCTURING CHARGE.  The restructuring plan implemented beginning in May
1998 resulted in a charge of $12.2 million for the year ended December 31, 1998.
The restructuring charge included approximately $6.6 million for the write-off
of capital assets and leasehold improvements, and approximately $3.0 million in
facility expenses and other costs relating primarily to the closure of the
Company's Utah facility. The charge also included approximately $2.6 million in
severance costs associated with approximately 140 terminated employees.
 
    INTEREST INCOME AND OTHER, NET.  Interest income and other, net was $4.9
million, $6.4 million, and $4.0 million in 1998, 1997, and 1996, respectively.
The decrease in 1998 from 1997 was due to the Company's lower average investment
balances. The increase from 1996 to 1997 was primarily due to the Company's
higher average investment balances resulting from the Company's initial public
offering in 1996 and the issuance of convertible subordinated notes in 1997.
 
    INTEREST EXPENSE.  Interest expense increased to $6.6 million in 1998 from
$4.7 million in 1997 and $0.6 million in 1996. The increase in each year was
primarily attributable to interest expense related to the Company's convertible
subordinated notes that were issued in April 1997.
 
    INCOME TAXES.  Due to operating losses and the inability to recognize the
benefits therefrom, there are no provisions for income taxes in 1998, 1997 or
1996.
 
    Realization of deferred tax assets is dependent on future earnings, if any,
the amount and timing of which are uncertain. Accordingly, a valuation allowance
in an amount equal to the net deferred tax assets as of December 31, 1998 and
1997 has been established to reflect these uncertainties.
 
    At December 31, 1998, the Company had net operating loss carryforwards for
federal and California tax purposes of approximately $121.0 million and $51.0
million, respectively, which will expire at various dates between 1999 and 2018
if not utilized. The Company also has research and development tax credit
carryforwards available to reduce future federal and state income taxes, if any,
of approximately $1.4 million and $1.3 million, respectively, for federal and
California tax purposes, which will expire in the years 2007 through 2013 if not
used. The Internal Revenue Code of 1986 and state tax statutes contain
provisions that may limit the net operating loss carryforwards and research and
development credits available for use in any given year should certain events
occur, including additional sales of equity securities and other changes in
ownership. Such events could limit the eventual utilization of these
carryforwards.
 
    EXTRAORDINARY ITEM.  In the fourth quarter of 1998, the Company purchased
$33.4 million in principal amount of its outstanding subordinated notes at a
discount from face value. The transaction resulted in a net gain of $15.6
million, consisting of a gain of $16.6 million due to the discount, offset by
the write-off of $1.0 million in issue costs associated with the original
issuance of the notes in April 1997. The Company financed this purchase through
$16.9 million in short-term borrowings.
 
LIQUIDITY AND CAPITAL RESOURCES
 
    Since inception, the Company has funded its operations and investments in
property and equipment primarily through the private sale of preferred stock,
totaling approximately $25.1 million, through an initial public offering of
Common Stock in April 1996, totaling approximately $110.8 million, and through a
private placement of convertible subordinated notes to qualified institutional
investors in April 1997, totaling approximately $82.8 million. In the fourth
quarter of 1998, the Company incurred $16.9 million in short-term borrowings
under a reverse repurchase agreement in connection with the purchase of a
portion of its outstanding convertible debt. The Company also has a $10.0
million credit facility with a commercial bank. No amount was outstanding under
this facility at December 31, 1998. At December 31, 1998, the Company had
approximately $70.1 million in cash and investments and approximately $46.2
million in working capital.
 
                                       31
<PAGE>
    Net cash used in operating activities was approximately $34.6 million, $51.8
million, and $28.6 million in 1998, 1997, and 1996, respectively and resulted
primarily from net losses in each period. For the year ended December 31, 1998,
net losses, adjusted for depreciation and amortization, were partly offset by a
non-cash extraordinary gain on the purchase of a portion of the Company's
convertible subordinated notes of $15.6 million, non-cash restructuring expenses
of approximately $7.5 million, accounts receivable collections of $4.0 million,
and a reduction in inventories of $3.2 million. The increase in 1997 net cash
used in operating activities over 1996 was primarily due to net losses and an
increase in accounts receivable as a result of the Company's first full year of
product sales.
 
    Net cash provided by investing activities was approximately $9.3 million for
the year ended December 31, 1998, compared with net cash used in investing
activities of approximately $30.5 million and $57.3 million for the years ended
December 31, 1997 and 1996, respectively. The net cash provided in 1998 was
primarily the result of net maturities and sales of short-term investments of
$17.6 million, reduced by $8.3 million in capital expenditures. In 1997 and
1996, net cash used in investing activities reflects the net purchases of $20.4
million and $51.2 million of short-term investments, respectively, and the
purchase of $10.2 million and $6.1 million of property and equipment,
respectively.
 
    Capital expenditures for equipment and leasehold improvements to support the
Company's operations were $8.3 million, $10.2 million, and $6.1 million in 1998,
1997, and 1996, respectively. The expenditures in 1998 were primarily related to
leasehold improvements associated with the Company's new corporate headquarters,
which was occupied in the fourth quarter of 1998. The expenditures in 1997 were
primarily related to training facility improvements, acquisition of equipment
for research and development and the expansion of the Company's manufacturing
capacity and facilities. The expenditures in 1996 were primarily related to the
acquisition of equipment for research and development and physician training and
the expansion of the Company's administrative facilities and manufacturing
capacity.
 
    Net cash used in financing activities was approximately $18,000 in 1998,
compared with net cash provided of $84.7 million and $111.9 million in 1997 and
1996, respectively. The net cash used in financing activities in 1998 included
payments of $16.9 million to repurchase the Company's convertible subordinated
notes, offset by $16.9 million in proceeds from borrowings under a reverse
repurchase agreement. Net cash provided by financing activities in 1997 was
primarily attributable to net proceeds of $82.8 million from the sale of
convertible subordinated notes and net cash provided by financing activities in
1996 was primarily attributable to the Company's initial public offering of
Common Stock.
 
    The Company believes that it has the financial resources through its current
level of liquid assets and credit facilities to meet business requirements
through at least 1999.
 
YEAR 2000
 
    The Year 2000 issue arose because many existing computer programs use only
the last two digits to refer to a year. Therefore, these computer programs do
not properly recognize a year that begins with 20 instead of 19. If not
corrected, many computer applications could fail or create erroneous results.
 
    The Company has reviewed the Year 2000 issue as it may affect the Company's
business activities. The Company has purchased its internal manufacturing and
financial information systems within the last three years and installs, on an
ongoing basis, all updates and patches as they are released by the vendors to
ensure that the Company's systems and software are up-to-date and Year 2000
compliant according to vendor representations.
 
    Management has also initiated a program to test its key software and
hardware systems by creating a parallel test environment to identify and resolve
any problems as a result of the date change on January 1, 2000. The Company will
test its business systems and the operating systems and hardware that run the
Company's corporate servers. This testing procedure is expected to be
substantially complete by the end of the second quarter 1999.
 
                                       32
<PAGE>
    The Company is developing a contingency plan in the event that one or more
internal systems or key external parties that support the Company's business
fails as a result of the Year 2000. This plan will incorporate manual processes
to carry out operating functions in the event that computer systems fail. The
Company also intends to develop an inventory stocking plan to address possible
failures related to third-party suppliers. This contingency plan is expected to
be completed by the end of the second quarter 1999.
 
    Costs to address the Company's Year 2000 issues are not expected to exceed
$100,000 in 1999, and will consist primarily of the cost of certain hardware and
software to perform testing functions and the cost of internal resources that
will be applied to this effort. No costs have been incurred through December 31,
1998.
 
    The Company is in the process of contacting all third parties with which it
has significant relationships, to determine the extent to which the Company
could be vulnerable to failure by any of them to obtain Year 2000 compliance. To
date, the Company is not aware of any significant third parties with a Year 2000
issue that could materially impact the Company's operations, liquidity or
capital resources. However, the Company has no means of ensuring that third
parties will be Year 2000 ready and the potential effect of third-party
non-compliance is currently not determinable.
 
    The Company has devoted and will continue to devote the resources necessary
to ensure that all Year 2000 issues are properly addressed. However, there can
be no assurance that all Year 2000 problems are detected. Further, there can be
no assurance that the Company's assessment of its third party vendors and
suppliers will be accurate. Some of the potential worst-case scenarios that
could occur include: (1) delayed product shipments or inability to produce
product; (2) corruption of data in the Company's internal systems; (3) failure
of infrastructure services provided by government agencies; and (4) health,
environmental and safety issues relating to the Company's facilities. If any of
these situations were to occur, the Company's operations could be temporarily
interrupted.
 
     ITEM 7.A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
 
    The Company is exposed to financial market risks, including changes in
interest rates. The fair value of the Company's convertible subordinated notes
and available-for-sale investments can be adversely affected by changes in
market interest rates. The convertible subordinated notes are due in 2004 and
bear interest at a fixed rate of 7.25%. The market interest rate exposure of the
Company's convertible subordinated notes is partially offset by the market
interest rate exposure of the Company's available-for-sale investments. The
primary objective of the Company's investment activities is to preserve
principal while at the same time maximizing yields without incurring significant
risk. To achieve this objective, the Company primarily invests in U.S.
Government or high-grade corporate debt securities. The weighted-average
maturity of the Company's available-for-sale investments was approximately 13
months at December 31, 1998. The Company has estimated the impact of potential
interest rate risk exposures using a sensitivity analysis. A hypothetical 1%
decrease in interest rates would result in an approximate $0.7 million net
adverse change in the net present value of all interest rate sensitive financial
instruments outstanding at December 31, 1998.
 
                                       33
<PAGE>
              ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                                HEARTPORT, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                                                                  PAGE
                                                                                                                  -----
<S>                                                                                                            <C>
Report of Ernst & Young LLP, Independent Auditors............................................................         F-2
 
Consolidated Balance Sheets..................................................................................         F-3
 
Consolidated Statements of Operations........................................................................         F-4
 
Consolidated Statements of Stockholders' Equity..............................................................         F-5
 
Consolidated Statements of Cash Flows........................................................................         F-6
 
Notes to Consolidated Financial Statements...................................................................         F-7
</TABLE>
 
                                      F-1
<PAGE>
               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
 
The Board of Directors and Stockholders
Heartport, Inc.
 
    We have audited the accompanying consolidated balance sheets of Heartport,
Inc. as of December 31, 1998 and 1997, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1998. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
 
    We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Heartport, Inc. at December 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
 
                                          ERNST & YOUNG LLP
 
Palo Alto, California
January 22, 1999
 
                                      F-2
<PAGE>
                                HEARTPORT, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                                DECEMBER 31,
                                                                                          ------------------------
                                                                                             1998         1997
                                                                                          -----------  -----------
<S>                                                                                       <C>          <C>
                                                      ASSETS
Current assets:
  Cash and cash equivalents.............................................................  $    10,479  $    35,805
  Short-term investments................................................................       59,591       76,780
  Accounts receivable, net of allowances of $709 in 1998 ($923 in 1997).................        1,933        5,925
  Inventories...........................................................................        1,452        4,878
  Other current assets..................................................................        1,306        1,460
                                                                                          -----------  -----------
Total current assets....................................................................       74,761      124,848
                                                                                          -----------  -----------
Property and equipment:
  Equipment.............................................................................        5,272        8,967
  Furniture and fixtures................................................................        1,694        1,924
  Leasehold improvements................................................................       10,204        6,991
                                                                                          -----------  -----------
                                                                                               17,170       17,882
  Accumulated depreciation and amortization.............................................        6,551        4,474
                                                                                          -----------  -----------
                                                                                               10,619       13,408
Other assets............................................................................        2,157        4,554
                                                                                          -----------  -----------
Total assets............................................................................  $    87,537  $   142,810
                                                                                          -----------  -----------
                                                                                          -----------  -----------
                                        LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable......................................................................  $     4,093  $     4,345
  Accrued compensation and related benefits.............................................        4,099        4,324
  Accrued interest......................................................................          639        1,042
  Short-term borrowings.................................................................       16,900           --
  Current portion of long-term debt.....................................................          447          807
  Other current liabilities.............................................................        2,413          407
                                                                                          -----------  -----------
Total current liabilities...............................................................       28,591       10,925
                                                                                          -----------  -----------
Noncurrent liabilities:
  Long-term debt, less current portion..................................................       53,013       86,842
  Other long-term liabilities...........................................................          163           65
  Deferred royalty income...............................................................        2,922        2,961
                                                                                          -----------  -----------
Total noncurrent liabilities............................................................       56,098       89,868
                                                                                          -----------  -----------
Commitments
Stockholders' equity:
  Preferred stock, $0.001 par value; 20,000 shares authorized, none issued and
    outstanding.........................................................................           --           --
  Common stock, $0.001 par value:
    Authorized shares--100,000
    Issued and outstanding shares--25,232 in 1998 (24,902 in 1997)......................           25           25
  Additional paid-in capital............................................................      145,929      144,824
  Notes receivable from stockholders....................................................         (901)        (902)
  Accumulated deficit...................................................................     (142,588)    (101,930)
  Accumulated other comprehensive income................................................          383           --
                                                                                          -----------  -----------
Total stockholders' equity..............................................................        2,848       42,017
                                                                                          -----------  -----------
Total liabilities and stockholders' equity..............................................  $    87,537  $   142,810
                                                                                          -----------  -----------
                                                                                          -----------  -----------
</TABLE>
 
                            See accompanying notes.
 
                                      F-3
<PAGE>
                                HEARTPORT, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                     YEARS ENDED DECEMBER 31,
                                                                                ----------------------------------
                                                                                   1998        1997        1996
                                                                                ----------  ----------  ----------
<S>                                                                             <C>         <C>         <C>
Net sales.....................................................................  $   18,611  $   23,421  $      624
Cost of sales.................................................................      16,846      15,395         561
                                                                                ----------  ----------  ----------
Gross profit..................................................................       1,765       8,026          63
Operating expenses:
  Research and development....................................................      10,985      18,005      21,059
  Selling, general and administrative.........................................      33,151      43,005      11,223
  Patent acquisition..........................................................          --          --       5,216
  Restructuring charge........................................................      12,158          --          --
                                                                                ----------  ----------  ----------
Loss from operations..........................................................     (54,529)    (52,984)    (37,435)
Interest income and other, net................................................       4,865       6,352       3,973
Interest expense..............................................................      (6,557)     (4,699)       (592)
                                                                                ----------  ----------  ----------
Loss before extraordinary item................................................     (56,221)    (51,331)    (34,054)
Extraordinary item--gain on repurchase of debt................................      15,563          --          --
                                                                                ----------  ----------  ----------
Net loss......................................................................  $  (40,658) $  (51,331) $  (34,054)
                                                                                ----------  ----------  ----------
                                                                                ----------  ----------  ----------
Basic and diluted loss per share before extraordinary item....................  $    (2.39) $    (2.29) $    (2.11)
Extraordinary income per share................................................        0.66          --          --
                                                                                ----------  ----------  ----------
Basic and diluted net loss per share..........................................  $    (1.73) $    (2.29) $    (2.11)
                                                                                ----------  ----------  ----------
                                                                                ----------  ----------  ----------
</TABLE>
 
                            See accompanying notes.
 
                                      F-4
<PAGE>
                                HEARTPORT, INC.
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                    CONVERTIBLE PREFERRED
                                            STOCK                  COMMON STOCK        ADDITIONAL
                                   ------------------------  ------------------------    PAID-IN       NOTES     ACCUMULATED
                                     SHARES       AMOUNT       SHARES       AMOUNT       CAPITAL    RECEIVABLE     DEFICIT
                                   -----------  -----------  -----------  -----------  -----------  -----------  ------------
<S>                                <C>          <C>          <C>          <C>          <C>          <C>          <C>
Balance at December 31, 1995.....       9,237    $       9        9,084    $       9    $  26,395    $  (1,093)   $  (16,545)
  Net loss and comprehensive
    loss.........................          --           --           --           --           --           --       (34,054)
  Conversion of convertible
    preferred stock into common
    stock........................      (9,237)          (9)       9,237            9           --           --            --
  Repurchases of common stock....          --           --         (184)          --          (69)          69            --
  Payments of stockholders' notes
    receivable...................          --           --           --           --           --           51            --
  Exercises of common stock
    options......................          --           --          327           --           67           --            --
  Issuances of common stock......          --           --        5,951            6      115,425           --            --
  Issuances of warrants..........          --           --           --           --          200           --            --
                                   -----------       -----   -----------       -----   -----------  -----------  ------------
Balance at December 31, 1996.....          --           --       24,415           24      142,018         (973)      (50,599)
  Net loss and comprehensive
    loss.........................          --           --           --           --           --           --       (51,331)
  Payments of stockholders' notes
    receivable...................          --           --           --           --           --           71            --
  Exercises of common stock
    options......................          --           --          413           --          940           --            --
  Issuances of common stock......          --           --           74            1        1,563           --            --
  Issuances of stock options to
    non-employees................          --           --           --           --          303           --            --
                                   -----------       -----   -----------       -----   -----------  -----------  ------------
Balance at December 31, 1997.....          --           --       24,902           25      144,824         (902)     (101,930)
  Net loss.......................          --           --           --           --           --           --       (40,658)
  Unrealized gain on
    securities...................
      Comprehensive loss.........
  Repurchases of common stock....          --           --          (54)          --          (20)          --            --
  Payments of stockholders' notes
    receivable...................          --           --           --           --           --            1            --
  Exercises of common stock
    options......................          --           --          293           --          178           --            --
  Issuances of common stock......          --           --           91           --          579           --            --
  Issuances of stock options.....          --           --           --           --          368           --            --
                                   -----------       -----   -----------       -----   -----------  -----------  ------------
Balance at December 31, 1998.....          --    $      --       25,232    $      25    $ 145,929    $    (901)   $ (142,588)
                                   -----------       -----   -----------       -----   -----------  -----------  ------------
                                   -----------       -----   -----------       -----   -----------  -----------  ------------
 
<CAPTION>
 
                                         OTHER            TOTAL
                                     COMPREHENSIVE    STOCKHOLDERS'
                                        INCOME           EQUITY
                                   -----------------  -------------
<S>                                <C>                <C>
Balance at December 31, 1995.....      $      --        $   8,775
  Net loss and comprehensive
    loss.........................             --          (34,054)
  Conversion of convertible
    preferred stock into common
    stock........................             --               --
  Repurchases of common stock....             --               --
  Payments of stockholders' notes
    receivable...................             --               51
  Exercises of common stock
    options......................             --               67
  Issuances of common stock......             --          115,431
  Issuances of warrants..........             --              200
                                           -----      -------------
Balance at December 31, 1996.....             --           90,470
  Net loss and comprehensive
    loss.........................             --          (51,331)
  Payments of stockholders' notes
    receivable...................             --               71
  Exercises of common stock
    options......................             --              940
  Issuances of common stock......             --            1,564
  Issuances of stock options to
    non-employees................             --              303
                                           -----      -------------
Balance at December 31, 1997.....             --           42,017
                                                      -------------
  Net loss.......................             --          (40,658)
  Unrealized gain on
    securities...................            383              383
                                                      -------------
      Comprehensive loss.........                         (40,275)
  Repurchases of common stock....             --              (20)
  Payments of stockholders' notes
    receivable...................             --                1
  Exercises of common stock
    options......................             --              178
  Issuances of common stock......             --              579
  Issuances of stock options.....             --              368
                                           -----      -------------
Balance at December 31, 1998.....      $     383        $   2,848
                                           -----      -------------
                                           -----      -------------
</TABLE>
 
                            See accompanying notes.
 
                                      F-5
<PAGE>
                                HEARTPORT, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                     YEARS ENDED DECEMBER 31,
                                                                                ----------------------------------
                                                                                   1998        1997        1996
                                                                                ----------  ----------  ----------
<S>                                                                             <C>         <C>         <C>
OPERATING ACTIVITIES:
Net loss......................................................................  $  (40,658) $  (51,331) $  (34,054)
Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation and amortization...............................................       4,433       2,896       1,084
  Extraordinary gain from repurchase of debt..................................     (15,563)         --          --
  Common stock and warrants issued for services rendered and certain
    technology................................................................          --         459       4,355
  Compensation related to stock options.......................................         368         303         183
  Loss on sales and disposals of equipment....................................         443         262          --
  Non-cash restructuring expenses.............................................       7,540          --          --
  Changes in operating assets and liabilities:
    Accounts receivable.......................................................       3,992      (5,375)       (550)
    Inventories...............................................................       3,216      (2,771)     (2,107)
    Other assets..............................................................         336          --      (2,666)
    Accounts payable, accrued expenses, and other liabilities.................       1,318       3,758       5,201
                                                                                ----------  ----------  ----------
Net cash used in operating activities.........................................     (34,575)    (51,799)    (28,554)
                                                                                ----------  ----------  ----------
INVESTING ACTIVITIES
Purchases of short-term investments...........................................     (85,758)    (90,166)   (120,629)
Maturities of short-term investments..........................................      48,062      60,654      59,420
Sales of short-term investments...............................................      55,268       9,139      10,000
Purchases of property and equipment...........................................      (8,305)    (10,165)     (6,104)
                                                                                ----------  ----------  ----------
Net cash provided by (used in) investing activities...........................       9,267     (30,538)    (57,313)
                                                                                ----------  ----------  ----------
FINANCING ACTIVITIES
Proceeds from issuances of common stock.......................................         737       2,045     111,159
Proceeds from short-term borrowings...........................................      16,900          --          --
Repurchase of long-term borrowings............................................     (16,867)         --          --
Proceeds from payments of stockholders' notes receivable......................           1          71          51
Proceeds from long-term borrowings............................................          --      83,240       1,155
Repayment of long-term borrowings.............................................        (789)       (659)       (465)
                                                                                ----------  ----------  ----------
Net cash (used in) provided by financing activities...........................         (18)     84,697     111,900
                                                                                ----------  ----------  ----------
Net (decrease) increase in cash and cash equivalents..........................     (25,326)      2,360      26,033
Cash and cash equivalents at beginning of year................................      35,805      33,445       7,412
                                                                                ----------  ----------  ----------
Cash and cash equivalents at end of year......................................  $   10,479  $   35,805  $   33,445
                                                                                ----------  ----------  ----------
                                                                                ----------  ----------  ----------
SUPPLEMENTAL DISCLOSURES OF CASH INFORMATION
Cash paid for interest........................................................  $    6,418  $    3,573  $      346
NONCASH FINANCING ACTIVITIES
Issuance of common stock for technology.......................................  $       --  $       --  $    4,155
Repurchase of common stock through forgiveness of notes receivable from
  stockholders................................................................  $       --  $       --  $       69
Conversion of long-term debt to deferred royalty income.......................  $       --  $       --  $    3,000
Conversion of preferred stock to common stock.................................  $       --  $       --  $        9
</TABLE>
 
                            See accompanying notes.
 
                                      F-6
<PAGE>
                                HEARTPORT, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
    BASIS OF PRESENTATION
 
    Heartport, Inc. (the Company) operates in one business segment which is
engaged principally in the research, development, manufacturing and sale of
minimally invasive cardiac surgery systems and related technology. The Company's
customers are primarily cardiac surgery centers in the United States and Europe.
The consolidated accounts include the accounts of Heartport, Inc. and its wholly
owned subsidiaries. Significant intercompany accounts and transactions have been
eliminated.
 
    USE OF ESTIMATES
 
    The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
    CASH AND CASH EQUIVALENTS
 
    The Company considers all highly liquid investments with insignificant
interest rate risk and with an original maturity of three months or less when
purchased to be cash equivalents.
 
    REVENUE RECOGNITION
 
    The Company recognizes product revenue upon shipment. The Company's product
revenue is primarily derived from sales of Port-Access disposable products
necessary to perform Port-Access cardiac surgery. Deferred royalty income
includes advances received but unrecognized under an agreement with St. Jude
Medical, Inc. Fees from distribution right agreements are recognized as relevant
contractual milestones are attained.
 
    During 1998 and 1997, sales to international customers were approximately
13% and 12% of net sales, respectively. All sales are denominated in U.S.
dollars.
 
    ADVERTISING
 
    The Company expenses advertising costs as incurred. For the years ended
December 31, 1998, 1997 and 1996 advertising expenses were $394,000, $504,000,
and $67,000 respectively.
 
    CONCENTRATIONS OF CREDIT RISK
 
    Financial instruments that subject the Company to credit risk consist
principally of investments and accounts receivable. By policy, the Company
places its investments only with high credit quality financial institutions and
corporations and, other than its investments in U.S. Government Treasury
instruments, limits the amounts invested in any one institution or type of
investment vehicle. In addition, the Company performs credit evaluations of its
customers' financial condition and generally requires no collateral. At December
31, 1998, no individual customer represented more than 9% of the total accounts
receivable balance.
 
    FAIR VALUE OF FINANCIAL INSTRUMENTS
 
    The fair value of investments and long-term debt is based on quoted market
prices or pricing models using current market rates.
 
                                      F-7
<PAGE>
                                HEARTPORT, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    INVESTMENTS
 
    All investments are designated as available-for-sale. Available-for-sale
securities are carried at fair value with unrealized gains and losses reported
in a separate component of stockholders' equity. The amortized cost of
available-for-sale debt securities is adjusted for the amortization of premiums
and the accretion of discounts to maturity. Such amortization is included in
interest income. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in investment
income. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in interest income.
 
    OTHER COMPREHENSIVE INCOME (LOSS)
 
    The Company adopted SFAS No. 130 "Reporting Comprehensive Income," at the
beginning of 1998. The adoption had no impact on net loss or total stockholders'
equity. Comprehensive income (loss) consists of net loss and other comprehensive
income (loss). Accumulated other comprehensive income presented in the
accompanying consolidated balance sheets consists solely of the accumulated net
unrealized gain on available-for-sale investments. There is no related tax
effect for the unrealized gain on available-for-sale investments.
 
    INVENTORIES
 
    Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Inventories at December 31 were as follows:
 
<TABLE>
<CAPTION>
                                                                               1998       1997
                                                                             ---------  ---------
                                                                                (IN THOUSANDS)
<S>                                                                          <C>        <C>
Materials and purchased parts..............................................  $   1,112  $   2,235
Work in process............................................................        264        456
Finished goods.............................................................         76      2,187
                                                                             ---------  ---------
Total inventories..........................................................  $   1,452  $   4,878
                                                                             ---------  ---------
                                                                             ---------  ---------
</TABLE>
 
    PROPERTY AND EQUIPMENT
 
    Property and equipment are stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets, ranging from
one to twelve years or over the term of the lease, if shorter. Amortization of
assets recorded under capital leases is included in depreciation expense.
 
    STOCK-BASED COMPENSATION
 
    The Company accounts for employee stock options using the intrinsic value
method in accordance with APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES." Under APB 25, when the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. In accordance with SFAS No. 123,
"ACCOUNTING FOR STOCK-BASED COMPENSATION," the Company has adopted the pro forma
disclosure of accounting for employee options under the fair value method. For
options or other stock based compensation issued to non-employees, the Company
recognizes compensation expense under the fair value method.
 
                                      F-8
<PAGE>
                                HEARTPORT, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    RECLASSIFICATIONS
 
    Certain amounts in prior years have been reclassified to conform to the 1998
financial statement presentation.
 
    NEW ACCOUNTING STANDARDS
 
    In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," which is
required to be adopted in years beginning after June 15, 1999. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings or the
financial position of the Company.
 
2.  COMMITMENTS
 
    The Company leases its facilities under noncancelable operating leases that
expire in the years 1999 through 2010. Rental expense was $2,068,000,
$1,937,000, and $959,000 (net of sublease income of $14,000), for the years
ended December 31, 1998, 1997 and 1996, respectively.
 
    The future minimum lease payments as of December 31, 1998 were as follows
(in thousands):
 
<TABLE>
<CAPTION>
                                                                 MINIMUM
                                                                  LEASE      SUBLEASE     NET LEASE
                                                                PAYMENTS      INCOME      PAYMENTS
                                                               -----------  -----------  -----------
<S>                                                            <C>          <C>          <C>
1999.........................................................   $   3,585    $   1,261    $   2,324
2000.........................................................       3,209        1,335        1,874
2001.........................................................       3,305        1,334        1,971
2002.........................................................       3,404          353        3,051
2003.........................................................       3,507           --        3,507
Thereafter...................................................      27,129           --       27,129
                                                               -----------  -----------  -----------
                                                                $  44,139    $   4,283    $  39,856
                                                               -----------  -----------  -----------
                                                               -----------  -----------  -----------
</TABLE>
 
                                      F-9
<PAGE>
                                HEARTPORT, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
3.  INVESTMENTS
 
    Investments as of December 31, including cash equivalents and short-term
investments, were as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                                                              1997
                                                                                  1998                    -------------
                                                                 ---------------------------------------    AMORTIZED
                                                                                  GROSS                    COST BASIS
                                                                  AMORTIZED    UNREALIZED     ESTIMATED   AND ESTIMATED
                                                                 COST BASIS       GAINS      FAIR VALUE    FAIR VALUE
                                                                 -----------  -------------  -----------  -------------
<S>                                                              <C>          <C>            <C>          <C>
Money market funds.............................................   $   1,013     $      --     $   1,013    $     2,014
Commercial paper...............................................          --            --            --         27,398
Auction rate preferred stock...................................          --            --            --          6,600
U.S. government agency securities..............................      38,946           302        39,248         29,718
Corporate notes................................................      15,579            74        15,653         39,990
Mortgage backed securities.....................................       8,146             7         8,153          2,222
                                                                 -----------        -----    -----------  -------------
Total available-for-sale investments...........................      63,684           383        64,067        107,942
Amounts classified as cash equivalents.........................      (4,476)           --        (4,476)       (31,162)
                                                                 -----------        -----    -----------  -------------
Short-term investments.........................................   $  59,208     $     383     $  59,591    $    76,780
                                                                 -----------        -----    -----------  -------------
                                                                 -----------        -----    -----------  -------------
</TABLE>
 
    There were no material realized gains or losses on sales of
available-for-sale investments in 1998, 1997, or 1996. There were no material
unrealized gains or losses for any major security type as of December 1997.
 
    The estimated fair value of investments in debt securities at December 31,
1998, by contractual maturity, were as follows (in thousands):
 
<TABLE>
<S>                                                                  <C>
Due in 1 year or less..............................................  $  28,976
Due in 1-2 years...................................................     26,938
                                                                     ---------
                                                                        55,914
Mortgage-backed securities.........................................      8,153
                                                                     ---------
Total investments in debt securities...............................  $  64,067
                                                                     ---------
                                                                     ---------
</TABLE>
 
4.  DEBT
 
    Long-term debt at December 31 was as follows:
 
<TABLE>
<CAPTION>
                                                                            1998       1997
                                                                          ---------  ---------
                                                                             (IN THOUSANDS)
<S>                                                                       <C>        <C>
Convertible subordinated notes, due in 2004 at 7.25%....................  $  52,850  $  86,250
Equipment financing and other debt......................................        610      1,399
                                                                          ---------  ---------
Total long-term debt....................................................     53,460     87,649
Current portion of long-term debt.......................................       (447)      (807)
                                                                          ---------  ---------
Long-term debt, less current portion....................................  $  53,013  $  86,842
                                                                          ---------  ---------
                                                                          ---------  ---------
</TABLE>
 
                                      F-10
<PAGE>
                                HEARTPORT, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
4.  DEBT (CONTINUED)
    In April 1997, the Company issued an aggregate principal amount of $86.3
million of convertible subordinated notes. The notes are due in 2004, bear
annual interest at 7.25%, and are convertible at the option of the holder into
the Company's common stock at a price of $28.958 per share. Original issuance
costs were approximately $3.4 million and are being amortized over the life of
the notes. At December 31, 1998, unamortized issue costs included in other
assets were approximately $1.5 million. At December 31, 1998, the fair value of
the Company's long-term debt is approximately 60% of its carrying value.
 
    In the fourth quarter of 1998, the Company purchased $33.4 million in
principal amount of its outstanding subordinated notes at a discount from face
value. The transaction resulted in a gain of $15.6 million, consisting of a gain
of $16.6 million due to the discount, offset by the write-off of $1.0 million in
issue costs associated with the original issuance of the notes in April 1997.
The Company financed this purchase through $16.9 million in short-term
borrowings, which are secured by approximately $16.9 million of the Company's
available-for-sale investments. At December 31, 1998, the interest rate on the
short-term borrowings was 5.1%.
 
    As of December 31, 1998, aggregate maturities of long-term debt were as
follows (in thousands):
 
<TABLE>
<S>                                                                  <C>
1999...............................................................  $     447
2000...............................................................        122
2001...............................................................         32
2002...............................................................          9
Thereafter.........................................................     52,850
                                                                     ---------
                                                                     $  53,460
                                                                     ---------
                                                                     ---------
</TABLE>
 
    As of December 31, 1998, the Company has an unused credit facility with a
commercial bank of $10.0 million. The annual commitment fee is 0.25% for the
unused portion of the line of credit.
 
5.  NET LOSS PER SHARE
 
    Basic and diluted net loss per share are computed using the weighted average
number of common shares outstanding during the period, less outstanding
nonvested shares. Outstanding nonvested shares are not included in the
computations of basic and diluted net loss per share until the time-based
vesting restriction has lapsed. However, for the purposes of computing diluted
earnings per share in periods with a profit, the dilutive effect of outstanding
nonvested shares is included using the treasury stock method. The Company has
other securities outstanding that could dilute basic earnings per share in the
future that were not included in the computation of diluted net loss per share
in the periods presented as their effect is antidilutive. For additional
disclosures regarding potentially dilutive stock options, warrants, nonvested
shares, convertible debentures and convertible preferred stock, see Notes 4 and
7.
 
                                      F-11
<PAGE>
                                HEARTPORT, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
5.  NET LOSS PER SHARE (CONTINUED)
    The following table sets forth the computation of basic and diluted net loss
per share (in thousands, except per share amounts):
 
<TABLE>
<CAPTION>
                                                                                   1998        1997        1996
                                                                                ----------  ----------  ----------
<S>                                                                             <C>         <C>         <C>
Numerator for basic, diluted and pro forma net loss per share:
  Net loss....................................................................  $  (40,658) $  (51,331) $  (34,054)
                                                                                ----------  ----------  ----------
                                                                                ----------  ----------  ----------
Denominator:
  Weighted-average common shares..............................................      25,082      24,687      19,502
  Weighted-average nonvested shares subject to repurchase.....................      (1,585)     (2,266)     (3,362)
                                                                                ----------  ----------  ----------
Denominator for basic and diluted net loss per share..........................      23,497      22,421      16,140
                                                                                ----------  ----------
                                                                                ----------  ----------
Convertible preferred shares..................................................                               2,910
                                                                                                        ----------
Denominator for pro forma net loss per share..................................                              19,050
                                                                                                        ----------
                                                                                                        ----------
Basic and diluted net loss per share..........................................  $    (1.73) $    (2.29) $    (2.11)
                                                                                ----------  ----------  ----------
                                                                                ----------  ----------  ----------
Pro forma net loss per share..................................................                          $    (1.79)
                                                                                                        ----------
                                                                                                        ----------
</TABLE>
 
    Pro forma net loss per share for 1996 has been computed as above and also
assumes the conversion of convertible preferred shares not included above that
automatically converted upon the completion of the Company's initial public
offering (using the if-converted method) from the original date of issuance.
 
6.  DISTRIBUTION AGREEMENT
 
    In December 1997, the Company entered into an agreement with Getz Bros. Co.,
Ltd. to assign exclusive rights to distribute the Company's products in Japan.
During 1997, the Company recognized $1.0 million in non-refundable fees upon the
signing of the agreement. Additional non-refundable fees can be received and
earned upon the achievement of certain milestones, including product approval
and certification in Japan.
 
7.  STOCKHOLDERS' EQUITY
 
    NONVESTED SHARES
 
    At December 31, 1998, approximately 1,420,000 shares of outstanding common
stock owned by employees of and consultants to the Company were subject to
repurchase, at the option of the Company, at the original purchase price in the
event of the termination of their employment or consulting relationship.
 
    STOCK OPTION PLANS
 
    Under the 1993 Stock Option Plan ("1993 Plan"), the Company may grant
incentive and nonstatutory stock options to purchase up to 6,720,000 shares of
common stock to directors, employees and consultants. Options may be granted at
an exercise price of not less than 85% of the fair value of the stock at the
date of grant for nonstatutory stock options and 100% of the fair value of the
stock at the date of grant for incentive stock options as determined by the
Board of Directors. Generally, options vest under such conditions as determined
by the Board of Directors, typically over a four year period, and expire after
ten
 
                                      F-12
<PAGE>
                                HEARTPORT, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
7.  STOCKHOLDERS' EQUITY (CONTINUED)
years. During 1996, the Company adopted the 1996 Stock Option Plan ("1996
Plan"), under which the Company reserved 2,110,000 shares of common stock for
issuance to employees, consultants and directors of the Company in addition to
the 3,390,000 shares incorporated from the 1993 plan. The Company had 326,000
shares available for grant under the plans as of December 31, 1998. In addition,
during 1998 the Company issued 905,000 nonstatutory options outside of the plans
to employees.
 
    In the second quarter of 1998, the Company's Board of Directors approved the
cancellation and reissuance of outstanding options under the Company's Stock
Option Plan. Generally, under the program, employees with outstanding options at
exercise prices in excess of $5.25 per share were given the choice of retaining
these options or of obtaining in substitution new options for the same number of
shares. The new options are exercisable at a price of $5.25 per share, the fair
market value of the stock on the reissue date. The new options have a four year
vesting schedule, subject to a one-year blackout period on exercise which
expires on June 23, 1999. If an employee voluntarily terminates his or her
employment prior to the end of the blackout period, the replacement options will
be forfeited. The number of options shown as granted and canceled in the table
below includes the reissuance of options.
 
    A summary of stock option transactions is as follows:
 
<TABLE>
<CAPTION>
                                                                      OUTSTANDING OPTIONS
                                                                 ------------------------------
<S>                                                              <C>              <C>
                                                                                    WEIGHTED
                                                                    NUMBER OF        AVERAGE
                                                                     SHARES         EXERCISE
                                                                 (IN THOUSANDS)       PRICE
                                                                 ---------------  -------------
December 31, 1995..............................................         2,003       $    0.34
  Options granted..............................................         3,100       $   16.39
  Options exercised............................................          (327)      $    0.20
  Options canceled.............................................          (399)      $    2.62
                                                                       ------
December 31, 1996..............................................         4,377       $   12.02
  Options granted..............................................         1,933       $   20.64
  Options exercised............................................          (413)      $    2.26
  Options canceled.............................................          (629)      $   10.84
                                                                       ------
December 31, 1997..............................................         5,268       $   16.08
  Options granted..............................................         4,646       $    5.99
  Options exercised............................................          (293)      $    0.61
  Options canceled.............................................        (3,823)      $   19.40
                                                                       ------
December 31, 1998..............................................         5,798       $    6.56
                                                                       ------
                                                                       ------
</TABLE>
 
<TABLE>
<CAPTION>
                                                                    NUMBER OF        WEIGHTED
                                                                     SHARES           AVERAGE
                                                                 (IN THOUSANDS)   EXERCISE PRICE
                                                                 ---------------  ---------------
<S>                                                              <C>              <C>
Options exercisable at:
  December 31, 1996............................................           801        $    3.21
  December 31, 1997............................................         1,530        $    9.88
  December 31, 1998............................................         1,286        $    7.87
</TABLE>
 
                                      F-13
<PAGE>
                                HEARTPORT, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
7.  STOCKHOLDERS' EQUITY (CONTINUED)
    The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1998:
 
<TABLE>
<CAPTION>
                                         OPTIONS OUTSTANDING                  OPTIONS EXERCISABLE
                             -------------------------------------------  ----------------------------
<S>                          <C>              <C>            <C>          <C>              <C>
                                                WEIGHTED
                                                 AVERAGE
                                                REMAINING     WEIGHTED                      WEIGHTED
                                NUMBER OF      CONTRACTUAL     AVERAGE       NUMBER OF       AVERAGE
         RANGE OF                SHARES           LIFE        EXERCISE        SHARES        EXERCISE
      EXERCISE PRICES        (IN THOUSANDS)    (IN YEARS)       PRICE     (IN THOUSANDS)      PRICE
---------------------------  ---------------  -------------  -----------  ---------------  -----------
$ 0.06 - $ 5.00............         1,229             8.4     $    2.95            554      $    2.50
$ 5.25 - $ 5.50............         3,203             9.5     $    5.25            132      $    5.25
$ 6.50 - $ 7.50............           667             7.1     $    7.50            312      $    7.50
$10.00 - $13.00............           102             9.2     $   11.92             15      $   12.50
$16.50 - $24.00............           597             8.2     $   19.05            273      $   20.22
                                    -----                                        -----
                                    5,798             8.8     $    6.56          1,286      $    7.87
                                    -----                                        -----
                                    -----                                        -----
</TABLE>
 
    STOCK BASED COMPENSATION
 
    Pro forma information regarding net loss and net loss per share is required
by SFAS 123, which also requires that the information be determined as if the
Company had accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions:
 
<TABLE>
<CAPTION>
                                                                   1998       1997       1996
                                                                 ---------  ---------  ---------
<S>                                                              <C>        <C>        <C>
Expected dividend yield........................................         0%         0%         0%
Expected stock price volatility................................        65%        65%        67%
Risk-free interest rate........................................      5.00%      5.35%      5.97%
Expected life of options.......................................    3 years    3 years    3 years
</TABLE>
 
    The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
 
    For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had the
Company elected to recognize compensation expense based on the fair value of the
options granted at grant dates as prescribed by SFAS No. 123, net loss and loss
per
 
                                      F-14
<PAGE>
                                HEARTPORT, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
7.  STOCKHOLDERS' EQUITY (CONTINUED)
share would have been increased to the pro forma amounts indicated in the table
below (in thousands except per share amounts):
 
<TABLE>
<CAPTION>
                                                               1998        1997        1996
                                                            ----------  ----------  ----------
<S>                                                         <C>         <C>         <C>
Net loss--as reported.....................................  $  (40,658) $  (51,331) $  (34,054)
Net loss--pro forma.......................................  $  (51,559) $  (62,112) $  (38,166)
Net loss per share--as reported...........................  $    (1.73) $    (2.29) $    (2.11)
Net loss per share--pro forma.............................  $    (2.19) $    (2.77) $    (2.36)
</TABLE>
 
    The weighted average fair value of options granted in 1998, 1997 and 1996
was $2.81, $9.75 and $7.41 per share, respectively.
 
    The effects on pro forma disclosures of applying SFAS No. 123 are not likely
to be representative of the effects on pro forma disclosures of future years.
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, the pro forma effect will not be fully reflected until 2000.
 
    STOCK PURCHASE PLAN
 
    Under the 1996 Employee Stock Purchase Plan ("Purchase Plan"), employees may
purchase common stock at the lower of 85% of the fair market value of the common
stock at the beginning or end of each offering period of up to an aggregate
total of 240,000 shares of the Company's common stock. During the years ended
December 31, 1998, 1997 and 1996, shares issued under the Purchase Plan were
92,000, 53,000 and 19,000, respectively.
 
    SHAREHOLDER RIGHTS PLAN
 
    On March 26, 1996, the Board of Directors of the Company declared a dividend
of one preferred share purchase right ("Right") for each outstanding share of
common stock outstanding on the effective date of the Offering. Each Right will
entitle stockholders to purchase 1/1000 of a share of Series A Junior
participating preferred stock of the Company, a designated series of preferred
stock for which each 1/1000 of a share has economic attributes and voting rights
equivalent to one share of the Company's common stock, at an exercise price of
$0.001 per share. The Rights only become exercisable in certain limited
circumstances involving acquisitions of or tender offers for 20% or more of the
Company's capital stock. At any time prior to the announcement of any such
acquisition or offer, the Rights are redeemable by the Company at a price of
$0.001 per Right. For a limited period of time after the announcement of any
such acquisition or offer, each Right becomes exercisable or, at the discretion
of the Board, may be exchanged for one share of common stock per Right. The
Rights expire in the year 2006.
 
                                      F-15
<PAGE>
                                HEARTPORT, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
7.  STOCKHOLDERS' EQUITY (CONTINUED)
    COMMON STOCK RESERVED
 
    At December 31, 1998, the Company has reserved shares of common stock for
future issuances as follows (in thousands):
 
<TABLE>
<S>                                                                    <C>
Stock option plans...................................................      4,642
Stock options outside the plans......................................      1,482
Stock purchase plan..................................................         76
Stock warrants.......................................................         18
                                                                       ---------
    Total............................................................      6,218
                                                                       ---------
                                                                       ---------
</TABLE>
 
    STOCK SPLIT
 
    On April 25, 1996, the Company effected a 1.6-for-1 split of the Company's
common stock. All outstanding share and per share amounts have been adjusted to
reflect the stock split.
 
8.  INCOME TAXES
 
    Due to operating losses and the inability to recognize the benefits
therefrom, there is no provision for income taxes for 1998, 1997 or 1996.
 
    Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets as of December 31, 1998 and 1997 are as
follows:
 
<TABLE>
<CAPTION>
                                                                           1998        1997
                                                                        ----------  ----------
                                                                            (IN THOUSANDS)
<S>                                                                     <C>         <C>
Deferred tax assets:
  Net operating loss carryforwards....................................  $   44,200  $   34,300
  Tax credit carryforwards............................................       2,300       2,400
  Capitalized research and development................................       1,000         400
  Acquired patent.....................................................       2,200       1,900
  Other temporary differences.........................................       7,900       2,600
                                                                        ----------  ----------
    Total deferred tax assets.........................................      57,600      41,600
Valuation allowance...................................................     (57,600)    (41,600)
                                                                        ----------  ----------
    Net deferred tax assets...........................................  $       --  $       --
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>
 
    Approximately $4.0 million of the valuation allowance is attributable to tax
deductions, the benefit of which will be credited to additional paid in capital
when realized. Realization of deferred tax assets is dependent upon future
earnings, the amount and timing of which are uncertain. Accordingly, a valuation
allowance in an amount equal to the net deferred tax assets as of December 31,
1998 and 1997 has been established to reflect these uncertainties. The increases
in the valuation allowance were approximately $16.0 million, $20.9 million and
$13.9 million for fiscal years 1998, 1997 and 1996, respectively.
 
                                      F-16
<PAGE>
                                HEARTPORT, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
8.  INCOME TAXES (CONTINUED)
    As of December 31, 1998, the Company had net operating loss carryforwards
for federal and California tax purposes of approximately $121.0 million and
$51.0 million, respectively, which will expire from 1999 through 2018. As of
December 31, 1998, the Company also had research and development tax credit
carryforwards of approximately $1.4 million and $1.3 million, respectively, for
federal and California tax purposes, which will expire in years 2007 through
2013 if not used.
 
    Utilization of net operating loss and credit carryforwards may be subject to
an annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
 
9.  RESTRUCTURING CHARGE
 
    In May 1998, the Company implemented a plan to significantly reduce expenses
and restructure its business operations to improve operating efficiency. Under
the restructuring plan, the Company has reduced its United States workforce and
has closed its training facility in Utah. The restructuring plan resulted in an
original charge of $14.4 million and included reducing headcount by
approximately 140 employees, vacating leased facilities, and disposing of
assets. The original charge of $14.4 million was reduced by $2.2 million in the
fourth quarter of 1998 due to the favorable resolution of lease commitments. The
following table summarizes the Company's restructuring activity for the year
ended December 31, 1998 (in thousands):
 
<TABLE>
<CAPTION>
                                                                                                     ACCRUED
                                          RESTRUCTURING                 CASH                      RESTRUCTURING
                                             CHARGE       NON-CASH    PAYMENTS                      CHARGE AT
                                            JUNE 1998      ITEMS     (RECEIPTS)   ADJUSTMENTS   DECEMBER 31, 1998
                                          -------------   --------   ----------   -----------   -----------------
<S>                                       <C>             <C>        <C>          <C>           <C>
Severance and benefits..................     $ 2,842      $    --     $ 2,428       $  (262)         $   152
Write-off of assets.....................       6,151        6,682         (65)          466               --
Exit facility leases....................       4,705          646         595        (2,466)             998
Other...................................         676          212         510            46               --
                                          -------------   --------   ----------   -----------        -------
  Total restructuring charge............     $14,374      $ 7,540     $ 3,468       $(2,216)         $ 1,150
                                          -------------   --------   ----------   -----------        -------
                                          -------------   --------   ----------   -----------        -------
</TABLE>
 
    The remaining charge relates primarily to estimated cash expenditures in
connection with the disposition of the Utah facility. The restructuring is
expected to be substantially completed by the second quarter of 1999.
 
10.  PATENT ACQUISITION
 
    Patent acquisition expenses consist of the cost to acquire a United States
patent, several pending U.S. patent applications, and related rights from
Endosurgical Development Corporation in July 1996 in exchange for shares of
Common Stock and cash.
 
11.  EMPLOYEE BENEFIT PLAN
 
    The Company has a savings plan which qualifies under Section 401(k) of the
Internal Revenue Code. Under the plan, participating employees may defer up to
20% of their pre-tax salary, up to statutory limits. All regular U.S. employees
are eligible to participate. The Company currently does not match employee
contributions made to the savings plan.
 
                                      F-17
<PAGE>
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.
 
    None.
 
                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
 
    The executive officers and directors of the Company, and their ages as of
December 31, 1998, are as follows:
 
<TABLE>
<CAPTION>
                 NAME                        AGE                                POSITION
---------------------------------------      ---      ------------------------------------------------------------
<S>                                      <C>          <C>
Frank M. Fischer                                 57   President, Chief Executive Officer and Director
 
Steven E. Johnson                                40   Senior Vice President of Manufacturing
 
Casey M. Tansey                                  41   Senior Vice President of Sales and Marketing
 
Michi E. Garrison                                37   Vice President of Research and Development
 
Luis J. Jimenez                                  43   Vice President of Quality Assurance and Regulatory Affairs
 
Lawrence C. Siegel, M.D.                         41   Vice President of Clinical Affairs
 
Bradford J. Shafer                               38   General Counsel and Secretary
 
Wesley D. Sterman, M.D.                          38   Chairman of the Board of Directors and Co-Founder
 
John H. Stevens, M.D.                            38   Director and Co-Founder
 
Robert V. Gunderson, Jr.(2)                      47   Director
 
Joseph S. Lacob(2)                               43   Director
 
Petri T. Vainio, M.D., Ph.D.(1)                  39   Director
 
Steven C. Wheelwright, Ph.D.(1)(2)               55   Director
</TABLE>
 
------------------------
 
(1) Member of Compensation Committee
 
(2) Member of Audit Committee
 
    FRANK M. FISCHER has been President and Chief Executive Officer and a
Director of the Company since May, 1998. Mr. Fischer was also a Director of the
Company from October, 1992 until May, 1997. Mr. Fischer was the President and
Chief Executive Officer and a director of Ventritex, Inc., a manufacturer of
implantable cardiac defibrillators from 1987 until 1997. From May, 1977 until
joining Ventritex, Mr. Fischer held various positions with Cordis Corporation, a
manufacturer of medical products, serving most recently as President of the
Implantable Products Division. Mr. Fischer holds an M.S. in Management from
Rensselaer Polytechnic Institute.
 
    STEVEN E. JOHNSON has been Senior Vice President of Manufacturing of the
Company since January 1998 and prior to that was Vice President of Manufacturing
of the Company since August, 1994. Prior to joining the Company, Mr. Johnson
served in various capacities with Advanced Cardiovascular Systems, Inc., a
medical device company, from 1983 to 1994, most recently as Vice President,
Manufacturing. Mr. Johnson earned a B.S. in Industrial Engineering from
Kettering University.
 
    CASEY M. TANSEY has been Senior Vice President of Sales and Marketing of the
Company since January 1998 and prior to that was Vice President of Sales and
Marketing of the Company since December, 1995. From 1988 until joining the
Company in 1995, Mr. Tansey served in various capacities with the Edwards C.V.S.
Division of Baxter. Mr. Tansey's most recent position at Baxter/Edwards was Vice
President, North
 
                                     III-1
<PAGE>
American Sales. Mr. Tansey earned a B.S. in Business Administration and an
M.B.A. from the College of Notre Dame.
 
    MICHI E. GARRISON has been Vice President of Research and Development of the
Company since April, 1998. Prior to that time, Ms. Garrison served as the
Company's Director of Research and Development and other technical positions
since June, 1993. Prior to joining the Company, Ms. Garrison was a senior
engineer at the following medical device companies: Cardiovascular Imaging
Systems from 1992 to 1993; Advanced Cardiovascular Systems from 1988 to 1992;
and MiniMed Technologies from 1984 to 1988. Ms. Garrison earned an A.B. in
Engineering from Harvard University and an M.S. from the University of
California, San Diego.
 
    LUIS J. JIMENEZ has been Vice President, Quality Assurance and Regulatory
Affairs of the Company since September, 1997. Prior to joining the Company, Mr.
Jimenez was employed by Boston Scientific Corporation (formerly Heart
Technology, Inc.) from 1993 to 1997, most recently as Senior Director, Program
Management/Quality. Mr. Jimenez served in various quality assurance and quality
engineering capacities with Baxter International, Inc. from 1984 to 1993. Mr.
Jimenez earned a B.S. from the University of Puerto Rico and an M.B.A. from the
University of Southern California, Los Angeles.
 
    LAWRENCE C. SIEGEL, M.D. has been Vice President of Clinical Affairs of the
Company since November, 1996. Prior to joining the Company, Dr. Siegel served in
various capacities with the Stanford University School of Medicine from 1986 to
1996, most recently as Associate Professor of Anesthesia and Chief of
Cardiovascular Anesthesiology. Dr. Siegel earned a B.S. in Electrical
Engineering from Massachusetts Institute of Technology and a M.D. from Harvard
Medical School. Dr. Siegel is a board certified anesthesiologist.
 
    BRADFORD J. SHAFER has been General Counsel and Secretary of the Company
since July, 1996. From July, 1985 until July, 1996, he was an attorney with the
law firm of Brobeck, Phleger & Harrison LLP, where he was a partner since
January, 1993. Mr. Shafer holds a B.A. from the University of the Pacific and a
J.D. from the University of California, Hastings College of the Law.
 
    WESLEY D. STERMAN, M.D. founded the Company with Dr. Stevens in May, 1991,
and has served as a director since that time and as Chairman of the Board of
Directors since May 1998. Dr. Sterman was the Company's President and Chief
Executive Officer from May 1991 until May 1998. Prior to founding the Company,
Dr. Sterman was founder, President and Chief Executive Officer of EndoVascular
Technologies, Inc., a medical device manufacturer, from July, 1989 to September,
1991. Dr. Sterman has B.S. degrees both in Biology and in Chemistry from
Stanford University. Dr. Sterman received an M.D. from the Stanford University
School of Medicine and an M.B.A. from the Graduate School of Business at
Stanford University, where he was an Arjay Miller Scholar.
 
    JOHN H. STEVENS, M.D. founded the Company with Dr. Sterman in May, 1991, and
has been a director of the Company since that time. Dr. Stevens was Heartport's
Chief Technology Officer from July, 1997 to December 31, 1998. Dr. Stevens also
has been Consulting Assistant Professor of Cardiac Surgery at Stanford
University School of Medicine since July, 1997. From August, 1996 until July,
1997 Dr. Stevens was Assistant Professor of Cardiothoracic Surgery at Stanford
and prior to that he served as Chief Resident of the Department of
Cardiothoracic Surgery at Stanford, and as Senior Registrar in Cardiothoracic
Surgery at the Great Ormond Street Hospital for Sick Children in London, England
from July, 1995 to March, 1996. Dr. Stevens earned B.U.S. and B.S. degrees in
Communications and Psychology from the University of Utah and an M.D. from
Stanford University.
 
    ROBERT V. GUNDERSON, JR. has been a director of the Company since May, 1995.
Mr. Gunderson has been a partner of the law firm of Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP, since its formation in September, 1995.
From May, 1988, until September, 1995, Mr. Gunderson was a partner of the law
firm of Brobeck, Phleger & Harrison, LLP. Mr. Gunderson holds an M.A. from
Stanford
 
                                     III-2
<PAGE>
University, an M.B.A. in finance from the Wharton School, University of
Pennsylvania and a J.D. from the University of Chicago.
 
    JOSEPH S. LACOB has been a director of the Company since April, 1992. Mr.
Lacob is a general partner of Kleiner Perkins Caufield & Byers ("Kleiner
Perkins"), a venture capital firm he joined in 1987. Prior to joining Kleiner
Perkins, he was Marketing Manager for Cetus Corporation, a biotechnology
company. Mr. Lacob serves as Chairman of the Board of Directors of CellPro,
Inc., and is a director of Cardima, Inc., Corixa Corporation, Microcide
Pharmaceuticals, Inc., Pharmacyclics, Inc., and five privately held companies.
Mr. Lacob holds a B.S. in Biochemistry from the University of California at
Irvine, a Masters in Public Health from the University of California at Los
Angeles, and an M.B.A. from the Graduate School of Business at Stanford
University.
 
    PETRI T. VAINIO, M.D., PH.D. has been a director of the Company since April,
1992. Dr. Vainio is a general partner of Sierra Ventures, a venture capital firm
he joined in 1988. He currently serves on the Board of Directors of Symphonix
Devices, Inc., a medical device company, and six privately held companies. Dr.
Vainio holds M.D. and Ph.D. degrees from the University of Helsinki, Finland,
and an M.B.A. from the Graduate School of Business at Stanford University.
 
    STEVEN C. WHEELWRIGHT, PH.D. has been a director of the Company since
January, 1995. Dr. Wheelwright currently serves as a senior associate dean at
the Graduate School of Business, Harvard University, where he has been a
professor since July, 1988. Dr. Wheelwright also served as a professor of the
Graduate School of Business, Harvard University, from August, 1985, to August,
1986. From August, 1986 to August, 1988, Dr. Wheelwright served as a professor
at the Graduate School of Business at Stanford University. Dr. Wheelwright is
also a member of the Board of Directors of Quantum Corporation, a mass storage
device company, T.J. International Corporation, an engineered wood products
company, and Franklin Covey, an organizational tools company.
 
ITEM 11.  EXECUTIVE COMPENSATION.
 
    The information required by this item is incorporated by reference to the
Proxy Statement for the Registrant's Annual Meeting of Stockholders.
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
    The information required by this item is incorporated by reference to the
Proxy Statement for the Registrant's Annual Meeting of Stockholders.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
    The information required by this item is incorporated by reference to the
Proxy Statement for the Registrant's Annual Meeting of Stockholders.
 
                                     III-3
<PAGE>
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
 
(a)(1)  EXHIBITS
 
<TABLE>
<CAPTION>
EXHIBIT NO.                                               DESCRIPTION
-----------  -----------------------------------------------------------------------------------------------------
<C>          <S>
 
    2.1+     Agreement and Plan of Merger dated April 3, 1995, for the reincorporation merger of Stanford Surgical
               Technology, Inc., a California corporation, into Heartport, Inc., a Delaware corporation.
    3.1+     Restated Certificate of Incorporation.
    3.2      Amended and Restated Bylaws of the Registrant.
    4.1      Reference is made to Exhibits 3.1 and 3.2.
    4.2+     Specimen Common Stock certificate.
    4.3+     Third Amended and Restated Rights Agreement among Registrant and the Founders and Investors specified
               therein dated April 17, 1995.
    4.4#     Rights Agreement between the Registrant and the First National Bank of Boston dated April 25, 1996.
   10.1+     Form of Indemnification Agreement entered into by and between Registrant and its officers and
               directors.
   10.2+     1993 Stock Option Plan and forms of agreements thereunder.
   10.3#     1996 Stock Option Plan as amended and restated October 21, 1996.
   10.4#     Employee Stock Purchase Plan, as amended and restated October 21, 1996.
   10.5+     Real Property Lease between the Registrant and Metropolitan Insurance Company dated September 21,
               1992, as amended.
   10.6+     Equipment Financing Agreement between the Registrant and Lease Management Services, Inc. dated
               February 23, 1995.
   10.7+*    Agreement between the Company and St. Jude Medical, Inc. dated September 11, 1995.
   10.8#     Third Amendment to Lease Agreement between Heartport Research and Training Center, Inc. and
               University of Utah Research Foundation dated as of October 25, 1996.
   10.9#*    Amendment to agreement between Registrant and St. Jude Medical, Inc. dated January 31, 1997.
   10.10     Amendment to Loan and Security Agreement dated as of October 12, 1998 between the Registrant and
               Silicon Valley Bank.
   10.11#    Industrial Build-To-Suit Lease dated September 19, 1997 between Registrant and Chestnut Bay LLC.
               (without exhibits)
   10.12#    First Amendment to Industrial Build-To-Suit Lease dated February 10, 1998 between Registrant and
               Chestnut Bay LLC.
   23.1      Consent of Ernst & Young LLP, Independent Auditors.
   27.1      Financial Data Schedule
</TABLE>
 
------------------------
 
*   Confidential treatment has been requested for certain portions of this
    exhibit. Omitted portions have been filed separately with the Securities and
    Exchange Commission.
 
+   Incorporated by reference to the Registrant's Registration Statement on Form
    S-1 (File No. 333-1906)
 
#  Previously filed.
 
                                      IV-1
<PAGE>
(a)(2)  SCHEDULES
 
    The following financial statement schedules required by Regulation S-X are
filed herewith:
 
<TABLE>
<CAPTION>
SCHEDULE NO.                DESCRIPTION
------------  ---------------------------------------
<C>           <S>
     II       Valuation and Qualifying Accounts
</TABLE>
 
    All other schedules are not applicable.
 
(b)  REPORTS ON FORM 8-K
 
    No reports on Form 8-K were filed by the Registrant during the quarter ended
December 31, 1998.
 
(c)  EXHIBITS
 
    See paragraph (a).
 
                                      IV-2
<PAGE>
                                   SIGNATURES
 
    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, in Redwood City, California, on this 26th day of March, 1999.
 
                                HEARTPORT, INC.
 
                                By:             /s/ FRANK M. FISCHER
                                     -----------------------------------------
                                                  Frank M. Fischer
                                       PRESIDENT AND CHIEF EXECUTIVE OFFICER
 
                               POWER OF ATTORNEY
 
    KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints, Frank M. Fischer and Bradford J. Shafer,
and each of them, his true and lawful attorneys-in-fact and agents with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto and all documents in connection
therewith with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
 
    Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-K has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated:
 
          SIGNATURE                       TITLE                    DATE
------------------------------  --------------------------  -------------------
 
                                President, Chief Executive
     /s/ FRANK M. FISCHER         Officer, Acting Chief
------------------------------    Financial Officer and       March 26, 1999
       Frank M. Fischer           Director (Principal
                                  Executive Officer)
 
 /s/ ROBERT V. GUNDERSON, JR.
------------------------------  Director                      March 26, 1999
   Robert V. Gunderson, Jr.
 
     /s/ JOSEPH S. LACOB
------------------------------  Director                      March 26, 1999
       Joseph S. Lacob
 
 /s/ WESLEY D. STERMAN, M.D.
------------------------------  Director                      March 26, 1999
   Wesley D. Sterman, M.D.
 
  /s/ JOHN H. STEVENS, M.D.
------------------------------  Director                      March 26, 1999
    John H. Stevens, M.D.
 
  /s/ PETER T. VAINIO, M.D.,
            PH.D.
------------------------------  Director                      March 26, 1999
 Peter T. Vainio, M.D., Ph.D.
 
  /s/ STEVEN C. WHEELWRIGHT,
            PH.D.
------------------------------  Director                      March 26, 1999
 Steven C. Wheelwright, Ph.D.
 
                                      IV-3
<PAGE>
                                  SCHEDULE II
                                HEARTPORT, INC.
                       VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
                                                                                  ADDITIONS
                                                                      BALANCE    CHARGED TO                  BALANCE
                                                                     BEGINNING    COSTS AND                    END
                                                                     OF PERIOD    EXPENSES    DEDUCTIONS    OF PERIOD
                                                                    -----------  -----------  -----------  -----------
                                                                                      (IN THOUSANDS)
<S>                                                                 <C>          <C>          <C>          <C>
Year Ended December 31, 1998
  Allowance for doubtful accounts.................................   $     314    $      53    $     100    $     267
  Allowance for sales returns.....................................   $     609    $     441    $     608    $     442
  Warranty reserves...............................................   $     407    $     818    $      --    $   1,225
  Restructure provision...........................................   $      --    $  12,158    $  11,008    $   1,150
Year Ended December 31, 1997
  Allowance for doubtful accounts.................................   $      33    $     281    $      --    $     314
  Allowance for sales returns.....................................   $      65    $     589    $      45    $     609
  Warranty reserves...............................................   $      --    $     407    $      --    $     407
Year Ended December 31, 1996
  Allowance for doubtful accounts.................................   $      --    $      33    $      --    $      33
  Allowance for sales returns.....................................   $      --    $      65    $      --    $      65
</TABLE>
 
                                      IV-4