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                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                            ------------------------

                                   FORM 10-K

(MARK ONE)

<TABLE>
<C>        <S>
   /X/     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES
           EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31,
           1999
</TABLE>

                                       OR

<TABLE>
<C>        <S>
   / /     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE
           SECURITIES EXCHANGE ACT OF 1934
</TABLE>

        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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<S>                                             <C>
                DELAWARE                                     94-3222307
    (State or Other Jurisdiction of                       (I.R.S. Employer
     Incorporation or Organization)                    Identification Number)
</TABLE>

                      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 / /  No /X/

    The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 20, 2000: approximately $95,309,000 (based on the last
reported sale price of $5.75 per share on March 20, 2000 on The Nasdaq Stock
Market).

    The number of shares of Common Stock outstanding as of March 20, 2000 was
25,573,433.

                      DOCUMENTS INCORPORATED BY REFERENCE

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<CAPTION>
                          DOCUMENT                                   FORM 10
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<S>                                                           <C>
Proxy Statement for Registrant's Annual Meeting to be held
  on June 7, 2000                                             Part III, Items 11-13
</TABLE>

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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 Operations.................................      29
  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 Disclosure..................................    F-19

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
</TABLE>

------------------------

    Heartport, the Heartport logo, EndoCPB, EndoVent, QuickDraw and EndoReturn
are registered trademarks of the Company. Port-Access, EndoDirect, EndoClamp,
DirectFlow, EndoPlege, Precision-OP, OPTrac, StillSite, InSite AVR and
StraightShot are trademarks of the Company.

                                       i
<PAGE>
                                     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") is a cardiovascular device
company that develops, manufactures and markets proprietary products designed to
make cardiac surgery less invasive for patients. The Company's technologies
allow surgeons to perform a wide range of less invasive open-chest and minimally
invasive heart operations, including stopped heart and beating heart procedures.
The Company's Port-Access-TM- systems for stopped heart surgeries are designed
to enable surgeons to perform several types of cardiac 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.
While fundamentally changing access to the heart, procedures performed with the
Company's Port-Access products closely parallel the conventional procedures that
have been used in heart surgery since the mid-1950s. Studies based on the
limited clinical experience to date indicate that Port-Access products 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. In 1999, the Company introduced several
new cardiac surgery products, including its Precision-OP-TM- system for cardiac
surgery performed on a beating heart. The Precision-OP system allows cardiac
surgeons to perform coronary artery bypass grafting without stopping the heart
and placing the patient on a cardiopulmonary bypass machine. The Company
believes that procedures performed with its Precision-OP system may have a
reduced rate of neurological and other complications as compared to conventional
cardiac procedures.

    In 1999, the Company implemented a restructuring plan designed to reduce
expenses and improve operating efficiency. As a result of the restructuring, the
Company has reduced its United States workforce by approximately 55 employees
and has subleased excess facilities. During the year, the Company also completed
the majority of activities associated with a restructuring plan that it began
implementing in 1998. The two restructuring plans resulted in a combined charge
of $2.4 million in 1999.

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 offers several advantages. First, stopping the heart creates
a motionless surgical field, which allows the surgeon to achieve a high degree
of surgical accuracy and precision. Second, stopping the heart protects the
heart muscle during surgery. Third, in valve repair and replacement, the heart
itself must be opened to repair or replace the diseased valve since the valves
are

                                       1
<PAGE>
located inside the heart. Placing the patient on CPB and stopping the heart is
necessary to enable surgeons to safely and accurately operate in 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 coronary artery bypass grafting ("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 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. Average charges for a CABG
procedure and for a valve procedure are approximately $45,000 and $55,000 per
patient, respectively. 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 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
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

                                       2
<PAGE>
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. 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.

    The most recent development in less invasive alternatives to conventional
cardiac surgery is the Off Pump Coronary Artery Bypass Grafting ("OPCABG")
procedure performed on a beating heart. In an OPCABG procedure, surgeons use
specially-designed tools to reduce or eliminate motion in the area surrounding a
diseased coronary artery so that bypass grafting can be performed safely and
effectively while the heart remains beating. Such surgery eliminates the need to
stop the heart and place the patient on a CPB machine. Although CPB offers
several advantages in performing cardiac surgery, it is also associated with
neurological and other complications. OPCABG procedures are performed through a
mid-line incision in the chest wall (sternotomy or mini-sternotomy), providing
maximum visualization and enabling the surgeon to manipulate the heart to gain
access to vascular beds on the back and sides of the heart. OPCABG tools and
techniques have evolved such that the procedure is currently used for multi-
vessel CABG procedures.

THE HEARTPORT SOLUTION

    STOPPED HEART SURGERY

    Heartport has developed proprietary systems and products for performing
several different types of minimally invasive heart surgery on a stopped heart.
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 small incisions, or "ports," placed between the
patient's ribs. The Company's systems include reusable and disposable devices
for Port-Access CABG, Port-Access mitral valve repair and mitral valve
replacement (collectively, "MVR"), and Port-Access aortic valve replacement
("AVR") surgeries. While fundamentally changing access to the heart, Port-Access
surgical procedures closely parallel the conventional procedures that have been
used in heart surgery since the mid-1950s. Clinical studies indicate that
Port-Access products offer efficacy equal to that of conventional open-chest
surgery, but with the benefits of reduced trauma and complications, reduced pain
and suffering, shorter hospital stays, reduced convalescence time, and lower

                                       3
<PAGE>
overall cost. See "Risk Factors--No Assurance of Market Acceptance" and "--No
Assurance of Regulatory Clearance or Approval; Significant Domestic and
International Regulation."

    BEATING HEART SURGERY

    The Company has also developed the Precision-OP system, a proprietary system
for performing coronary artery bypass grafting procedures on a beating heart.
This system has been exempted by the FDA for commercial sale in the United
States. In March 2000, the Company obtained Conformite Europeene ("CE") Mark
approval for the Precision-OP system, enabling the Company to market the system
in Europe. With the Precision-OP platform, surgeons can perform multi-vessel
CABG without stopping the heart and placing the patient on a CPB machine. The
Company believes that procedures performed with its Precision-OP system may have
a reduced rate of neurological and other complications as compared to
conventional cardiac procedures. 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 average approximately $20,000 for PTCA, $45,000 for conventional
CABG, and $55,000 for conventional valve surgery. The Company has demonstrated
that its products provide less invasive surgical alternatives for CABG, MVR, AVR
and other 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 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. 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.

                                       4
<PAGE>
    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 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.

    In an OPCABG procedure using the Company's Precision-OP system, a sternotomy
or mini-sternotomy is performed to create access to the heart, and the Company's
OPTrac-TM- Retractor is used to spread the ribs apart and assist the surgical
team in performing other activities. The StillSite-TM-Stabilizer is connected to
the retractor and positioned over the diseased coronary artery to render it
motionless while the heart remains beating. The surgeon then attaches the graft
vessel beyond the blockage in the coronary artery using standard techniques. The
surgeon can manipulate the heart to reach coronary arteries on the back and
sides of the heart, and thus perform multi-vessel bypass grafting on all
coronary vascular beds. After grafting is complete, the chest incision is closed
in the same manner as in a conventional cardiac procedure.

    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 EndoCPB system or the EndoDirect system is
used 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.

    An aortic valve replacement procedure is performed with the Company's InSite
AVR-TM- system in much the same way as a Port-Access MVR surgery, except that
the aortic valve is accessed through the aorta rather than through the left
atrium. A variety of incisions can be used with the InSite AVR system to gain
access to the heart, allowing significant flexibility in surgical technique. The
InSite AVR system is used along with a conventional surgical cross-clamp to
place the patient on CPB. The diseased aortic valve is replaced with a
prosthesis using standard techniques, and the chest is closed once the procedure
is complete.

                                       5
<PAGE>
STRATEGY

    The Company's objective is to become the global leader in research,
development and commercialization of systems for less invasive and minimally
invasive cardiac surgery. Key elements of the Company's strategy include:

    PROVIDE CARDIAC SURGEONS WITH A WIDE RANGE OF PRODUCTS FOR BOTH STOPPED
HEART AND BEATING HEART SURGERY. In 1999, the Company expanded its product
offering substantially, introducing several new cardiac surgery products and
systems including systems for aortic valve replacement and beating heart
coronary artery bypass grafting. Additional new products are under development,
with market launches planned in 2000. The Company believes that its expanded
product line will increase sales force efficiency and will result in a growing
customer base.

    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 marketing its
products to leading cardiac surgery centers in the United States and Europe. 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.  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 20, 2000 the Company had 23 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 20, 2000 the Company also had 5 clinical education specialists in the
United States and 1 clinical education specialist in Europe who work closely
with the field sales specialists.

    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, procedure-specific Port-Access
products and beating heart products. As of March 20, 2000, the Company owns 111
issued or allowed United States patent and 16 issued foreign patents. In
addition, as of March 20, 2000, the Company has 72 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, Port-Access and
Precision-OP systems. In addition, the Company has trained surgical teams from
centers in several countries, including England, Scotland, Germany, France,
Spain, Belgium, Italy, Canada, Australia, India, Japan and Israel. In
December 1997 the Company entered into a distribution, training and supply
agreement with Getz Bros. Co., Ltd. ("Getz") under which Getz is the Company's
exclusive distributor of Port-Access minimally invasive cardiac surgery systems
in Japan. See "Strategic Relationships."

                                       6
<PAGE>
TECHNOLOGY

    STOPPED HEART SURGERY

    The Company's systems for stopped heart minimally invasive cardiac surgical
procedures consist of a common platform, either the EndoCPB system or the
EndoDirect system, and procedure-specific systems comprising proprietary
reusable and disposable devices.

    ENDOVASCULAR AND DIRECT CANNULATION 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-Registered Trademark- venous drainage cannula removes
      deoxygenated blood from the body;

    - the EndoReturn-Registered Trademark- 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.

    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 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 for
performing 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.

    AORTIC VALVE REPLACEMENT.  The InSite AVR system includes the following four
proprietary catheters, which are used to place the patient on CPB and to stop
and protect the heart during cardiac surgery:

    - the QuickDraw venous drainage cannula;

    - the StraightShot-TM- arterial return cannula with Incising Introducer for
      single-step aortotomy;

    - the EndoVent pulmonary venting catheter; and

    - the EndoPlege sinus catheter.

                                       7
<PAGE>
    Disposable and reusable products included in the Port-Access MVR system are
also used for performing AVR surgery along with the Company's InSite AVR system.

    BEATING HEART SURGERY

    The Precision-OP system for performing coronary artery bypass grafting on a
beating heart is used to stabilize the diseased coronary artery so that grafting
can be performed with accuracy and precision. It comprises the following
components:

    - the OPTrac Retractor separates the ribs and maximizes access to the chest
      cavity through a sternotomy or mini-sternotomy;

    - the StillSite Stabilizer attaches to the OPTrac Retractor and applies
      light pressure to the blocked coronary artery to minimize motion at the
      grafting site; and

    - the SutureStays secure pericardial sutures to optimally position the heart
      for the procedure and to provide an unobstructed surgical field.

    The OPTrac Retractor is a fully reusable device that can be used for
conventional open-chest cardiac surgeries as well as beating heart procedures.

    In January 2000, the Company introduced the StillSite II, designed for
improved access to coronary arteries on the back and sides of the heart that are
more difficult to reach than those on the front of the heart. The Company
expects to begin shipping this system early in the second quarter of 2000.

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 EndoCPB, Port-Access CABG and Port-Access MVR systems 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's Precision-OP system is a Class I device that is exempt from FDA
premarket notification requirements.

    The Company continues to submit 510(k) notifications for enhancements to its
EndoCPB and EndoDirect systems and for additional specialty disposable devices
to enhance performance of 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 also submitted amendments to
its Product Dossiers for enhancements to its EndoCPB system to further enhance
performance of Port-Access CABG and MVR procedures. In March 1999, the Company
received CE Mark clearance for its EndoDirect System. In March 2000, the Company
received CE Mark clearance

                                       8
<PAGE>
for its Precision-OP 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 products. In
December 1997, the Company entered into a distribution, training and supply
agreement with Getz Bros. Co., Ltd. ("Getz") under which Getz is 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.

    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 and
Precision-OP products that are effective, easy to use, safe and reliable. The
Company's research and development department focuses on the continued
development and refinement of its existing products as well as on the
development of new products for treating cardiac diseases. Research and
development expenses were $7.0 million, $11.0 million and $18.0 million in 1999,
1998 and 1997, respectively. The Company intends to introduce new products in
2000 that are currently under development. There can be no assurance that the
Company will be successful in developing such products or that such products
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."

MANUFACTURING

    The Company manufactures the majority of 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 2000. See "Item 2 Properties."

    To date, the Company's manufacturing activities have primarily consisted of
manufacturing low volume quantities for early commercial sales. The Company has
no experience in manufacturing its products in the higher volumes that would be
necessary to achieve profitability. Medical device manufacturers often encounter
difficulties in scaling up manufacturing, 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. Difficulties in increasing manufacturing
volumes could have a material adverse effect on the Company's business,
financial condition, and results of operations. See "Risk Factors--Limited
Manufacturing Experience; Dependence on Key Suppliers."

    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. See "Risk
Factors--No Assurance of Regulatory Clearance or Approval; Significant Domestic
and International Regulation."

                                       9
<PAGE>
    Currently, the Company contracts with independent suppliers for the
manufacture of certain products and product components. Any significant supply
interruption could have a material adverse effect on the Company's business,
financial condition, and results of operations. The Company has considered and
will continue to consider the internal manufacture of products and product
components provided by third parties. There can be no assurance that
manufacturing yields or costs would not be adversely affected by the transition
to in-house production, if undertaken, and that such transition would not
materially and adversely affect the Company's business, financial condition, and
results of operations. See "Risk Factors--Limited Manufacturing Experience;
Dependence on Key Suppliers."

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 currently markets 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 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 its systems and products. 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
January 2000 Clinical Report, the registry reported that data for 3,210 patients
were submitted to the registry from 113 centers between June 1997 and
August 1999. Clinical outcomes data, for events occurring postoperatively, were
collected for all patients. The January 2000 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 and less 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 and less invasive cardiac surgery technology. In addition, new
companies have been and are likely to continue to be formed to pursue
opportunities in this field.

    Cardiovascular diseases that can be treated with the Company's 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 procedures using the Company's products and could render the
Company's technology obsolete. There can be no assurance that physicians will
use the Company's products to replace or supplement established treatments, such
as conventional open-chest heart surgery and PTCA, or that the Company's
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.

    The Company's current products and any future products developed by the
Company that gain 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
minimally invasive and less invasive cardiac surgery 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 on 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 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 exemption ("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 its systems and products 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 and March 2000 for its EndoDirect system and Precision-OP
system, respectively. 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 20, 2000, the Company owns 111 issued or allowed
United States patents and 16 issued foreign patents. In addition, as of
March 20, 2000 the Company has 72 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

                                       14
<PAGE>
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 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 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, 1999, the Company had approximately 140 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 June 1999, the Company began implementing a restructuring plan to reduce
expenses and improve operating efficiency. As a result of the restructuring, the
Company has reduced its United States workforce by approximately 55 employees
and has subleased excess facilities. Implementation of the 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. Although
the Company believes that the actions taken in connection with the restructuring
have helped align the Company's expense structure with its business prospects,
there can be no assurance that such actions will enable the Company to achieve
its objective of further reducing its net losses.

    WALL STREET JOURNAL ARTICLE

    On May 5, 1999, THE WALL STREET JOURNAL published a highly unfavorable
article about the Company. Among other things, the article implied that the
Company's Port-Access products were not safe and that the FDA was considering
regulatory action. The article did not reflect the excellent clinical outcomes
surgeons have achieved with Port-Access minimally invasive cardiac surgery. With
regard to the FDA, the Company has a long-standing working relationship with the
agency, and in late 1998, as part of a routine inspection, the FDA conducted a
comprehensive review of the Company's facility and quality systems, including
complaint and adverse events. The inspection was satisfactorily concluded with
no formal observations.

    THE WALL STREET JOURNAL article had an immediate and material adverse impact
on the Company's customers and, consequently, the Company's business. A
significant number of the Company's customers have reduced the number of
Port-Access procedures they are performing, stopped the Port-Access program at
their hospitals or indicated that they are not comfortable continuing to perform
Port-Access surgery until they have a better understanding of the issues raised
in the article. There can be no assurance that the Company will be able to
convince these customers to begin using its products again or to increase the
number of Port-Access procedures they are performing. The Company also
anticipates that the article will make it difficult to convince potential new
customers to become interested in Port-Access surgery. The Company believes that
the article may continue to have a material adverse impact on its net sales and
results of operations in future periods.

    EARLY STAGE OF UTILIZATION; NO ASSURANCE OF SAFETY AND EFFICACY

    The Company's EndoCPB, EndoDirect and Precision-OP systems and other
products are at an early stage of clinical utilization, and there can be no
assurance as to their clinical safety and efficacy. Port-Access and OPCABG
surgery have many of the risks of conventional 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 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. The Company has little clinical experience with its
recently introduced products, including the Precision-OP system. Accordingly,
there can be no assurance as to their clinical safety and

                                       17
<PAGE>
efficacy. 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 health care
payors' reimbursement of minimally invasive and less invasive cardiac surgery
procedures will be essential for market acceptance of its products, and there
can be no assurance that any such recommendations or approvals will be obtained.
Physicians will not recommend minimally invasive or less invasive cardiac
surgical procedures unless they conclude, based on clinical data, ease of use,
operative time and other factors, that such 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 PTCA and
intravascular stents, or may refer the patient to a cardiac surgeon for
open-chest surgery. Cardiologists may not recommend minimally invasive or less
invasive surgical procedures until such time, if any, as such 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 minimally
invasive or less invasive surgical procedures until such time, if any, as the
efficacy of such 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 minimally invasive and less invasive cardiac surgical
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 its Port-Access procedure volume by trained cardiac
surgery teams has been negatively impacted by ease of 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 Port-Access procedure volume, or that any of its
products will obtain any significant degree of market acceptance. Failure of the
Company to increase Port-Access procedure 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; restructuring activities; 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.

                                       18
<PAGE>
    Operating results have been and will continue to be difficult to forecast.
Future revenue is also difficult to forecast because the market for minimally
invasive and less 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 Port-Access
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.

    CUSTOMER CONCENTRATION

    Approximately 55% of the Company's net sales in 1999 were derived from sales
to twenty customers. The Company believes that this customer concentration will
continue during 2000. 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 PROCEDURES; EXTENSIVE TRAINING
     REQUIREMENTS

    Use of the Company's Port-Access 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. 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 Port-Access products. In addition, certain
patients requiring heart surgery cannot be treated with the present Port-Access
products, 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 Port-Access
products 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 training facility in Utah and has implemented a field-based
training program. In addition, the Company has limited training experience with
its recently introduced products designed for less invasive open-chest surgery,
aortic valve replacement and stopped heart and beating heart minimally invasive
cardiac surgery. 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. Delays in training or delays in trained surgical teams'
ability to become proficient with any of 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 early 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
Port-Access products in higher volume commercial quantities, and the Company has
very little experience in manufacturing its recently introduced products
designed for less invasive open-chest surgery, aortic valve replacement and
stopped heart and beating heart minimally invasive cardiac surgery. Certain
products and product components are manufactured by third parties. There can be
no assurance that the Company and its suppliers will be able to successfully
scale-up production to meet commercial

                                       19
<PAGE>
demand for the Company's 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 manufacturing certain of its products, 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 products and
product 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 Regulations, 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.

    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. 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 and less 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 and
less invasive cardiac surgery technology. In addition, new companies have been
and will continue to be formed to pursue opportunities in this field.

    Cardiovascular diseases that can be treated with the Company's 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 community and
have a long history of use. In addition, technological advances with other
therapies for

                                       20
<PAGE>
heart disease such as drugs or future innovations in cardiac surgery techniques
could make such other therapies more effective or lower in cost than procedures
using Company's products and could render the Company's technology obsolete.
There can be no assurance that physicians will use the Company's products to
replace or supplement established treatments, such as conventional open-chest
heart surgery, PTCA, or intravascular stents, or that the Company's 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.

    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 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. 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.

    SUBSTANTIAL FUTURE LOSSES AND FUTURE CAPITAL REQUIREMENTS

    The Company has never had a profit from operations. For the period from
inception to December 31, 1999, the Company has incurred cumulative net losses
of approximately $164.0 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.

    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; the costs of expanding manufacturing
capacity; the costs of developing marketing and distribution capabilities; the
progress and scope of clinical trials 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 substantial 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.

    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 20, 2000, the Company owns 111 issued or allowed
United States patents and 16 issued foreign patents. In addition, as of
March 20, 2000, the Company has 72 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

                                       21
<PAGE>
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 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.

                                       22
<PAGE>
    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. The Company's
business and future operating results also significantly depend 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. 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 devices are subject to regulatory clearances or approvals by
the FDA. The Company believes that most of its devices and systems under
development 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 or exemption from the
FDA to market the EndoCPB, EndoDirect and Precision-OP systems 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 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

                                       23
<PAGE>
differ. Although the Company's EndoCPB, EndoDirect, Port-Access CABG,
Port-Access MVR and Precision-OP systems bear the CE Mark under the European
Community medical device directive, some European countries may impose
additional requirements for commercialization of those products. The Company's
products under development 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 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 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.

    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.

                                       24
<PAGE>
    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 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.

    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 in recent periods, 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 $1.88 on July 29, 1999. On March 20, 2000 the price of the Company's
Common Stock was $5.75. 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 result; announcements of technological innovations, new
products or new 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.

    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 products. The Company's future success
may depend, in part, on its relationships with third parties and their success
in marketing the Company's products or willingness to purchase 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

                                       25
<PAGE>
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 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 71,000 square feet of this space to other entities. The Company
terminated the lease of its former training facility in Salt Lake City, Utah
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 other 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, 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

YEAR ENDED DECEMBER 31, 1999:
  First Quarter.............................................   $ 8.44     $ 4.44
  Second Quarter............................................     6.00       2.38
  Third Quarter.............................................     4.56       1.88
  Fourth Quarter............................................     6.06       3.00
</TABLE>

    On March 20, 2000, the last sale price of the Company's Common Stock as
reported by The Nasdaq Stock Market was $5.75 per share. There were 316 holders
of record of the Company's Common Stock as of March 20, 2000. 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 credit 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 each of the
three years in the period ended December 31, 1999, and the balance sheet data at
December 31, 1999 and 1998 are derived from the audited financial statements
included elsewhere herein. The statement of operations data for each of the
years ended December 31, 1996 and 1995, and the balance sheet data at
December 31, 1997, 1996 and 1995 are derived from audited financial statements
not included herein.

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                              ----------------------------------------------------
                                                1999       1998       1997       1996       1995
                                              --------   --------   --------   --------   --------
                                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                           <C>        <C>        <C>        <C>        <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales...................................  $ 18,090   $ 18,611   $ 23,421   $    624   $    --
Cost of sales...............................    10,634     16,846     15,395        561        --
                                              --------   --------   --------   --------   -------
Gross profit................................     7,456      1,765      8,026         63        --
Operating expenses:
  Research and development..................     7,039     10,985     18,005     21,059     8,477
  Selling, general and administrative.......    18,520     33,151     43,005     11,223     1,229
  Patent acquisition........................        --         --         --      5,216        --
  Restructuring charges.....................     2,363     12,158         --         --        --
                                              --------   --------   --------   --------   -------
Loss from operations........................   (20,466)   (54,529)   (52,984)   (37,435)   (9,706)
Interest and other, net.....................      (933)    (1,692)     1,653      3,381       353
                                              --------   --------   --------   --------   -------
Loss before extraordinary item..............   (21,399)   (56,221)   (51,331)   (34,054)   (9,353)
Extraordinary item--gain on repurchase of
  debt......................................        --     15,563         --         --        --
                                              --------   --------   --------   --------   -------
Net loss....................................  $(21,399)  $(40,658)  $(51,331)  $(34,054)  $(9,353)
                                              ========   ========   ========   ========   =======
Basic and diluted net loss per share........  $  (0.88)  $  (1.73)  $  (2.29)  $  (2.11)  $ (2.52)
                                              ========   ========   ========   ========   =======
Extraordinary income per share..............             $   0.66
                                                         ========
</TABLE>

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                          -------------------------------------------------------
                                            1999        1998        1997        1996       1995
                                          ---------   ---------   ---------   --------   --------
                                                              (IN THOUSANDS)
<S>                                       <C>         <C>         <C>         <C>        <C>
CONSOLIDATED BALANCE SHEET DATA:
Current assets..........................  $  48,683   $  74,761   $ 124,848   $ 94,226   $ 12,692
Working capital.........................     24,906      46,170     113,923     87,561     11,234
Total assets............................     60,813      87,537     142,810    101,852     14,266
Long-term obligations, less current
  portion...............................     55,433      56,098      89,868      4,717      4,034
Accumulated deficit.....................   (163,987)   (142,588)   (101,930)   (50,599)   (16,545)
Total stockholders' equity (net capital
  deficiency)...........................    (18,397)      2,848      42,017     90,470      8,775
</TABLE>

                                       28
<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

OVERVIEW

    Since its inception in May 1991, Heartport, Inc. (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 EndoCPB system and other Port-Access systems for
minimally invasive cardiac surgery performed on a stopped heart. During the
third quarter of 1998 the Company began selling its EndoDirect system, a direct
aortic cannulation system for stopped heart minimally invasive cardiac surgery.
In 1999, the Company commercially introduced several new cardiac surgery
products, including its Precision-OP system for cardiac surgery performed on a
beating heart. The Company is now engaged in extensive marketing and selling
activities as well as continued research and development. Sales of the EndoCPB
and EndoDirect systems comprise the majority of its net sales.

    The Company has never had a profit from operations. For the period from
inception to December 31, 1999, the Company has incurred cumulative net losses
of approximately $164 million. For at least the next 12 months, the Company
expects to continue to incur losses.

    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 began implementing a plan to
significantly reduce expenses and restructure its business operations to improve
operating efficiency. As a result of this 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 Company closed its training facility in
Utah and augmented its sales organization by moving more clinical training
specialists into the field to work directly with surgical teams at their
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.

    In June 1999, the Company adopted a second restructuring plan to further
reduce expenses and improve operating efficiency. Under the 1999 restructuring
plan, the Company reduced its United States workforce by approximately 55
employees and subleased excess facilities. During the year, the Company also
completed the majority of the restructuring activities that it began in 1998.
The two restructuring plans resulted in a combined charge of $2.4 million for
the year ended December 31, 1999.

    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 $18.1 million, $18.6 million and $23.4 million in
1999, 1998 and 1997, respectively. Net sales consist primarily of sales of the
Company's EndoCPB and EndoDirect systems. Revenue from product sales is
recognized upon transfer of title, which is generally upon product shipment.
International net sales represented approximately 19% and 13% of net sales in
1999 and 1998, respectively. In 1999, approximately 10% of the Company's total
net sales was to New York University Medical Center. The decrease in 1999 net
sales was partly attributable to an unfavorable article about the Company in THE

                                       29
<PAGE>
WALL STREET JOURNAL in May 1999. The decrease in net sales in 1998 compared with
1997 was due to the Company's efforts to reduce customer inventories of its
Port-Access minimally invasive cardiac surgery systems in 1998.

    COST OF SALES.  Cost of sales was $10.6 million, $16.8 million and
$15.4 million in 1999, 1998 and 1997, respectively. Cost of sales consists
primarily of material, labor and overhead costs associated with manufacturing
the Company's EndoCPB and EndoDirect systems and related disposable and reusable
devices.

    Gross margin was 41%, 9% and 34% in 1999, 1998 and 1997, respectively. The
1999 gross margin increase resulted from a decrease in manufacturing overhead
and an increase in production efficiency following the June 1999 restructuring.
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 related to product expiration risks. 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
$7.0 million, $11.0 million and $18.0 million in 1999, 1998 and 1997,
respectively. The decrease in expenses between 1999 and 1998 was primarily due
to a reduction in headcount, and the decrease between 1998 and 1997 was
primarily due to a reduction in headcount and the cancellation of several
projects. 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.

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and
administrative expenses were $18.5 million, $33.2 million and $43.0 million in
1999, 1998 and 1997, respectively. The decrease in 1999 from 1998 resulting
primarily from the implementation of the restructuring plans that were initiated
in June 1999 and May 1998. The decrease in 1998 from 1997 was primarily due to
the restructuring plan that was implemented starting in May 1998.

    Selling, general and administrative expenses consist primarily of costs for
sales, marketing and administrative personnel, as well as physician training
costs and professional fees.

    RESTRUCTURING CHARGES.  The restructuring plan adopted in June 1999 resulted
in a charge of $2.5 million for the year ended December 31, 1999. The
restructuring charge included approximately $1.9 million in severance and
employee-related costs and approximately $0.6 million related to excess
facilities and the disposal of assets. Approximately 55 employees in the United
States were terminated as a result of the plan. The Company also completed the
majority of the restructuring activities begun in 1998, which resulted in a
$0.1 million decrease in the restructuring charge in 1999.

    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 related 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
$4.1 million, $4.9 million and $6.4 million in 1999, 1998 and 1997,
respectively. The decrease in each year was primarily attributable to the
Company's lower average investment balances.

                                       30
<PAGE>
    INTEREST EXPENSE.  Interest expense was $5.1 million in 1999, $6.6 million
in 1998 and $4.7 million in 1997. The decrease in 1999 was primarily due to the
purchase of $33.4 million in principal amount of the Company's outstanding
convertible subordinated notes in the fourth quarter of 1998. The increase in
1998 was due to the issuance of the convertible subordinated notes 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 1999, 1998 or
1997.

    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, 1999 and 1998
has been established to reflect these uncertainties.

    At December 31, 1999, the Company had net operating loss carryforwards for
federal and California tax purposes of approximately $146.0 million and
$58.0 million, respectively, which will expire on various dates from 2000
through 2019 if not utilized. As of December 31, 1999, the Company also had
research and development tax credit carryforwards of approximately $1.8 million
and $1.7 million respectively, for federal and California tax purposes, which
will expire in the years 2007 through 2014 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.

    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

    At December 31, 1999, the Company had approximately $41.9 million in cash
and investments and approximately $24.9 million in working capital.
Approximately $20.6 million of the Company's cash and investments secures the
Company's short-term borrowings and a letter of credit related to its facility,
and is therefore not available for operations. The Company also has a
$10.0 million credit facility with a commercial bank. No amount was outstanding
under this facility at December 31, 1999. As of December 31, 1999, the Company
had a net capital deficiency of $18.4 million.

    Net cash used in operating activities was approximately $25.7 million,
$34.6 million and $51.8 million in 1999, 1998 and 1997, respectively and
resulted primarily from net losses in each period. For the year ended
December 31, 1999, net cash used in operating activities was also attributable
to an increase in accounts receivable resulting primarily from higher net sales
in December 1999 compared to December 1998 and a reduction in liabilities due
primarily to the Company's reduced expenses. In 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, net accounts receivable collections of $4.0 million, and a
reduction of inventories of $3.2 million.

    Net cash provided by investing activities was approximately $20.4 million
and $9.3 million for the years ended December 31, 1999 and 1998, respectively,
compared with net cash used in investing activities of approximately
$30.5 million for the year ended December 31, 1997. The net cash provided in
1999 and 1998 was primarily the result of net maturities and sales of short-term
investments of $22.5 million and $17.6 million, respectively, offset partially
by capital expenditures in each year. In 1997, net cash used in investing
activities reflects the net purchases of short-term investments of
$20.4 million and purchases of property and equipment of $10.2 million.

                                       31
<PAGE>
    Capital expenditures for equipment and leasehold improvements to support the
Company's operations were $2.1 million, $8.3 million and $10.2 million in 1999,
1998 and 1997, respectively. The expenditures in 1999 were primarily related to
leasehold improvements to the Company's facility to accommodate subleasing of
excess space. In 1998, the expenditures were primarily related to leasehold
improvements associated with the Company's 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.

    Net cash provided by financing activities was approximately $114,000 in
1999, compared with net cash used of $18,000 in 1998 and net cash provided of
$84.7 million in 1997. In 1999, the net cash provided resulted primarily from
the issuance of $429,000 of common stock, offset by the repayment of $435,000 of
long term borrowings. 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.

    The Company believes that it has the financial resources through its current
level of liquid assets and credit facilities to meet business requirements
through the year 2000.

IMPACT OF YEAR 2000

    In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company spent
approximately $30,000 during 1999 in connection with remediating its systems.
The Company is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems, or the products and
services of third parties that impact the Company's products. The Company will
continue to monitor its mission critical computer applications and those of its
suppliers and vendors throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.

                                       32
<PAGE>
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
9 months at December 31, 1999. The Company has estimated the impact of potential
interest rate risk exposures using a sensitivity analysis. For 1999 as well as
1998, 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.

                                       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 Cash Flows.......................    F-5
Consolidated Statements of Stockholders' Equity (Net Capital
  Deficiency)...............................................    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, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity (net capital deficiency), and
cash flows for each of the three years in the period ended December 31, 1999.
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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the 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, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with auditing standards generally
accepted in the United States. 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 21, 2000

                                      F-2
<PAGE>
                                HEARTPORT, INC.

                          CONSOLIDATED BALANCE SHEETS

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                1999        1998
                                                              ---------   ---------
<S>                                                           <C>         <C>
                                      ASSETS
Current assets:
  Cash and cash equivalents.................................  $   5,288   $  10,479
  Short-term investments....................................     36,611      59,591
  Accounts receivable, net of allowances of $507 in 1999
    ($709 in 1998)..........................................      3,881       1,933
  Inventories...............................................      1,644       1,452
  Other current assets......................................      1,259       1,306
                                                              ---------   ---------
Total current assets........................................     48,683      74,761
                                                              ---------   ---------
Property and equipment:
  Equipment.................................................      5,409       5,272
  Furniture and fixtures....................................      1,788       1,694
  Leasehold improvements....................................      9,171      10,204
                                                              ---------   ---------
                                                                 16,368      17,170
  Accumulated depreciation and amortization.................      6,105       6,551
                                                              ---------   ---------
  Property and equipment, net...............................     10,263      10,619
                                                              ---------   ---------
Other assets................................................      1,867       2,157
                                                              ---------   ---------
Total assets................................................  $  60,813   $  87,537
                                                              =========   =========
            LIABILITIES & STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
  Accounts payable..........................................  $   1,757   $   4,093
  Accrued compensation and related benefits.................      2,960       4,099
  Accrued interest..........................................        639         639
  Short-term borrowings.....................................     16,900      16,900
  Current portion of long-term debt.........................        134         447
  Other current liabilities.................................      1,387       2,413
                                                              ---------   ---------
Total current liabilities...................................     23,777      28,591
                                                              ---------   ---------
Noncurrent liabilities:
  Long-term debt, less current portion......................     52,891      53,013
  Other long-term liabilities...............................        620         163
  Deferred royalty income...................................      1,922       2,922
                                                              ---------   ---------
Total noncurrent liabilities................................     55,433      56,098
                                                              ---------   ---------
Commitments and contingencies
Stockholders' equity (net capital deficiency):
  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--25,492 in 1999 (25,232 in
      1998)                                                          25          25
  Additional paid-in capital................................    146,460     145,929
  Notes receivable from stockholders........................       (781)       (901)
  Accumulated deficit.......................................   (163,987)   (142,588)
  Accumulated other comprehensive income (loss).............       (114)        383
                                                              ---------   ---------
Total stockholders' equity (net capital deficiency).........    (18,397)      2,848
                                                              ---------   ---------
Total liabilities and stockholders' equity..................  $  60,813   $  87,537
                                                              =========   =========
</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,
                                                              ------------------------------
                                                                1999       1998       1997
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Net sales...................................................  $ 18,090   $ 18,611   $ 23,421
Cost of sales...............................................    10,634     16,846     15,395
                                                              --------   --------   --------
Gross profit................................................     7,456      1,765      8,026
Operating expenses:
  Research and development..................................     7,039     10,985     18,005
  Selling, general and administrative.......................    18,520     33,151     43,005
  Restructuring charges.....................................     2,363     12,158         --
                                                              --------   --------   --------
Loss from operations........................................   (20,466)   (54,529)   (52,984)
Interest income and other, net..............................     4,126      4,865      6,352
Interest expense............................................    (5,059)    (6,557)    (4,699)
                                                              --------   --------   --------
Loss before extraordinary item..............................   (21,399)   (56,221)   (51,331)
                                                              --------   --------   --------
Extraordinary item--gain on repurchase of debt..............        --     15,563         --
                                                              --------   --------   --------
Net loss....................................................  $(21,399)  $(40,658)  $(51,331)
                                                              ========   ========   ========
Basic and diluted loss per share before extraordinary
  item......................................................  $  (0.88)  $  (2.39)  $  (2.29)
Extraordinary income per share..............................        --       0.66         --
                                                              --------   --------   --------
Basic and diluted net loss per share........................  $  (0.88)  $  (1.73)  $  (2.29)
                                                              ========   ========   ========
</TABLE>

                            See accompanying notes.

                                      F-4
<PAGE>
                                HEARTPORT, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                              ------------------------------
                                                                1999       1998       1997
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
OPERATING ACTIVITIES:
Net loss....................................................  $(21,399)  $(40,658)  $(51,331)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation and amortization.............................     2,507      4,433      2,896
  Extraordinary gain from repurchase of debt................        --    (15,563)        --
  Common stock and warrants issued for services rendered and
    certain technology......................................        --         --        459
  Compensation related to stock options.....................       102        368        303
  Loss (gain) on sales and disposals of equipment...........       (24)       443        262
  Non-cash restructuring expenses...........................       225      7,540         --
  Changes in operating assets and liabilities:
    Accounts receivable.....................................    (1,948)     3,992     (5,375)
    Inventories.............................................      (192)     3,216     (2,771)
    Other assets............................................        56        336         --
    Accounts payable, accrued expenses, and other
      liabilities...........................................    (5,043)     1,318      3,758
                                                              --------   --------   --------
Net cash used in operating activities.......................   (25,716)   (34,575)   (51,799)
                                                              --------   --------   --------
INVESTING ACTIVITIES
Purchases of short-term investments.........................   (23,116)   (85,758)   (90,166)
Maturities of short-term investments........................    14,515     48,062     60,654
Sales of short-term investments.............................    31,084     55,268      9,139
Purchases of property and equipment.........................    (2,072)    (8,305)   (10,165)
                                                              --------   --------   --------
Net cash provided by (used in) investing activities.........    20,411      9,267    (30,538)
                                                              --------   --------   --------
FINANCING ACTIVITIES
Proceeds from issuances of common stock.....................       429        737      2,045
Proceeds from short-term borrowings.........................        --     16,900         --
Repurchase of long-term borrowings..........................        --    (16,867)        --
Proceeds from payments of stockholders' notes receivable....       120          1         71
Proceeds from long-term borrowings..........................        --         --     83,240
Repayment of long-term borrowings...........................      (435)      (789)      (659)
                                                              --------   --------   --------
Net cash provided by (used in) financing activities.........       114        (18)    84,697
                                                              --------   --------   --------
Net (decrease) increase in cash and cash equivalents........    (5,191)   (25,326)     2,360
Cash and cash equivalents at beginning of year..............    10,479     35,805     33,445
                                                              --------   --------   --------
Cash and cash equivalents at end of year....................  $  5,288   $ 10,479   $ 35,805
                                                              ========   ========   ========
Supplemental disclosures of cash information
  Cash paid for interest....................................  $  4,711   $  6,418   $  3,573
</TABLE>

                            See accompanying notes.

                                      F-5
<PAGE>
                                HEARTPORT, INC.

    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                               TOTAL
                                                                                                           STOCKHOLDERS'
                              COMMON STOCK       ADDITIONAL                                   OTHER           EQUITY
                           -------------------    PAID-IN       NOTES      ACCUMULATED    COMPREHENSIVE    (NET CAPITAL
                            SHARES     AMOUNT     CAPITAL     RECEIVABLE     DEFICIT      INCOME (LOSS)     DEFICIENCY)
                           --------   --------   ----------   ----------   ------------   --------------   -------------
<S>                        <C>        <C>        <C>          <C>          <C>            <C>              <C>
Balance at December 31,
  1996...................   24,415     $  24      $142,018     $   (973)    $ (50,599)      $      --        $ 90,470
  Net loss and
    comprehensive loss...       --        --            --           --       (51,331)             --         (51,331)
  Payments of
    stockholders' notes
    receivable...........       --        --            --           71            --              --              71
  Exercises of common
    stock options........      413        --           940           --            --              --             940
  Issuances of common
    stock................       74         1         1,563           --            --              --           1,564
  Issuances of stock
    options to non-
    employees............       --        --           303           --            --              --             303
                           -------     -----      --------     --------     ---------       ---------        --------
Balance at December 31,
  1997...................   24,902        25       144,824         (902)     (101,930)             --          42,017
                                                                                                             --------
  Net loss                      --        --            --           --       (40,658)             --         (40,658)
  Change in unrealized
    gain (loss) on
    investments..........       --        --            --           --            --             383             383
                                                                                                             --------
    Comprehensive loss...       --        --            --           --            --              --         (40,275)
  Repurchases of common
    stock................      (54)       --           (20)          --            --              --             (20)
  Payments of
    stockholders' notes
    receivable...........       --        --            --            1            --              --               1
  Exercises of common
    stock options........      293        --           178           --            --              --             178
  Issuances of common
    stock................       91        --           579           --            --              --             579
  Compensation related to
    stock options........       --        --           368           --            --              --             368
                           -------     -----      --------     --------     ---------       ---------        --------
Balance at December 31,
  1998...................   25,232        25       145,929         (901)     (142,588)            383           2,848
  Net loss...............       --        --            --           --       (21,399)             --         (21,399)
  Change in unrealized
    gain (loss) on
    investments..........       --        --            --           --            --            (497)           (497)
                                                                                                             --------
    Comprehensive loss...       --        --            --           --            --              --         (21,896)
  Repurchase of common
    stock................      (10)       --            (3)          --            --              --              (3)
  Payments of
    stockholders' notes
    receivable...........       --        --            --          120            --              --             120
  Exercises of common
    stock options........      205        --           210           --            --              --             210
  Issuances of common
    stock................       65        --           222           --            --              --             222
  Compensation related to
    stock options........       --        --           102           --            --              --             102
                           -------     -----      --------     --------     ---------       ---------        --------
Balance at December 31,
  1999...................   25,492     $  25      $146,460     $   (781)    $(163,987)      $    (114)       $(18,397)
                           =======     =====      ========     ========     =========       =========        ========
</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 and less 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 accounting
principles generally accepted in the United States 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 transfer of title, which is
generally 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 1999 and 1998, sales to international customers were approximately
19% and 13% of net sales, respectively. All sales are denominated in U.S.
dollars. No international country represented more than 10% of the Company's net
sales in 1999 or 1998.

    ADVERTISING

    The Company expenses advertising costs as incurred. For the years ended
December 31, 1999, 1998 and 1997 advertising expenses were $19,000, $394,000,
and $504,000 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, 1999, one customer represented 22% of the total accounts receivable
balance. No other individual customer represented more than 3% of the total
accounts receivable balance.

                                      F-7
<PAGE>
                                HEARTPORT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    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. The fair value of short
term borrowings approximates cost due to the short term to maturity.

    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)

    Comprehensive income (loss) consists of net loss and other comprehensive
income (loss). Accumulated other comprehensive income (loss) presented in the
accompanying consolidated balance sheets consists solely of the accumulated net
unrealized gain (loss) on available-for-sale investments. There is no related
tax effect for the unrealized gain (loss) 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 (in
thousands):

<TABLE>
<CAPTION>
                                                                1999       1998
                                                              --------   --------
<S>                                                           <C>        <C>
Materials and purchased parts...............................   $1,240     $1,112
Work in process.............................................       68        264
Finished goods..............................................      336         76
                                                               ------     ------
Total inventories...........................................   $1,644     $1,452
                                                               ======     ======
</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

                                      F-8
<PAGE>
                                HEARTPORT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.

    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, 2000. 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 facility under a noncancelable operating lease that
expires in the year 2010. Rental expense was $1,825,000 (net of sublease income
of $1,036,000), $2,068,000, and $1,937,000, for the years ended December 31,
1999, 1998 and 1997, respectively.

    The future minimum lease payments as of December 31, 1999 were as follows
(in thousands):

<TABLE>
<CAPTION>
                                                   MINIMUM                 NET
                                                    LEASE     SUBLEASE    LEASE
                                                   PAYMENTS    INCOME    PAYMENTS
                                                   --------   --------   --------
<S>                                                <C>        <C>        <C>
2000.............................................  $ 2,738     $2,174    $   564
2001.............................................    3,100      2,061      1,039
2002.............................................    3,193        746      2,447
2003.............................................    3,288          -      3,288
2004.............................................    3,387          -      3,387
Thereafter.......................................   22,559          -     22,559
                                                   -------     ------    -------
                                                   $38,265     $4,981    $33,284
                                                   =======     ======    =======
</TABLE>

3. INVESTMENTS

    Investments, including cash equivalents and short-term investments, as of
December 31 were as follows (in thousands):

<TABLE>
<CAPTION>
                                                  1999                                   1998
                                 --------------------------------------   ----------------------------------
                                 AMORTIZED       GROSS        ESTIMATED   AMORTIZED     GROSS      ESTIMATED
                                   COST        UNREALIZED       FAIR        COST      UNREALIZED     FAIR
                                   BASIS     GAINS (LOSSES)     VALUE       BASIS       GAINS        VALUE
                                 ---------   --------------   ---------   ---------   ----------   ---------
<S>                              <C>         <C>              <C>         <C>         <C>          <C>
Money market funds.............   $ 1,018        $  --         $ 1,018     $ 1,013       $ --       $ 1,013
U.S. government securities.....    22,441         (123)         22,318      38,946        302        39,248
Corporate notes................    10,021          (14)         10,007      15,579         74        15,653
Mortgage backed securities.....     4,263           23           4,286       8,146          7         8,153
                                  -------        -----         -------     -------       ----       -------
Total available-for-sale
  investments..................    37,743         (114)         37,629      63,684        383        64,067
Amounts classified as cash
  equivalents..................    (1,018)          --          (1,018)     (4,476)        --        (4,476)
                                  -------        -----         -------     -------       ----       -------
Short-term investments.........   $36,725        $(114)        $36,611     $59,208       $383       $59,591
                                  =======        =====         =======     =======       ====       =======
</TABLE>

                                      F-9
<PAGE>
                                HEARTPORT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. INVESTMENTS (CONTINUED)
    There were no material realized gains or losses on sales of
available-for-sale investments in 1999, 1998 or 1997.

    The estimated fair value of investments in debt securities at December 31,
1999, by contractual maturity, were as follows (in thousands):

<TABLE>
<S>                                                           <C>
Due in 1 year or less.......................................  $25,388
Due in 1-2 years............................................    7,955
                                                              -------
                                                               33,343
Mortgage-backed securities..................................    4,286
                                                              -------
Total investments in debt securities........................  $37,629
                                                              =======
</TABLE>

    Approximately $20.6 million of the Company's cash and investments secures
the Company's short-term borrowings and a letter of credit related to its
facility, and is therefore not available for operations.

4. DEBT

    Long-term debt at December 31 was as follows (in thousands):

<TABLE>
<CAPTION>
                                                              1999       1998
                                                            --------   --------
<S>                                                         <C>        <C>
Convertible subordinated notes, due in 2004 at 7.25%......  $52,850    $52,850
Equipment financing and other debt........................      175        610
                                                            -------    -------
Total long-term debt......................................   53,025     53,460
Current portion of long-term debt.........................     (134)      (447)
                                                            -------    -------
Long-term debt, less current portion......................  $52,891    $53,013
                                                            =======    =======
</TABLE>

    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 to interest
expense over the life of the notes. At December 31, 1999, unamortized issue
costs included in other assets were approximately $1.2 million. At December 31,
1999, the fair value of the Company's long-term debt is approximately 50% 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, 1999, the interest rate on the
short-term borrowings was 5.45%.

                                      F-10
<PAGE>
                                HEARTPORT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. DEBT (CONTINUED)

    As of December 31, 1999, aggregate maturities of long-term debt were as
follows (in thousands):

<TABLE>
<S>                                                           <C>
2000........................................................  $   134
2001........................................................       32
2002........................................................        9
2003........................................................       --
2004........................................................   52,850
                                                              -------
                                                              $53,025
                                                              =======
</TABLE>

    As of December 31, 1999, 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.

    The following table sets forth the computation of basic and diluted net loss
per share (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                1999       1998       1997
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Numerator for basic and diluted net loss per share:
  Net loss..................................................  $(21,399)  $(40,658)  $(51,331)
                                                              ========   ========   ========
Denominator:
  Weighted-average common shares............................    25,403     25,082     24,687
  Weighted-average nonvested shares subject to repurchase...    (1,142)    (1,585)    (2,266)
                                                              --------   --------   --------
Denominator for basic and diluted net loss per share........    24,261     23,497     22,421
                                                              ========   ========   ========
Basic and diluted net loss per share........................  $  (0.88)  $  (1.73)  $  (2.29)
                                                              ========   ========   ========
</TABLE>

6. STOCKHOLDERS' EQUITY

    NONVESTED SHARES

    At December 31, 1999, 963,000 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.

                                      F-11
<PAGE>
                                HEARTPORT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. STOCKHOLDERS' EQUITY (CONTINUED)
    STOCK OPTION PLANS

    Under the 1993 Stock Option Plan (the 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 two or four year period, and expire
after ten years. During 1996, the Company adopted the 1996 Stock Option Plan
(the 1996 Plan), under which the Company reserved 2,110,000 shares of common
stock for issuance to employees, consultants and directors in addition to the
3,390,000 shares incorporated from the 1993 Plan. In 1999, the Company adopted
the 1999 Supplemental Stock Option Plan, under which the Company may grant
nonstatutory stock options to purchase up to 1,500,000 shares of common stock to
directors, consultants and employees who are not officers. The Company had
664,000 shares available for grant under the plans as of December 31, 1999.

    In the second quarter of 1998, the Company's Board of Directors approved the
cancellation and reissuance of outstanding options. 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 expired on June 23, 1999. If an
employee voluntarily terminated his or her employment prior to the end of the
blackout period, the replacement options were forfeited. The number of options
shown as granted and canceled in the table below includes the reissuance of
options.

                                      F-12
<PAGE>
                                HEARTPORT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. STOCKHOLDERS' EQUITY (CONTINUED)
    A summary of stock option transactions is as follows:

<TABLE>
<CAPTION>
                                                           OUTSTANDING OPTIONS
                                                     -------------------------------
                                                         NUMBER          WEIGHTED
                                                       OF SHARES         AVERAGE
                                                     (IN THOUSANDS)   EXERCISE PRICE
                                                     --------------   --------------
<S>                                                  <C>              <C>
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
  Options granted..................................       3,086           $ 2.44
  Options exercised................................        (205)          $ 1.03
  Options canceled.................................      (2,298)          $ 7.01
                                                         ------
December 31, 1999..................................       6,381           $ 4.58
                                                         ======
</TABLE>

<TABLE>
<CAPTION>
                                                         NUMBER          WEIGHTED
                                                       OF SHARES         AVERAGE
                                                     (IN THOUSANDS)   EXERCISE PRICE
                                                     --------------   --------------
<S>                                                  <C>              <C>
Options exercisable at:
  December 31, 1997................................      1,530             $9.88
  December 31, 1998................................      1,286             $7.87
  December 31, 1999................................      2,215             $5.11
</TABLE>

    The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1999:

<TABLE>
<CAPTION>
                                                  OPTIONS OUTSTANDING                 OPTIONS EXERCISABLE
                                        ----------------------------------------   --------------------------
                                                           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
--------------------------------------  ---------------   -----------   --------   ---------------   --------
<S>                                     <C>               <C>           <C>        <C>               <C>
$ 0.06 - $ 1.88.......................       2,186            9.1        $ 1.73           474         $ 1.26
$ 2.00 - $ 5.00.......................       1,521            9.5        $ 3.79           405         $ 4.36
$ 5.13 - $ 5.50.......................       2,145            8.5        $ 5.25         1,149         $ 5.25
$ 6.00 - $12.50.......................         115            8.0        $ 9.05            42         $ 9.66
$16.50 - $24.00.......................         414            7.5        $17.86           145         $17.37
                                             -----                                      -----
                                             6,381            8.9        $ 4.58         2,215         $ 5.11
                                             =====                                      =====
</TABLE>

                                      F-13
<PAGE>
                                HEARTPORT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. STOCKHOLDERS' EQUITY (CONTINUED)
    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>
                                                      1999       1998       1997
                                                    --------   --------   --------
<S>                                                 <C>        <C>        <C>
Expected dividend yield...........................        0%         0%         0%
Expected stock price volatility...................       65%        65%        65%
Risk-free interest rate...........................     6.00%      5.00%      5.35%
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 net
loss per share would have been increased to the pro forma amounts indicated in
the table below (in thousands except per share amounts):

<TABLE>
<CAPTION>
                                                   1999       1998       1997
                                                 --------   --------   --------
<S>                                              <C>        <C>        <C>
Net loss--as reported..........................  $(21,399)  $(40,658)  $(51,331)
Net loss--pro forma............................  $(25,677)  $(51,559)  $(62,112)
Net loss per share--as reported................  $  (0.88)  $  (1.73)  $  (2.29)
Net loss per share--pro forma..................  $  (1.06)  $  (2.19)  $  (2.77)
</TABLE>

    The weighted average fair value of options granted in 1999, 1998 and 1997
was $1.16, $2.81 and $9.75 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 (the 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 366,000 shares of the Company's common stock as of
December 31, 1999. In 1999, the Purchase Plan was amended to provide for an
automatic increase in the number of shares authorized for purchase under the
plan on January 1st of each year equal to the lesser of

                                      F-14
<PAGE>
                                HEARTPORT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. STOCKHOLDERS' EQUITY (CONTINUED)
(i)0.5% of the outstanding shares of the Company's common stock or (ii) 150,000
shares. During the years ended December 31, 1999, 1998 and 1997, shares issued
under the Purchase Plan were 65,000, 92,000 and 53,000, 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.

    COMMON STOCK RESERVED

    At December 31, 1999, the Company has reserved shares of common stock for
future issuances as follows (in thousands):

<TABLE>
<S>                                                           <C>
Stock options...............................................  7,045
Stock purchase plan.........................................    138
Stock warrants..............................................     18
                                                              -----
    Total...................................................  7,201
                                                              =====
</TABLE>

7. INCOME TAXES

    Due to operating losses and the inability to recognize the benefits
therefrom, there is no provision for income taxes for 1999, 1998 or 1997.

                                      F-15
<PAGE>
                                HEARTPORT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. INCOME TAXES (CONTINUED)

    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, 1999 and 1998 are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                                1999       1998
                                                              --------   --------
<S>                                                           <C>        <C>
Deferred tax assets:
  Net operating loss carryforwards..........................  $ 53,000   $ 44,200
  Tax credit carryforwards..................................     2,300      2,300
  Capitalized research and development......................     1,100      1,000
  Acquired patent...........................................     2,300      2,200
  Other temporary differences...............................     7,600      7,900
                                                              --------   --------
Total deferred tax assets...................................    66,300     57,600
Valuation allowance.........................................   (66,300)   (57,600)
                                                              --------   --------
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
the amount equal to the net deferred tax assets as of December 31, 1999 and 1998
has been established to reflect these uncertainties. The increases in the
valuation allowance were $8.7 million, $16.0 million and $20.9 million for the
fiscal years 1999, 1998 and 1997 respectively.

    At December 31, 1999, the Company had net operating loss carryforwards for
federal and California tax purposes of approximately $146.0 million and
$58.0 million, respectively, which will expire in the years 2000 through 2019 if
not utilized. As of December 31, 1999, the Company also had research and
development tax credit carryforwards of approximately $1.8 million and
$1.7 million respectively, for federal and California tax purposes, which will
expire in years 2007 through 2014 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
Internal Revenue Code of 1986 and similar state provisions.

8. RESTRUCTURING CHARGE--1999

    In June 1999, the Company adopted a restructuring plan to reduce expenses
and improve operating efficiency. Under the restructuring plan, the Company
reduced its United States workforce by approximately 55 employees primarily in
manufacturing and administration. The restructuring activities resulted in an
original charge of $2.9 million which was reduced by $0.4 million in the fourth
quarter of 1999 due primarily to a reduction in certain employee-related
expenses. The net charge of $2.5 million includes approximately $1.9 million
related to severance and other employee-related costs, and $0.6 million related
to excess facilities and the disposal of assets.

                                      F-16
<PAGE>
                                HEARTPORT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. RESTRUCTURING CHARGE--1999 (CONTINUED)
    The following table summarizes the Company's restructuring activity for the
1999 restructuring charge (in thousands):

<TABLE>
<CAPTION>
                                                  NON-CASH
                                                 WRITE OFFS                                       ACCRUED
                                 RESTRUCTURING      AND                                        RESTRUCTURING
                                    CHARGE         WRITE        CASH        CHANGE IN            CHARGE AT
                                   JUNE 1999       DOWNS      PAYMENTS   RESERVE ESTIMATE    DECEMBER 31, 1999
                                 -------------   ----------   --------   ----------------   -------------------
<S>                              <C>             <C>          <C>        <C>                <C>
Severance and benefits.........      2,416            --       (1,576)          (484)               356
Write off of assets............        225          (225)          --             --                 --
Sublease excess facilities.....        266            --         (187)            50                129
                                    ------         -----      -------          -----               ----
  Total restructuring charge...     $2,907         $(225)     $(1,763)         $(434)              $485
                                    ======         =====      =======          =====               ====
</TABLE>

    The remaining liability relates primarily to estimated cash expenditures in
connection with excess facilities and severance and other employee-related
costs.

9. RESTRUCTURING CHARGE--1998

    In May 1998, the Company adopted a restructuring plan whereby the Company
reduced its United States workforce and 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 (primarily related to
manufacturing and the Company's training facility in Utah), 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 and $0.1 million in 1999
due to the favorable resolution of lease commitments.

    The following tables summarize the Company's restructuring activity for the
1998 restructuring charge (in thousands):

<TABLE>
<CAPTION>
                                                  NON-CASH
                                                 WRITE OFFS                                       ACCRUED
                                 RESTRUCTURING      AND                                        RESTRUCTURING
                                    CHARGE         WRITE        CASH        CHANGE IN            CHARGE AT
                                   JUNE 1998       DOWNS      PAYMENTS   RESERVE ESTIMATE    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>

<TABLE>
<CAPTION>
                                              ACCRUED                                             ACCRUED
                                           RESTRUCTURING                                       RESTRUCTURING
                                             CHARGE AT          CASH        CHANGE IN            CHARGE AT
                                         DECEMBER 31, 1998    PAYMENTS   RESERVE ESTIMATE    DECEMBER 31, 1999
                                        -------------------   --------   ----------------   -------------------
<S>                                     <C>                   <C>        <C>                <C>
Severance and benefits................        $  152           $(137)          $ (15)              $ --
Exit facility leases..................           998            (785)            (95)               118
                                              ------           -----           -----               ----
  Total restructuring charge..........        $1,150           $(922)          $(110)              $118
                                              ======           =====           =====               ====
</TABLE>

                                      F-17
<PAGE>
                                HEARTPORT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. RESTRUCTURING CHARGE--1998 (CONTINUED)
    The remaining liability relates primarily to estimated cash expenditures in
connection with excess facilities.

10. 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. In 1999 the Company began matching employee
contributions made to the savings plan up to $125 per employee per quarter. The
total matching contributions in 1999 were $52,000.

                                      F-18
<PAGE>
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

    None.

                                      F-19
<PAGE>
                                    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, 1999, are as follows:

<TABLE>
<CAPTION>
                   NAME                       AGE                   POSITION
------------------------------------------  --------   -----------------------------------
<S>                                         <C>        <C>
Casey M. Tansey                                42      President, Chief Executive Officer
                                                       and Director

Jeffry J. Grainger                             37      Vice President, Legal Affairs,
                                                       General Counsel and Secretary

Christopher A. Hubbard                         41      Vice President, Sales

Steven E. Johnson                              41      Senior Vice President, Operations

Lawrence C. Siegel, M.D.                       42      Chief Technical Officer

Frank M. Fischer                               58      Chairman of the Board of Directors

Robert V. Gunderson, Jr.(2)                    48      Director

Joseph S. Lacob(2)                             44      Director

Wesley D. Sterman, M.D.                        39      Director and Co-Founder

John H. Stevens, M.D.(1)                       39      Director and Co-Founder

Steven C. Wheelwright, Ph.D.(1)(2)             56      Director
</TABLE>

------------------------

(1) Member of Compensation Committee

(2) Member of Audit Committee

    CASEY M. TANSEY has been President and Chief Executive Officer and a
director of the Company since September 1999. Prior to that, he was the
Company's President and Chief Operating Officer from June 1999 to
September 1999, Senior Vice President, Sales and Marketing from January 1998 to
June 1999 and Vice President, Sales and Marketing from December 1995 to
January 1998. 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 American Sales.
Mr. Tansey earned a B.S. in Business Administration and an M.B.A. from the
College of Notre Dame.

    JEFFRY J. GRAINGER has been the Company's Vice President, Legal Affairs and
General Counsel since June 1999 and Secretary since September 1999.
Mr. Grainger was Chief Patent Counsel of the Company from July 1996 to
June 1999 and Patent Counsel of the Company from June 1993 to July 1996. Before
joining Heartport in 1993, Mr. Grainger was an attorney specializing in patents,
copyrights and trademarks at Townsend and Townsend since 1991. He received a B.S
in Mechanical Engineering from Stanford University and a J.D. from the
University of Washington School of Law.

    CHRISTOPHER A. HUBBARD has been Vice President, Sales of the Company since
June 1999. Prior to that, he was the Company's Senior Director, U.S. Sales from
September 1997 to June 1999, Director, U.S. Sales from January 1997 to
September 1997 and Regional Sales Manager from March 1996 to January 1997.
Before joining the Company in 1996, Mr. Hubbard was Regional Sales Manager at
Devices for Vascular Intervention, formerly a subsidiary of Guidant Corporation,
since 1990. Mr. Hubbard holds a B.S. in Marketing from the University of
Illinois.

    STEVEN E. JOHNSON has been Senior Vice President, Operations of the Company
since June 1999 and was the Company's Senior Vice President, Manufacturing from
January 1998 to June 1999. Prior to that, he was Vice President, Manufacturing
of the Company since August 1994. Before joining the Company,

                                     III-1
<PAGE>
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.

    LAWRENCE C. SIEGEL, M.D. has been Chief Technical Officer of the Company
since November 1999. Prior to that, Dr. Siegel was the Company's Senior Vice
President, Research and Development and Clinical and Regulatory Affairs from
June 1999 to November 1999 and Vice President, Clinical Affairs from
November 1996 to June 1999. 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.

    FRANK M. FISCHER has been Chairman of the Board of Directors of the Company
since June 1999 and a director since May 1998. He was the Company's Chief
Executive Officer from June 1999 to September 1999 and was President and Chief
Executive Officer of the Company from May 1998 to June 1999. 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.

    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
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 is a director of Corixa Corporation, Pharmacyclics, Inc.,
Sportsline USA, Inc., and several 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.

    WESLEY D. STERMAN, M.D. founded the Company with Dr. Stevens in May 1991,
and has served as a director since that time. Dr. Sterman was Chairman of the
Board of Directors from May 1998 to June 1999 and 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. From August 1996
until July 1997 Dr. Stevens was Assistant Professor of Cardiothoracic Surgery at
Stanford University School of Medicine 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

                                     III-2
<PAGE>
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.

    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, Franklin Covey, an organizational tools company, and Millennium
Pharmaceuticals, a biotechnology 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 and May 7, 1999.
            10.4            Employee Stock Purchase Plan, as amended and restated
                              October 21, 1996 and January 1, 1999.
            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#          Amended and Restated Loan and Security Agreement dated
                              October 12, 1998 between the Registrant and Silicon Valley
                              Bank.
            10.11X          Industrial Build-To-Suit Lease dated September 19, 1997
                              between Registrant and Chestnut Bay LLC. (without
                              exhibits)
            10.12X          First Amendment to Industrial Build-To-Suit Lease dated
                              February 10, 1998 between Registrant and Chestnut Bay LLC.
            10.13           1999 Supplemental Stock Option Plan
            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.

                                      IV-1
<PAGE>
+  Incorporated by reference to the Registrant's Registration Statement on
    Form S-1 (File No. 333-1906)

#  Incorporated by reference to the Registrant's Form 10-K for the year ended
    December 31, 1998.

X  Incorporated by reference to the Registrant's Form 10-K for the year ended
    December 31, 1997.

@  Incorporated by reference to the Registrant's Form 10-K for the year ended
    December 31, 1996.

(a)(2) SCHEDULES

    The following financial statement schedules required by Regulation S-X are
filed herewith:

<TABLE>
<CAPTION>
SCHEDULE NO.                      DESCRIPTION
------------                      -----------
<S>                  <C>
     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, 1999.

(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 23rd day of March, 2000.

<TABLE>
<S>                                                    <C>  <C>
                                                       HEARTPORT, INC.

                                                       By:             /S/ REBECCA L. KUHN
                                                            -----------------------------------------
                                                                         Rebecca L. Kuhn
                                                                TREASURER AND DIRECTOR OF FINANCE
</TABLE>

                               POWER OF ATTORNEY

    KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints, Casey M. Tansey and Rebecca L. Kuhn, 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:

<TABLE>
<CAPTION>
                      SIGNATURE                                    TITLE                    DATE
                      ---------                                    -----                    ----
<C>                                                    <S>                             <C>
                 /S/ CASEY M. TANSEY                   President, Chief Executive
     -------------------------------------------       Officer and Director            March 23, 2000
                   Casey M. Tansey                     (Principal Executive Officer)

                 /S/ REBECCA L. KUHN                   Treasurer and Director of
     -------------------------------------------       Finance (Principal Financial    March 23, 2000
                   Rebecca L. Kuhn                     and Accounting Officer)

                /S/ FRANK M. FISCHER
     -------------------------------------------       Director                        March 23, 2000
                  Frank M. Fischer

            /S/ ROBERT V. GUNDERSON, JR.
     -------------------------------------------       Director                        March 23, 2000
              Robert V. Gunderson, Jr.
</TABLE>

                                      IV-3
<PAGE>

<TABLE>
<CAPTION>
                      SIGNATURE                                    TITLE                    DATE
                      ---------                                    -----                    ----
<C>                                                    <S>                             <C>
                 /S/ JOSEPH S. LACOB
     -------------------------------------------       Director                        March 23, 2000
                   Joseph S. Lacob

             /S/ WESLEY D. STERMAN, M.D.
     -------------------------------------------       Director                        March 23, 2000
               Wesley D. Sterman, M.D.

              /S/ JOHN H. STEVENS, M.D.
     -------------------------------------------       Director                        March 23, 2000
                John H. Stevens, M.D.

          /S/ STEVEN C. WHEELWRIGHT, PH.D.
     -------------------------------------------       Director                        March 23, 2000
            Steven C. Wheelwright, Ph.D.
</TABLE>

                                      IV-4
<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, 1999
  Allowance for doubtful accounts....................   $  267      $    50       $    --     $  317
  Allowance for sales returns........................   $  442      $    --       $   252     $  190
  Warranty reserves..................................   $1,225      $    --       $   441     $  784
  Restructure provision..............................   $1,150      $ 2,907       $ 3,454     $  603

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
</TABLE>

                                      IV-5