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                                   UNITED STATES
                         SECURITIES AND EXCHANGE COMMISSION
                              Washington, D.C.  20549
                                          
                                     Form 10-K
                                          
 X   Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
---- Act of 1934.
     For the fiscal year ended January 1, 1999 or

     Transition report pursuant to Section 13 or 15(d) of the Securities
---- Exchange Act of 1934.
     For the transition period from _______________to __________.

                               Commission File Number
                                      0-27880
                                          
                            CardioThoracic Systems, Inc.
                            ----------------------------
               (Exact Name of Registrant as Specified in Its Charter)

                Delaware                        94-3228757
                --------                        ----------
     (State or Other Jurisdiction of         (I.R.S. Employer
     Incorporation or Organization)          Identification No.)

        10600 N. Tantau Ave., Cupertino, CA                    95014-0739
      ---------------------------------------                  ----------
      (Address of Principal Executive Offices)                  (Zip Code)

     Registrant's telephone, including area code: (408) 342-1700
     Securities registered pursuant to Section 12(b) of the Act:  None
     Securities registered pursuant to Section 12(g) of the Act:

                           Common Stock, $.001 par value
                           ------------------------------
                          Preferred Share Purchase Rights
                           ------------------------------
                                  (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
requirements for the past 90 days.  Yes     X     No    
                                          ------     ------

Indicate by check mark if disclosures 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.  [    ]

The aggregate value of voting stock held by nonaffiliates of the Registrant 
was approximately $74,368,000 as of March 15, 1999 based upon the closing 
price of the Registrant's common stock reported for such date on the Nasdaq 
National Market.  Shares of common stock held by each executive officer and 
director and by each person who owns 5% or more of the outstanding common 
stock have been excluded in that such persons may be deemed affiliates.  The 
determination of affiliate status is not necessarily a conclusive 
determination for other purposes.  As of March 15, 1999, the Registrant had 
outstanding 14,321,933 shares of the Common Stock.

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                        DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Annual Report to stockholders for Registrant's 1998 fiscal year, 
filed as an exhibit hereto, are incorporated by reference into Parts II and 
IV hereof; and parts of the Proxy Statement for Registrant's 1999 Annual 
Meeting of Stockholders, to be filed with the Commission on or before 120 
days after the end of the 1998 fiscal year, are incorporated by reference 
into Part III hereof.


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                                       PART I
ITEM 1.  BUSINESS
                                          
OVERVIEW

     This annual report on Form 10-K contains forward-looking statements 
within the meaning of Section 27A of the Securities Act of 1933 and Section 
21E of the Securities Exchange Act of 1934.  The Company's future results 
could differ materially from those anticipated by such forward-looking 
statements as a result of certain factors including those set forth in this 
section and in the section entitled "Other Risk Factors".
     
     CardioThoracic Systems, Inc. ("CTS" or the "Company") develops, 
manufactures, and markets  proprietary, disposable instruments and systems 
for performing minimally invasive cardiac surgery ("MICS"). The Company's 
current products are designed to enable the majority of cardiothoracic 
surgeons, using their existing skills coupled with Company sponsored 
training, to perform MICS on a beating heart. The OPCAB-TM- (Off Pump 
Coronary Artery Bypass) and MIDCAB-TM- (Minimally Invasive Direct Coronary 
Artery Bypass) procedures eliminate the need for a heart-lung machine, and 
recent studies indicate that the MICS procedures reduce the trauma, 
procedural costs and post-surgical complications associated with conventional 
coronary artery bypass graft ("CABG") surgery while providing long-term 
procedural success rates comparable to CABG surgery. 
     
     The main components of the CTS OPCAB-TM- Procedure and MIDCAB-TM- 
Procedure family of products include the Access Platform, which is designed 
to maximize access to the chest cavity through a mid-line or mini-thoracotomy 
incision, the Stabilizer, which is designed to isolate and minimize the 
motion of the diseased artery and the CTS-Registered Trademark- Access MP-TM- 
Lift, which is designed to offset the ribs to provide a window into the chest 
cavity so the surgeon can harvest the internal mammary artery (IMA) through a 
mini-thoracotomy.  In 1998 the Company also introduced the CTS-Registered 
Trademark- FloCoil Shunt which is inserted into the coronary artery to create 
a near bloodless field and to provide myocardial protection during off-pump 
beating heart CABG.
     
BACKGROUND

     Heart disease is the leading cause of death in America, with the 
American Heart Association reporting in the 1999 Heart and Stroke Statistical 
Update that an estimated 13.9 million Americans have a history of coronary 
artery or other heart disease. The report went on to project that in 1999 an 
estimated 1.1 million Americans will have a new or recurrent coronary attack, 
of whom about one third will die.  Each year, approximately 1.4 million 
patients undergo a revascularization procedure to treat coronary artery 
disease. Coronary artery disease (atherosclerosis) is caused by cholesterol 
and other fatty materials becoming deposited on the walls of blood vessels, 
which form a build-up known as plaque. The heart needs a constant supply of 
oxygen and nutrients, which are carried by the blood in the coronary 
arteries. The accumulation of plaque narrows the interior of the blood 
vessels, thereby reducing blood flow to the heart muscle (the myocardium). 
When blood flow to the heart muscle becomes insufficient, an injury occurs, 
which may result in a heart attack (myocardial infarction) and often death.
     
     The heart has three main branches of coronary arteries: the left 
anterior descending artery ("LAD"), which descends from the left across the 
heart; the right coronary artery ("RCA"), which extends from the right of the 
heart around to the back of the heart; and the left circumflex artery, which 
extends from the left of the heart around to the back of the heart. The LAD 
is the primary blood supply to the heart and supplies blood to a large amount 
of the myocardium. Studies indicate that restoring blood flow to the LAD is 
the single most important determinant of long-term, event-free survival. 
Traditional treatments for 

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coronary artery disease include drug therapy, coronary artery bypass 
graft ("CABG") surgery and catheter-based treatments, including balloon 
angioplasty, atherectomy and coronary stenting. CABG bypass surgery is highly 
invasive and traumatic to the patient, but is considered the most effective 
and long-lasting treatment for severe coronary artery disease. While 
catheter-based treatments are less invasive, the procedures are limited by 
high rates of restenosis, a renarrowing of the treated coronary artery, which 
generally requires reintervention. Catheter-based treatments have been 
increasingly adopted because they are a less invasive treatment alternative. 
There are approximately 1.0 million catheter-based procedures performed 
annually worldwide. Notwithstanding the introduction of less invasive 
catheter-based treatments, the Company believes that the number of patients 
treated by CABG surgery has continued to grow each year and that more than 
650,000 CABG procedures are performed annually worldwide. The Company 
believes that many of the patients currently undergoing CABG surgery or 
catheter-based treatments are candidates for the MIDCAB or OPCAB procedure.
     
     DRUG THERAPY

     Drug therapy is a non-invasive treatment to improve blood flow and 
alleviate some of the symptoms associated with angina (chest pain). However, 
while some drug therapies may inhibit continued plaque build-up in the 
arteries, drug therapy is not a cure for heart disease. The various drugs 
utilized include nitroglycerin, beta blockers, calcium channel blockers and 
cholesterol lowering drugs. Although drug therapy is the least invasive 
treatment currently available, it is typically expensive because it must be 
chronically administered. Some patients suffer from side effects as well as 
require future interventional procedures.
     
     CORONARY ARTERY BYPASS GRAFT SURGERY

     CABG surgery is a treatment for severe cases of coronary artery disease 
in which blood vessel grafts are used to bypass the site of the blocked 
artery. This procedure restores blood flow by routing around a blockage using 
a healthy blood vessel from another part of the body. Although CABG surgery 
is highly effective in treating coronary artery disease, it is a highly 
invasive, traumatic and expensive procedure. In the United States the cost of 
undergoing CABG is approximately $36,000. The average post-operative hospital 
stay for a person undergoing a CABG procedure in the United States in 1994 
was five to seven days, and the average recuperation period following 
discharge from the hospital was approximately eight to ten weeks.
     
     The CABG procedure involves sawing the patient's sternum or breast bone 
in half, creating a twelve inch incision (sternotomy) for the purpose of 
exposing the patient's heart. The two halves are spread approximately six 
inches apart with a steel sternal retractor, and the heart is exposed. 
Cannulae (plastic tubes) are inserted into the aorta and right atrium of the 
heart, a clamp is placed on the aorta to stop blood flow, and the heart is 
connected to a heart-lung machine (going "on pump") to be slowly cooled and 
eventually stopped before the grafting can occur. The heart-lung machine is a 
series of interconnected specialty medical devices that together function as 
the patient's heart and lungs by temporarily circulating and oxygenating 
blood while the patient's own heart and lungs are rendered inactive. The 
patient's blood is circulated through plastic tubes to reservoirs in the 
heart-lung machine where carbon dioxide is removed, oxygen is replaced, and 
temperature is controlled. The patient's circulation is maintained on the 
external equipment throughout much of the CABG procedure, which averages 
three to six hours, depending on the patient's condition and number of grafts 
that must be created. Often patients undergo multiple vessel procedures, 
which may involve harvesting a saphenous vein from the leg and bypassing 
several blockages to achieve revascularization. When a saphenous vein is used 
as a graft, typically a continuous incision is made from the ankle to the 
thigh of a patient's leg, the saphenous vein is dissected and removed, and 
the wound is sutured closed. A study involving over 1,000 patients indicates 
that the open harvesting 

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of the saphenous vein (saphenectomy) results in wound healing impairment in 
approximately 24% of patients. As an alternative to bypassing the blockage 
with a saphenous vein graft, an internal mammary artery ("IMA") can be 
grafted directly on the coronary artery, bypassing the blocked section. At 
the conclusion of the CABG procedure, cannulae and the heart-lung machine are 
removed, the sternal halves are tied together with steel wire, and the skin 
is closed with suture material.
     
     Despite the invasiveness and trauma of the procedure, CABG is considered 
the most effective and long lasting treatment for severe coronary artery 
disease. Over 85% of bypass grafts formed from saphenous veins are patent 
(open) one year after surgery and over 60% are patent ten years after 
surgery. Grafts using the internal mammary arteries have patency rates of 
over 85% ten years after surgery and are well documented as being highly 
resistant to atherosclerosis.
     
     While every effort is made to minimize potential adverse effects from a 
procedure as traumatic as CABG surgery, published studies have shown that 
approximately 68% of all CABG surgeries have some complications. Some of the 
most severe complications can be attributed to the heart-lung machine, 
including strokes, multiple organ dysfunction, inflammatory complications, 
respiratory failure and post-operative internal bleeding complications. It is 
estimated that stroke, which can have devastating functional consequences, 
occurs in approximately 5% to 8% of all CABG procedures. Another common 
complication of the use of the heart-lung machine is cognitive dysfunction, 
with patients experiencing significant loss of memory, attention span, verbal 
fluency, and psychomotor speed, even as long as six months after CABG 
surgery, regardless of attempts to mitigate or decrease the heart-lung 
machine time and trauma.
     
     Severe complications related to CABG procedures can also result from the 
sternotomy. Significant post-operative sternal infection usually requires 
reoperation and excision of the sternum and muscle flap. The rate of wound 
complications after sternotomy in a major study was 1.1% overall (72 patients 
out of 6,504), with 10 of those 72 dying before being discharged from the 
hospital. The patients with wound complications had a median length of 
hospital stay of 43 days, and triple the hospital costs of patients without 
such complications.
     
     CATHETER-BASED THERAPIES

     Catheter-based therapies, such as balloon angioplasty, atherectomy and 
coronary stenting, have become increasingly popular and effective over the 
last ten years. Balloon angioplasty is a procedure in which a balloon-tipped 
intravascular catheter is inserted into the femoral artery through a small 
incision in the upper thigh, is guided to the lesion (site of plaque) and 
is inflated and deflated several times to reshape the plaque and increase 
blood flow. Additional interventional devices for coronary artery disease 
include atherectomy devices (devices that cut or ablate and remove plaque 
from the arterial wall), laser catheter devices (devices that use laser 
energy to reduce plaque in arteries) and coronary stents (expandable metal 
frames that are positioned within the diseased area in the coronary artery to 
maintain the vessel opening). These treatments occur in a catheterization 
laboratory and are performed on a beating heart so they do not require a 
heart-lung machine. As a result, the length of stay and recuperation period 
are substantially less than those required with conventional CABG. Currently, 
a common form of catheter-based treatment involves the use of balloon 
angioplasty followed by the placement of a coronary stent in the diseased 
artery. As a result of these minimally invasive approaches, patients are 
typically discharged within 24 to 48 hours and can return to a normal 
lifestyle within several days.
     
     While less invasive and traumatic than CABG, catheter-based therapies may
not offer prolonged efficacy. Studies have indicated that within three to six
months after a balloon angioplasty, between 25% and 45% of patients experience
restenosis (a renarrowing of the treated coronary artery). In addition, 5% 

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to 7% of coronary balloon angioplasty patients experience abrupt reclosure of 
the treated vessel, which may be caused in part by flaps or tears of plaque 
that occur in the course of such treatment. In patients with multi-vessel 
coronary artery disease, a randomized study has shown that within three years 
of receiving treatment, only 7% of patients receiving CABG surgery required 
reintervention while 40% of patients receiving balloon angioplasty required 
reintervention. Additional studies have confirmed that approximately 20% of 
balloon angioplasty patients with multi-vessel disease will undergo CABG 
surgery within one year of receiving balloon angioplasty. However, the 
efficacy of catheter-based treatments may be improving. Recent multi-center 
studies indicated that restenosis rates after treatment with stents can be 
reduced by approximately 30% as compared to balloon angioplasty alone. Future 
advancements in stents or other catheter-based treatments may further reduce 
restenosis rates.
     
     The average cost of a balloon angioplasty procedure in the United States 
is approximately $15,000 or less than one-half of the average cost of CABG 
surgery. In a recent study, the cost of balloon angioplasty was equivalent to 
that of CABG three years after the procedure, primarily due to the expense of 
reintervention for the balloon angioplasty patient. In addition, the use of 
stenting greatly increases the cost of a catheter-based procedure. One study 
indicated that the average cost per procedure for elective stenting was 
approximately twice the cost of balloon angioplasty treatment without 
stenting (or nearly equal to the cost of CABG surgery).
     
THE MIDCAB PROCEDURE

     A procedure known as Minimally Invasive Direct Coronary Artery Bypass 
("MIDCAB") applies the techniques of minimally invasive intervention to CABG 
surgery. The Company believes that this procedure will provide patients with 
minimally invasive advantages similar to those of catheter-based procedures 
and clinical benefits comparable to those of CABG procedures. The Company 
believes the MIDCAB procedure offers the following benefits:
     
     ELIMINATES HEART-LUNG MACHINE (OFF PUMP).  Surgery is performed on the 
beating heart, eliminating the need for a heart-lung machine. The heart-lung 
machine is a major contributing factor to the post-operative complications of 
CABG, which include stroke, bleeding and respiratory complications.
     
     MINIMALLY INVASIVE.  Access to the heart is provided through a small 
incision called a mini-thoracotomy, eliminating the need for a sternotomy, in 
which a twelve inch incision is made by sawing through the sternum or 
breastbone and spreading the ribcage apart to expose the heart. The healing 
of the sternum adds to the recovery time for a CABG procedure, even in 
procedures without complications.

     PROVIDES DIRECT ACCESS.  Placement of the mini-thoracotomy provides 
access to the heart and the internal mammary arteries, permitting grafts to 
be performed under the surgeon's direct vision without the need for 
endoscopic equipment.

     REDUCES COSTS.  Studies indicate that fewer complications result in 
shorter hospital stays (approximately two to three days), less recuperation 
time (approximately two weeks) and reduced patient trauma relative to CABG 
surgery. The Company believes that the MIDCAB procedure represents a 
significant advancement in the delivery of coronary revascularization and 
provides patients, payors and providers with a cost-effective alternative to 
existing interventional procedures.
     
     In the CTS MIDCAB procedure, the patient is placed under general 
anesthesia and a mini-thoracotomy is made just below the patient's breast, 
between the ribs. The procedure takes advantage of the fact that the heart 
and the LAD artery are located directly under the incision. The Access MP-TM- 
Lift is inserted into the mini-thoracotomy and expanded to create an opening 
and offset the ribs. Under direct vision, 

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without the need for endoscopic equipment, the surgeon then dissects the IMA 
from the chest wall. The IMA branches are gently exposed and are then clipped 
and cauterized. After the IMA is harvested to a satisfactory length the 
Access MP-TM- Lift is removed and the Access Platform is inserted into the 
chest opening. A small incision is then made in the pericardium (a fibrous, 
fluid filled sac that holds the heart in place in the chest cavity) and the 
LAD artery is exposed. The CTS MIDCAB procedure requires only a small 
pericardial incision, which allows the pericardium to continue to provide 
some support to the heart. The surgeon positions the Stabilizer at the 
grafting site isolating it and rendering it motionless. A small incision is 
made in the LAD artery at the site of the grafting, and the IMA artery is 
grafted, under the surgeon's direct vision, onto the beating heart. After the 
grafting is finished, the chest is sewn shut and the procedure is complete. 
     
     Despite the potential benefits of the MIDCAB procedure for the treatment 
of coronary heart disease, it is regularly performed by only a limited number 
of cardiothoracic surgeons. The Company believes that many cardiothoracic 
surgeons have been reluctant to attempt or have stopped performing the MIDCAB 
procedure because of, among other things, the difficulties of performing 
surgery on the beating heart including harvesting the IMA and in most cases 
its limitation to the LAD artery or branches off the LAD. Of the MIDCAB 
procedures performed to date, virtually all have been performed on the LAD or 
branches off the LAD. During 1998 the Company believes that approximately 17 
percent of the units shipped by the Company were used in a MIDCAB procedure. 
          
THE OPCAB PROCEDURE

     A procedure known as Off Pump Coronary Artery Bypass ("OPCAB") has been 
developed that offers the same benefits of MIDCAB except that it is done 
through a mid-line incision (mini-sternotomy or sternotomy). This procedure 
provides surgeons the ability to do multi-vessel bypass procedures on a 
beating heart since it allows greater visualization of the heart and more 
freedom in lifting and rotating the heart.  During 1998 the Company believes 
that approximately 83 percent of the units shipped by the Company were used 
in an OPCAB procedure.

     Despite the potential benefits of the OPCAB procedure for the treatment 
of coronary heart disease, it is currently performed by a limited number of 
cardiothoracic surgeons. The Company believes that some cardiothoracic 
surgeons maybe reluctant to attempt the OPCAB procedure because of, among 
other things, the difficulties of performing surgery on the beating heart and 
the difficulties of positioning the heart to bypass certain arteries.  The 
Company is unable to predict how quickly, if at all, the OPCAB procedure will 
be adopted by the medical community or, if it is adopted, the number of OPCAB 
procedures that will be performed.

     Although the Company believes that the CTS OPCAB and MIDCAB procedures have
significant advantages over competing procedures, broad-based clinical adoption
of the procedures will not occur until physicians determine that the procedures
are an attractive alternative to current treatments for coronary artery disease.
The Company believes that physician endorsements are essential for clinical
adoption of these procedures, and there can be no assurance that physicians
currently endorsing off-pump CABG will continue to do so. Clinical adoption will
also depend upon the Company's ability to facilitate training of cardiothoracic
surgeons to perform CABG on a beating heart, and the willingness of such
surgeons to perform such a procedure. Patient acceptance of the procedures will
depend in part upon physician recommendations as well as other factors,
including the degree of invasiveness, the effectiveness of the procedures and
rate and severity of complications associated with the procedures as compared to
other treatments. Even if the clinical efficacy of the OPCAB and MIDCAB
procedures are established, physicians may elect not to recommend the procedures
unless acceptable reimbursement from health care 

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payors is available. Health care payor acceptance may require evidence of the 
cost effectiveness of the OPCAB and MIDCAB procedures as compared to other 
currently available treatments. There can be no assurance that the OPCAB or 
MIDCAB procedures will gain significant clinical adoption. Failure of the 
OPCAB and MIDCAB procedures to achieve significant clinical adoption would 
have a material adverse effect on the Company's business, financial condition 
and results of operations.

CTS PRODUCTS

     The majority of the Company's products are disposable surgical 
instruments designed to facilitate the OPCAB and MIDCAB procedures. The 
Company has seen the adoption of the off-pump beating heart CABG grow as it 
continues to develop products that enable the majority of cardiothoracic 
surgeons, using their existing skills coupled with Company sponsored 
training, to perform the OPCAB and MIDCAB     procedures.  The Company's 
current and future products can be placed into one of four groups: beating 
heart products, stopped heart products, harvesting products and ancillary 
products.
     
     Beating Heart Products - OPCAB Procedures 
     
     In April and June of 1998 the Company shipped its first products 
specifically designed for the OPCAB procedure.  The OPCAB Access Systems 
(Access MV2-TM- was first shipped in April 1998 and Access Plus-TM- was first 
shipped in June 1998) enable off-pump beating heart CABG procedures utilizing 
a conventional mid-sternal approach.  
     
     These systems are made up of an access platform, stabilizer and internal 
mammary artery ("IMA") clip.  The access platform is designed to maximize 
access to the chest cavity through a mid-line incision, providing a full 
one-inch wider opening of the sternum than the previous CTS product.  The 
stabilizer incorporates an articulating foot that is attached by a mounting 
system to the access platform. The stabilizer is designed to apply slight 
pressure to the myocardium and thereby isolate the diseased artery, minimize 
the motion of the beating heart and permit the surgeon to complete the graft. 
 The IMA clip is designed to hold the IMA while the surgeon is sewing the 
graft.  The Access Plus differs from the Access MV2 in that it has an 
additional two places to mount the stabilizer, increasing the surgeon's 
flexibility to access the target arteries without repositioning the access 
platform.
     
     In January 1999 the Company started shipping the CTS-Registered 
Trademark- Access Ultima-TM- System, its next generation OPCAB procedure 
system.  The access platform provides a rail system for mounting the 
stabilizer, pericardial suture holders and a multi-use drive mechanism.  The 
stabilizer mounting system was enhanced to provide a greater range of motion 
for the stabilizer.  This system further improves the surgeon's flexibility 
to access the target arteries.
     
     Beating Heart Products - MIDCAB Procedures
     
     The CTS-Registered Trademark- Access MV-TM- Stabilizer Set and the 
CTS-Registered Trademark- Access MP-TM- Lift make up a system  designed to 
provide the necessary access to the chest cavity through a mini-thoracotomy, 
simplify the harvesting of the internal mammary artery, and optimize the 
conditions necessary for a quality graft to be performed on a beating heart. 
In addition to the access platform and stabilizer, this system also provides a 
unique spreading device that offsets the ribs to provide a window into the 
chest cavity so the surgeon can harvest the IMA without using an endoscope.

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     Stopped Heart Products
     
     During the second quarter of 1999 the Company expects to start shipping 
the CTS-Registered Trademark- Aurora-TM- MultiTrac System.  The system is 
designed to optimize the working space and organization of a less invasive 
valve surgery. The system includes an access platform with suture holders and 
a multi-use drive mechanism and an integrated tissue retractor and valve 
retainer.
     
     During 1999, upon receiving Federal Drug Administration ("FDA") 
clearance, the Company expects to start shipping the CTS-Registered 
Trademark- Voyager-TM-Quad Cannula.  This device is designed to offer a less 
traumatic way of eliminating blood flow to the heart during less invasive 
valve surgery and conventional CABG surgery.  Through a single incision into 
the aorta this device provides arterial perfusion, intra-aortic occlusion, 
antegrade cardioplegia delivery and aortic venting.
     
     Harvesting Products
     
     In the third and fourth quarters of 1998 the Company had a limited 
launch of the CTS-Registered Trademark- Ceres-TM- SV System.  The system is 
designed to minimize patient trauma by endoscopic harvesting of the saphenous 
vein from just a few small incisions.  The Company is not currently shipping 
this product and with the experienced gained from this limited launch, CTS 
plans to develop its second-generation saphenous vein harvesting system.
     
     Ancillary Products
     
     In the first quarter of 1998, the Company commenced shipments of the 
CTS-Registered Trademark- FloCoil-TM- Shunt.  The FloCoil is inserted into 
the coronary artery to provide myocardial protection and create a near 
bloodless field during the suturing of the coronary anastomosis. 
     
     In the fourth quarter of 1998, the Company commenced shipments of 
Cardioflon-Registered Trademark- and Cardionyl-Registered Trademark- sutures 
under a distribution agreement with Peters Laboratories, a corporation of 
France.  These sutures have been designed for use in various cardiac surgery 
procedures. 
     
     In February of 1999, the Company commenced shipments of the 
CTS-Registered Trademark- Aries-TM- CO2 Blower/Mister. The Aries provides 
controlled delivery of CO2 and saline to improve visibility during the 
anastomosis by keeping blood away from the anastomotic site.
     
     In February of 1999, the Company commenced shipments of the 
CTS-Registered Trademark- Coronary FloMeter System under a distribution 
agreement with Transonic Systems, Inc.  The CTS Coronary FloMeter System 
allows the surgeon to confirm acute graft patency and is made up of a 
FloMeter and FloProbes.  The FloMeter contains the electronics, printer and 
LED display showing blood flow measurement in millimeters per minute and 
provides a hard copy record of real time diastolic flow pattern.  The 
FloProbe is placed on the artery and using ultrasound technology captures the 
information necessary for the FloMeter to determine and display the blood 
flow rate of the artery being measured.
     
     During the second quarter of 1999, the Company expects to start shipping 
CTS-Registered Trademark- OPCAB-TM- Procedure Kits.  These kits package 
together essential accessories and devices for off-pump beating heart bypass 
surgery. Included in the kits are an aortic punch, silastic tape, soft jaw 
bulldog clamp, CTS Aries Blower/Mister and optional CTS FloCoil Shunts.  
     
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SALES, MARKETING AND DISTRIBUTION

     The Company markets its products principally to cardiac surgeons.  The 
Company's marketing strategy is to generate broad based market acceptance of 
the OPCAB procedure, the MIDCAB procedure and other less invasive cardiac 
surgery procedures by sponsoring educational programs and  surgeon training 
programs, and by cultivating relationships with opinion leaders in cardiac 
surgery. The Company has established a Medical Advisory Board comprised of 
cardiothoracic surgery opinion leaders, prominent surgeons and leading 
interventional cardiologists. Some of the members of the Medical Advisory 
Board as well as other key off-pump surgeons participate in  
Company-sponsored educational and training sessions, thereby encouraging 
acceptance of the OPCAB and MIDCAB procedures among cardiothoracic surgeons 
and the integration of beating heart CABG into their hospital and surgical 
practices.
     
     The Company currently has a direct sales force of twenty-one people in 
the United States which are supported by three clinical sales associates. For 
most of 1998 the Company had CardioThoracic Systems, GmBH, a wholly owned 
subsidiary, in Dusseldorf Germany which supported a direct sales and 
marketing organization for Germany.  In accordance with a restructuring plan, 
during the fourth quarter of 1998 the Company closed its Germany subsidiary.  
In the first quarter of 1999, CTS entered into a distribution agreement with 
a distributor in Germany. In other international markets, the Company sells 
its products through distributors. 
     
     The Company has a small sales and marketing organization when compared 
to most of its competitors. There can be no assurance that the Company will 
be able to build a larger direct sales force or marketing organization, that 
maintaining a direct sales force or marketing organization will be cost 
effective, or that the Company's sales and marketing efforts will be 
successful. There can be no assurance that the Company will be able to 
maintain agreements with distributors, or that such distributors will devote 
adequate resources to selling the Company's products.  Since the Company has 
entered into distribution agreements for the sale of its products in certain 
countries, it will be dependent upon the efforts of these third parties, and 
there can be no assurance that such efforts will be successful. Failure to 
maintain or grow an effective direct sales and marketing organization or to 
maintain effective distributors could have a material adverse effect on the 
Company's business, financial condition and results of operations.

CUSTOMER TRAINING 

     The Company believes that its CORriculum-SM- training and education 
program plays a important role in the adoption of the OPCAB and MIDCAB 
procedures. Through the CORriculum Institute of Education, CTS partners with 
some of the country's top opinion leaders to train surgeons and their staff 
members on the latest techniques in minimally invasive cardiac surgery.  The 
CORriculum continuum utilizes a multi-step process aimed at driving adoption. 
 This process begins with a sales inservicing call, and is followed by a 
series of group and one-on-one training courses that combine lectures and 
live cases.  During 1998, nearly 1,300 surgical personnel were trained 
through the Company's programs.

RESEARCH AND DEVELOPMENT

     The Company directs its research efforts toward development of 
proprietary surgical instruments and systems for cardiothoracic minimally 
invasive procedures, including off-pump beating heart coronary artery bypass, 
saphenous vein and other arterial conduit harvesting and on-pump less 
invasive valve surgery and coronary procedures. Some of the products under 
development will require regulatory clearance or approval prior to 
commercialization.  As of January 1, 1999, the Company's research and 
development staff consisted of 45 full-time engineers, technicians, 
machinists and managers who have substantial experience in the development of 
medical devices, including expertise in the application of mechanical and 
electrical design principles to devices for cardiovascular applications. 
Research and 

                                       10

<PAGE>

development expenses for the years ended January 1, 1999, January 2, 1998 and 
December 31, 1996 were $11.5 million, $10.8 million and $11.5 million, 
respectively.
     
MANUFACTURING

     To date, the Company's manufacturing activities have consisted of 
assembling CTS' various products.  The Company purchases most of the 
components for its products from various independent suppliers that are 
either standard components or are built or molded to the Company's 
proprietary specifications. In addition, the Company contracts with third 
parties for the performance of certain processes involved in the 
manufacturing cycle, such as finished product sterilization. Some of these 
components and processes may only be available from single-source vendors. 
Any prolonged supply interruption or yield problems experienced by the 
Company due to a single-source vendor could have a material adverse effect on 
the Company's ability to manufacture its products until a new source of 
supply is qualified. Many of the Company's components are molded parts that 
require custom tooling which is manufactured and maintained by third party 
vendors.  Should such custom tooling be damaged it could result in a supply 
interruption that could have a material adverse effect on the Company's 
ability to manufacture its products until a new tool is manufactured.  Also, 
the Company's new product development efforts and the timeliness of new 
product launches could be significantly affected by tooling vendors ability 
to meet completion and quality commitments on the manufacture of custom 
tooling.  As the Company increases production, it may from time to time 
experience lower than anticipated yields or production constraints, resulting 
in delayed product shipments, which could have a material adverse effect on 
the Company's business, financial condition and results of operation.
     
     The Company's manufacturing facilities are subject to the FDA's Quality 
System Regulations ("QSR"), (formerly referred to as Good Manufacturing 
Practices, GMPs) international quality standards (ISO 9001) and other 
regulatory requirements. The Company has received ISO 9001 certification, has 
obtained its California Device Manufacturing license and has successfully 
undergone a facility inspection by the FDA. Difficulties encountered by the 
Company in maintaining its facilities in accordance with QSR regulations, 
international quality standards or other regulatory requirements could entail 
a delay or termination of production, which could have a material adverse 
effect on the Company's business, financial condition and results of 
operations.
     
     The Company has no experience manufacturing its products in the volumes 
that would be necessary for the Company to achieve profitable operations. 
There can be no assurance that reliable, high-volume manufacturing can be 
established or maintained at commercially reasonable costs. Companies often 
encounter difficulties in scaling up production, including problems involving 
production yield, quality control and assurance, and shortages of qualified 
personnel. Difficulties encountered by the Company in manufacturing scale-up 
could have a material adverse effect on the Company's business, financial 
condition and results of operations.

PATENTS AND PROPRIETARY RIGHTS

     The Company's ability to compete effectively will depend in part on its 
ability to develop and maintain proprietary aspects of its technology. The 
Company owns eleven issued United States patents, including one which 
contains claims that cover certain aspects of the Company's FloCoil-TM- 
Shunt. Additionally, the Company has fifty-three United States patent 
applications and various foreign patent applications pending. The Company is 
the licensee of a United States patent and several related pending 
applications for a heart valve insertion and stapling device, and a United 
States patent application for bipolar electrosurgical scissors.  
Additionally, the Company has acquired exclusive rights to a United States 
patent covering methods of minimally invasive harvesting.

                                       11

<PAGE>
     
      There can be no assurance that any issued patents or any patents which 
may be issued as a result of the Company's licensed patent applications or 
pending United States and foreign patent applications will provide any 
competitive advantages for the Company's products or that they will not be 
successfully challenged, invalidated or designed around in the future. In 
addition, there can be no assurance that competitors, many of which have 
substantial resources 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 and sell 
its products either in the United States or in international markets.
     
     The medical device industry has been characterized by extensive 
litigation regarding patents and other intellectual property rights, and 
companies in the medical device industry have employed intellectual property 
litigation to gain a competitive advantage. There can be no assurance that 
the Company will not become subject to patent infringement claims or 
litigation or interference proceedings declared by the USPTO to determine the 
priority of inventions. The defense and prosecution of intellectual property 
suits, USPTO interference proceedings and related legal and administrative 
proceedings are both costly and time-consuming. Litigation 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. Any litigation or interference 
proceedings will result in substantial expense to the Company and significant 
diversion of effort by the Company's technical and management personnel. An 
adverse determination in litigation or interference proceeding to which the 
Company becomes a party could subject the Company to significant liabilities 
to third parties or require the Company to seek licenses from third parties 
or prevent the Company from selling its products in certain markets, or at 
all. Costs associated with settlements, licensing and similar arrangements 
may be substantial and could include ongoing royalties. Furthermore, there 
can be no assurance that the necessary licenses would be available to the 
Company on satisfactory terms, if at all. Adverse determinations 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.

     Congress enacted legislation, which became effective October 1, 1996, 
that places certain restrictions on the ability of medical device 
manufacturers to enforce certain patent claims, relating to surgical and 
medical methods, against medical practitioners.  Such limitations on the 
enforceability of patent claims, relating to medical and surgical methods, 
against medical practitioners could have a material adverse effect on the 
Company's ability to protect its proprietary methods and procedures against 
medical practitioners.

     In addition to patents, the Company relies on trade secrets and 
proprietary know-how, which it seeks to protect, in part, through 
confidentiality and proprietary information agreements. There can be no 
assurance that such confidentiality or proprietary information agreements 
will not be breached, that the Company would have adequate remedies for any 
breach, or that the Company's trade secrets will not otherwise become known 
to or be independently developed by competitors.

COMPETITION

     The Company believes that the principal competitive factors in the market
for treatment of cardiovascular disease are safety, efficacy, ease of use,
reliability and cost effectiveness. The Company believes that the OPCAB and
MIDCAB procedures performed with the Company's products will be substantially
less costly than highly-invasive, traditional surgical procedures and may
ultimately replace 

                                       12

<PAGE>

these procedures in some applications. The Company believes that its products 
will enable surgeons to perform coronary bypass surgery less invasively, in a 
shorter period of time and with reduced patient trauma, resulting in reduced 
recuperation time in the ICU, shorter hospital stays and faster recovery, as 
well as lower complication rates. As a result, the Company believes that its 
products will compete favorably with respect to each of these factors, 
although no assurance can be given that it will compete favorably.
     
     The medical device industry and the market for treatment of 
cardiovascular disease, in particular, are characterized by rapidly evolving 
technology and intense competition. A number of companies, including Johnson 
& Johnson, Boston Scientific Corporation, Guidant Corporation and Medtronic, 
Inc., are currently marketing stents, catheters, lasers, drugs and other less 
invasive means of treating cardiovascular disease. Many of these less 
invasive treatments, as well as CABG surgery, are widely accepted in the 
medical community and have a long history of safe and effective use. Many of 
the Company's competitors have substantially greater capital resources, name 
recognition and expertise in and resources devoted to research and 
development, manufacturing and marketing and obtaining regulatory clearances 
or approvals. Furthermore, competition in the emerging market for minimally 
invasive cardiac surgery is intense and is expected to increase. Medtronic, 
Inc., Genzyme Surgical Products Corp., Johnson & Johnson, Guidant 
Corporation, Baxter International, Inc., Heartport, Inc. and United States 
Surgical Corp. are marketing or have announced that they are developing 
products to be used in MICS procedures. There can be no assurance that MICS 
procedures will replace any current treatments. Additionally, even if MICS 
procedures are widely adopted, there can be no assurance that the Company's 
competitors will not succeed in developing or marketing alternative 
procedures and technologies, competing devices to perform the same 
procedures, or therapeutic drugs that are more effective than the Company's 
products or that render the Company's products or technologies obsolete or 
not competitive. In addition, there can be no assurance that existing 
products for other surgical uses will not be used in MICS procedures. 
Furthermore, sales of the Company's products could be adversely affected by 
reuse, notwithstanding the instructions in the Company's clinical protocols 
and product labeling indicating that certain components of the Company's 
products are single-use devices.  Such competition or reuse could have a 
material adverse effect on the Company's business, financial condition and 
results of operations.
     
GOVERNMENT REGULATION

     The medical devices to be marketed and manufactured by the Company are 
subject to extensive regulation by the FDA, and, in some instances, by 
foreign governments. Pursuant to the Federal Food, Drug, and Cosmetic Act of 
1976, 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, 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 three classes 
(Class I, II or III), on the basis of the controls deemed necessary by the 
FDA to reasonably assure their safety and effectiveness. Under FDA 
regulations, Class I devices are subject to general controls (for example, 
labeling, premarket notification and adherence to QSRs) and Class II devices 
are subject to general and special controls (for example, performance 
standards, postmarket surveillance, patient registries and FDA guidelines). 
Generally, Class III devices are those which must receive premarket approval 
by the FDA to ensure their safety and effectiveness (for example, 
life-sustaining, life-supporting and implantable devices, or new devices 
which have not been found substantially equivalent to legally marketed 
devices).  

                                       13

<PAGE>
     
     Before a new device can be introduced into the United States market, the 
manufacturer must generally obtain marketing clearance through either a 
510(k) premarket notification or a premarket approval ("PMA") application. A 
510(k) clearance will be granted if the submitted information establishes 
that the proposed 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 a PMA. The FDA may determine that a proposed device is 
not substantially equivalent to a legally marketed device, or that additional 
information or data are needed before a substantial equivalence determination 
can be made. A request for additional data may require that clinical studies 
of the device's safety and efficacy be performed. 
     
     Commercial distribution of a device for which a 510(k) premarket 
notification is required can begin only after the FDA issues an order finding 
the device to be "substantially equivalent" to a predicate device. The FDA 
has recently been requiring a more rigorous demonstration of substantial 
equivalence than in the past. It generally takes from four to six months from 
the date of submission to obtain a 510(k) clearance, 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 "not substantially equivalent" determination, or a request for 
additional information, could delay the market introduction of new products 
that fall into this category and could have a materially adverse effect on 
the Company's business, financial condition and results of operations. For 
any of the Company's products that were cleared through the 510(k) process, 
modifications or enhancements that could significantly affect the safety or 
efficacy of the device or that constitute a major change to the intended use 
of the device will require new 510(k) submissions.
     
     A PMA application must be filed if a proposed device is not 
substantially equivalent to a legally marketed Class I or Class II device, or 
if it is a Class III device for which the FDA has called for PMAs. A PMA 
application must be supported by valid scientific evidence which typically 
includes extensive data, including human clinical trial data to demonstrate 
the safety and effectiveness of the device. The 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 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. An FDA review of a PMA application 
generally takes one to two 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 review process, the FDA generally will conduct an inspection of 
the manufacturer's facilities to ensure that the facilities are in compliance 
with 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, which usually contains a number of conditions that must be
met in order to secure final approval of the PMA. When and if those 

                                       14

<PAGE>

conditions have been fulfilled to the satisfaction of the FDA, the agency 
will issue a PMA approval letter, authorizing commercial marketing of the 
device for certain indications. If the FDA's evaluation of the PMA 
application or manufacturing facilities are not favorable, the FDA will delay 
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 PMA approval may be delayed for several years while additional clinical 
trials are conducted and submitted in an amendment to the PMA. The PMA 
process is 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. Modifications to a device that is the subject of an approved PMA, 
its labeling, or manufacturing process may require approval by the FDA of PMA 
supplements or new PMAs. Supplements to a PMA often require the submission of 
the same type of information required for an initial PMA, except that the 
supplement is generally limited to that information needed to support the 
proposed change from the product covered by the original PMA.
     
     If human clinical trials of a device are required in connection with 
either a 510(k) premarket notification or a PMA, 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 prior to commencing human clinical trials. The 
IDE application must be supported by data, typically including the results of 
animal and laboratory testing. If the IDE application is reviewed and 
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 sell 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.
     
     Any products manufactured or distributed by the Company pursuant to the 
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 QSR regulations which impose certain 
procedural and documentation requirements upon the Company with respect to 
manufacturing and quality assurance activities. The FDA has recently 
finalized changes to the QSR regulations, which will likely increase the cost 
of complying with 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 marketed. 
Any applicable state or local regulations may hinder the Company's ability to 
market its products in those states or localities. Manufacturers are 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 or that such laws or regulations will not have a material adverse 
effect upon the Company's ability to do business.

                                       15

<PAGE>

     
     Exports of products that have market clearance from the FDA do not 
require export approval. However, some foreign countries require 
manufacturers to provide an FDA certificate for products for export ("CPE") 
which requires the device manufacturer to certify to the FDA that the product 
has been granted premarket clearance in the United States and that the 
manufacturing facilities appeared to be in compliance with QSRs at the time 
of the last QSR inspection. The FDA will refuse to issue a CPE if significant 
outstanding QSR violations exist.
     
     Exports of products subject to the 510(k) notification requirements, but 
not yet cleared to market, are permitted without FDA export approval provided 
certain requirements are met. Unapproved products subject to the PMA 
requirements must be approved by FDA for export. To obtain FDA export 
approval certain requirements must be met and information must be provided to 
the FDA, including documentation demonstrating that the product is approved 
for import into the country to which it is to be exported and, in some 
instances, safety data from animal or human studies. There can be no 
assurance that the FDA will grant export approval when such approval is 
necessary, or that countries to which the devices are to be exported will 
approve the devices for import. Failure of the Company to obtain CPEs, meet 
the FDA's export requirements, or obtain FDA export approval when required to 
do so, could have a material adverse effect on the Company's business, 
financial condition and results of operations.
     
     The introduction of the Company's products in foreign markets will also 
subject the Company to foreign regulatory clearances, registrations or 
approvals which may impose additional substantial costs and burdens. 
International sales of medical devices are subject to the regulatory 
requirements of each country. The regulatory review process varies from 
country to country. Many countries also impose product standards, packaging 
requirements, labeling requirements and import restrictions on devices. In 
addition, each country has its own tariff regulations, duties and tax 
requirements. The approval by the FDA and foreign government authorities is 
unpredictable and uncertain, and no assurance can be given that the necessary 
clearances, registrations or approvals will be granted on a timely basis or 
at all. Delays in receipt of, or a failure to receive, such clearances, 
registrations or approvals, or the loss of any previously received, 
clearances, registrations or approvals, could have a material adverse effect 
on the business, financial condition and results of operations of the Company.
     
     The European Union has promulgated rules that require that medical 
products receive the right to affix the CE mark prior to their sale. The CE 
mark is an international symbol of adherence to quality assurance standards 
and compliance with applicable European medical device directives. In order 
to maintain the right to affix the CE mark to its current and future 
products, the Company must maintain processes that meet ISO 9000 quality 
standards and have each individual product comply with the Medical Devices 
Directive 93/42/EEC. In January 1997 the Company received ISO 9001 
certification and CE Mark approval for the first generation MIDCAB products.  
Subsequent products must conform to the Medical Devices Directive in order to 
affix the CE mark.
     
     The CTS Access Ultima System, CTS Access MV Stabilizer Set, CTS Access 
MP Lift, CTS Aurora MultiTrac System and CTS Ceres SV System are Class I 
devices which do not require marketing clearance from the FDA.  The Company 
also has the right to affix the CE Mark to these products.  The CTS FloCoil 
Shunt, CTS Bipolar Scissors and CTS Aries CO2 Blower/Mister received FDA 
marketing clearance through the 510(k) process.  The Company has also met the 
necessary requirements to affix the CE Mark to these products.  The 
manufacturers of the CTS Coronary FloMeter System, CTS Coronary FloProbes, 
Cardioflon Sutures, Cardionyl Sutures and other products in the CTS OPCAB 
Procedure Kits have received FDA marketing clearance through the 510(k) 
process.  The Company is currently in the process of obtaining 510(k) 
clearance for the CTS Voyager Quad Cannula.  There can be no assurance that 
the Company will obtain 510(k) clearance to market the CTS Voyager Quad 
Cannula.

                                       16

<PAGE>

     
     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 FDA clearance that 
could delay or preclude the Company from selling its potential products in 
the United States. Failure to receive, or delays in the receipt of FDA 
clearances or approvals could have a material adverse effect on the Company's 
business, financial condition and results of operations.
      
     The Company's products are subject to continued and pervasive regulation 
by the FDA and other foreign and domestic regulatory authorities. 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 or that laws or regulations will not have a material adverse 
effect upon the Company's business, financial condition or results of 
operations.
     
     Regulatory clearances or approvals, if granted, may include significant 
limitations on the indicated uses for which the Company's products may be 
marketed. FDA enforcement policy strictly prohibits the marketing of FDA 
cleared or approved medical devices for unapproved uses. In addition, the 
Company's manufacturing processes are required to comply with the QSR 
regulations of the FDA. These regulations include design, testing, 
production, control, documentation and other requirements. Enforcement of 
QSRs has increased significantly in the last several years, and the FDA has 
publicly stated that compliance will be more strictly scrutinized. The 
Company's facilities and manufacturing processes, as well as those of any 
future third-party suppliers, will be subject to periodic inspection by the 
FDA, the California Department of Health Services and other agencies. The 
Company has received ISO 9001 certification, has obtained its California 
Device Manufacturing license and has successfully undergone a facility 
inspection by the FDA. Failure to comply with these and other applicable 
regulatory requirements could result in, among other things, warning letters, 
fines, injunctions, civil penalties, recall or seizure of products, total or 
partial suspension of production, refusal of the government to grant 
premarket clearance or premarket approval for devices, withdrawal of 
clearances or approvals and criminal prosecution, any of which could have a 
material adverse effect on the Company's business, financial condition and 
results of operations.
     
THIRD-PARTY REIMBURSEMENT

     In the United States, health care providers, such as hospitals and 
physicians, that purchase medical devices such as the Company's products, 
generally rely on third-party payors, principally Medicare, Medicaid and 
private health insurance plans, to reimburse all or part of the cost of the 
procedure in which the medical device is being used. Reimbursement for 
cardiovascular surgery, including CABG surgery, using devices that have 
received FDA approval, has generally been available in the United States. In 
addition, certain health care providers are moving toward a managed care 
system in which such providers contract to provide comprehensive health care 
for a fixed cost per person. The Company is unable to predict what changes, 
if any, may be made in the reimbursement methods utilized by third-party 
health care payors. The Company could be adversely affected by changes in 
reimbursement policies of government or private health care payors, 
particularly to the extent any such changes affect reimbursement for the 
procedures in which the Company's products are intended to be used. Failure 
by physicians, hospitals and other potential users of the Company's products 
to obtain sufficient reimbursement from health care payors for the procedures 
in which the Company's products are intended to be used or adverse changes in 
government and private third-party payors' policies toward reimbursement for 
such procedures could have a material adverse effect on the Company's 
business, financial condition and results of operations.

                                       17

<PAGE>
     
     Market acceptance of the Company's products in international markets is 
dependent, in part, upon the availability of reimbursement within prevailing 
health care payment systems. Reimbursement and health care payment systems in 
international markets vary significantly by country, and include both 
government sponsored health care and private insurance. The Company intends 
to seek international reimbursement approvals, although there can be no 
assurance that any such approvals will be obtained in a timely manner, if at 
all, and failure to receive international reimbursement approvals could have 
a material adverse effect on market acceptance of the Company's products in 
the international markets in which such approvals are sought.
     
PRODUCT LIABILITY AND INSURANCE

     The development, manufacture and sale of medical products entail 
significant risk of product liability claims and product recalls. The 
Company's current product liability insurance coverage limits are $5,000,000 
per occurrence and $5,000,000 in the aggregate, and there can be no assurance 
that such coverage limits are adequate to protect the Company from any 
liabilities it might incur in connection with the development, manufacture 
and sale of its products. In addition, the Company may require increased 
product liability insurance coverage as product sales increase.  Product 
liability insurance is expensive and in the future may not be available to 
the Company on acceptable terms, if at all. A successful product liability 
claim or series of claims brought against the Company in excess of its 
insurance coverage, or a product recall, could have a material adverse effect 
on the Company's business, financial condition and results of operations.

EMPLOYEES

     As of January 1, 1999, the Company had 147 full-time employees. 
Forty-five persons are engaged in research and development and regulatory 
affairs activities, fifty-five persons are engaged in sales and marketing 
activities, thirty-four persons are engaged in manufacturing and quality 
assurance and thirteen persons are engaged in finance and administration. No 
employees are covered by collective bargaining agreements, and the Company 
believes it maintains good relations with its employees.
     
OTHER RISK FACTORS 

     This annual report on Form 10-K contains forward-looking statements 
within the meaning of Section 27A of the Securities Act of 1933 and Section 
21E of the Securities and Exchange Act of 1934.  The Company's future results 
could differ materially from those anticipated by such forward-looking 
statements as a result of certain factors including those set forth in the 
following factors and elsewhere in this annual report on Form 10-K.
     
     LIMITED OPERATING HISTORY; HISTORY OF LOSSES AND EXPECTATION OF FUTURE
LOSSES.  The Company has a limited operating history upon which evaluation of
its prospects can be made. Such prospects must be considered in light of the
substantial risks, expenses and difficulties encountered by entrants into the
medical device industry, which is characterized by an increasing number of
participants, intense competition and a high failure rate. The Company began
commercial sales of its products in December 1996 and has limited experience in
manufacturing, marketing and selling its products. The Company has experienced
operating losses since its inception, and, as of January 1, 1999, the Company
had an accumulated deficit of approximately $62.0 million. The development and
commercialization of the Company's products will continue to require substantial
development, regulatory, sales and marketing, manufacturing and other
expenditures. The Company expects its operating losses to continue at least
through 1999 as it expends substantial resources to continue development of its
products, obtain additional regulatory clearances or approvals, continue to
market, sell and manufacture its products, support its 

                                       18

<PAGE>

finance and administrative organizations and conduct further research and 
development. There can be no assurance that the Company's products will gain 
enough commercial acceptance to allow the Company to generate the revenues 
necessary to achieve profitability.

     UNCERTAINTY OF CLINICAL ADOPTION OF MICS PROCEDURES. Most of the 
Company's current products are designed to enable the majority of 
cardiothoracic surgeons to perform minimally invasive cardiac surgery 
("MICS") on a beating heart. Accordingly, the Company's success is dependent 
upon acceptance of this procedure by the medical community as a reliable, 
safe and cost effective alternative to existing treatments for 
revascularizing blocked coronary arteries. The Company is unable to predict 
how quickly, if at all, MICS will be adopted by the medical community or, if 
it is adopted, the number of MICS procedures that will be performed. The 
medical conditions that can be treated with MICS can also be treated with 
widely accepted surgical procedures such as CABG surgery and catheter-based 
treatments, including balloon angioplasty, atherectomy and coronary stenting. 
Although the Company believes that MICS  has significant advantages over 
competing procedures, broad-based clinical adoption of MICS will not occur 
until physicians determine that the approach is an attractive alternative to 
current treatments for coronary artery disease. The Company believes that 
continued physician endorsements will be essential for clinical adoption of 
MICS, and there can be no assurance that such endorsements will be continued. 
Clinical adoption will also depend upon the Company's ability to facilitate 
training of cardiothoracic surgeons to perform MICS, and the willingness of 
such surgeons to perform MICS procedures. Patient acceptance of MICS will 
depend in part upon physician recommendations as well as other factors, 
including the degree of invasiveness, the effectiveness of the procedure and 
rate and severity of complications associated with MICS as compared to other 
treatments. Even if the clinical efficacy of MICS is established, physicians 
may elect not to recommend the procedure unless acceptable reimbursement from 
health care payors is available. Health care payor acceptance may require 
evidence of the cost effectiveness of the MICS as compared to other currently 
available treatments. For all of these reasons, there can be no assurance 
that MICS will gain clinical adoption. Failure of MICS to achieve significant 
clinical adoption would have a material adverse effect on the Company's 
business, financial condition and results of operations.

     Most of the Company's current products are designed for beating heart 
MICS and are expected to account for the great majority of the Company's 
revenues in 1999.  The Company manufactured and sold approximately 23,700 
beating heart MICS systems in the two years ended January 1, 1999, but there 
can be no assurance that demand for the Company's  current or future products 
will be sufficient to allow profitable operations. Failure of the Company's 
current and future products to be successfully commercialized at 
significantly higher volumes would have a material adverse effect on the 
Company's business, financial condition and results of operations.
     
     EARLY STAGE OF DEVELOPMENT AND COMMERCIALIZATION; NO ASSURANCE OF 
ABILITY TO MANAGE GROWTH.  The Company believes that the Company's products 
could address a large potential market. There can be no assurance that the 
Company's marketing efforts will result in significant demand for its 
products, or that the current demand for the Company's products will grow. 
Even if demand for the Company's products does grow, there can be no 
assurance that the Company will be able to develop the necessary 
manufacturing capability; build and train the necessary manufacturing, sales 
and marketing teams; attract, retain and integrate the required key 
personnel; or implement the financial and management systems to meet growing 
demand for its products. Failure of the Company to successfully manage its 
growth would have a material adverse effect on the Company's business, 
financial condition and results of operations.
     
     RISKS RELATING TO INTERNATIONAL OPERATIONS.  The Company markets its 
products in international markets. Changes in overseas economic conditions, 
currency exchange rates, foreign tax laws, or tariffs or 

                                       19

<PAGE>

other trade regulations could have a material adverse effect on the Company's 
business, financial condition and results of operations. The international 
nature of the Company's business is also expected to subject it and its 
distributors to laws and regulations of the foreign jurisdictions in which 
they operate or the Company's products are sold. The regulation of medical 
devices in a number of such jurisdictions, particularly in the European 
Union, continues to develop and there can be no assurance that new laws or 
regulations will not have an adverse effect on the Company's business, 
financial condition and results of operations. In addition, the laws of 
certain foreign countries do not protect the Company's intellectual property 
rights to the same extent as do the laws of the United States.
     
     POSSIBLE FUTURE CAPITAL REQUIREMENTS. The Company's capital 
requirements, and the availability of product revenues, depend on numerous 
factors, including the progress of the Company's product development 
programs, the receipt of and the time required to obtain regulatory 
clearances or approvals, the resources the Company devotes to developing, 
manufacturing and marketing its products, the extent to which the Company's 
products receive market acceptance, and other factors.  The Company expects 
to devote substantial capital resources to research and development, to 
support a direct sales force and marketing operation in the United States and 
to continue to support its manufacturing capacity and facilities. 
Consequently, the Company may be required to raise additional funds through 
public or private financing, collaborative relationships or other 
arrangements.  There can be no assurance that the Company will not require 
additional funding or that such additional funding, if needed, will be 
available on terms attractive to the Company, or at all, which could have a 
material adverse effect on the Company's business, financial condition and 
results of operations.  Any additional equity financing may be dilutive to 
stockholders, and debt financing, if available, may involve restrictive 
convenants.
     
     POTENTIAL VOLATILITY OF STOCK PRICE.  The stock markets have experienced 
price and volume fluctuations that have particularly affected medical 
technology companies, resulting in changes in the market prices of the stocks 
of many companies that may not have been directly related to the operating 
performance of those companies. Such broad market fluctuations may adversely 
affect the market price of the Company's Common Stock. In addition, the 
market price of the Common Stock may be highly volatile. Factors such as 
variations in the Company's financial results, comments by securities 
analysts, announcements of technological innovations or new products by the 
Company or its competitors, changing government regulations and developments 
with respect to FDA submissions, patents, proprietary rights or litigation 
may have a significant adverse effect on the market price of the Common Stock.
     
     SIGNIFICANT RESTRICTIONS ON CHANGE OF CONTROL.  The Company has adopted 
a number of anti-takeover measures.  The Company has adopted a Preferred 
Shares Rights Agreement, sometimes referred to as a poison pill, designed to 
prevent hostile takeovers not approved by the Board of Directors.  In 
addition, the Company is authorized to issue 5,000,000 shares of undesignated 
Preferred Stock. Such shares of Preferred Stock may be issued by the Company 
without stockholder approval upon such terms as the Company's Board of 
Directors may determine.  The issuance of Preferred Stock may have the effect 
of delaying, deferring or preventing a change of control of the Company, may 
discourage bids for the Company's Common Stock at a premium over the market 
price of the Common Stock and may adversely affect the market price of the 
voting and other rights of, the holders of Common Stock.  At present, the 
Company has no plans to issue any of the Preferred Stock.
     
     The Company's Certificate of Incorporation and Bylaws provide for the 
division of the Board of Directors into three classes of directors serving 
staggered three-year terms.  In addition, the Certificate of Incorporation 
requires that any action required or permitted to be taken by the 
stockholders must be taken at a meeting and may not be taken by written 
consent in lieu of a meeting.  The Bylaws provide that special meetings of 
the stockholders may be called only by the board of directors, the chairman 
of the board or the president of the Company, and not by the stockholders.  
Advanced notice must be given by 

                                       20

<PAGE>

stockholders of any stockholder proposal or director nomination or other 
business to be brought by stockholders at stockholders' meetings.

ITEM 2.  PROPERTIES

     The Company currently leases a 23,500 and a 4,125 square foot facility 
in Cupertino, California.  The facilities include an environmentally 
controlled, Class 10,000 clean room for assembly together with laboratory, 
machine shop, warehouse and office space.  The leases expire on June 1, 2001. 
The Company expects to enter into a sublease for approximately 17,000 square 
foot of office and warehouse space in the second quarter of 1999.  The 
Company estimates that this additional space will be sufficient for the 
Company's growth in 1999.  The Company is currently evaluating its 
requirements for 2000 and beyond.
     
ITEM 3.  LEGAL PROCEEDINGS
     
     The Company is not currently party to any legal proceeding.

     Heartport, Inc. (formerly Stanford Surgical Technologies, Inc.), the 
former employer of the Company's founder and Chief Technical Officer, Charles 
S. Taylor, has alleged in certain correspondence in late 1995 and again in 
September 1997 that Mr. Taylor and the Company may have misappropriated trade 
secrets of the former employer and breached confidentiality obligations to 
the former employer. The former employer has also claimed in such 
correspondence an ownership interest in certain developments and products of 
the Company. The Company has agreed to provide for the defense of Mr. Taylor 
in the event that litigation is commenced. Litigation is subject to inherent 
uncertainties, especially in cases where complex technical issues are decided 
by a lay jury. Accordingly, no assurance can be given that if a lawsuit is 
commenced it would not be decided against the Company. Such an adverse 
determination could have a material adverse effect upon the Company's 
business, financial condition and results of operations.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
     
          (a)  A special meeting of stockholders was held on October 29, 1998.

          (b)  The matter voted upon at the meeting and results of the voting
          with respect to that matter are as follows:
          
               (1)  Approve the adoption of the 1998 Employee Stock Purchase
                    Plan including the reservation of 250,000 shares of Common
                    Stock for sale thereunder and an annual increase in the
                    number of shares of Common Stock reserved for sale
                    thereunder by the lesser of 250,000 or 1.5% of the
                    outstanding shares of Common Stock.
               
                    For  7,385,692     Against  755,724     Abstain  32,655
                         ---------              -------              ------

                                       21

<PAGE>


                                      PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
         MATTERS.

     The information required by this item is incorporated by reference to 
the portion of the Registrant's 1998 annual report to stockholders entitled 
"Market Price of Common Stock and Dividend Information" and included in 
Exhibit 13.1 to this report.

     The following information is provided as an amendment to the initial 
report on Form SR, "Report of Sales and Securities and Use of Proceeds 
Therefrom", regarding the use of proceeds from the sale of securities under 
the Company's Registration Statement Form S-1 (333-1840), which was declared 
effective on April 18, 1996 (CUSIP number 141907).  The information provided 
is for the period from April 18, 1996 through January 1, 1999.

<TABLE>
<CAPTION>
          Use of Proceeds                                            Amount
          ---------------                                            ------
          <S>                                                     <C>
          Construction of plant, building and facilities          $     0
          Purchase and installation of machinery and equipment      6,416,000
          Purchase of real estate                                       0
          Acquisition of other businesses                               0
          Repayment of indebtedness                                     0
          Working capital                                           4,242,000
          Cost of operations                                       34,776,000
                                                                  
          Temporary Investment                                            
          --------------------                                    
          Cash                                                        240,000
          Commercial paper, notes and bonds                       $38,602,000
</TABLE>

All amounts above represent estimates of direct or indirect payments to third 
parties.

The amounts below were paid directly to officers of the Company.

<TABLE>
<CAPTION>
          Use of Proceeds                                            Amount
          ---------------                                            ------
          <S>                                                     <C>
          Loans to officers                                       $   655,000
</TABLE>

ITEM 6.  SELECTED FINANCIAL DATA

     The information required by this item is incorporated by reference to 
the portion of the Registrant's 1998 annual report to stockholders entitled 
"Selected Financial Data" and included in Exhibit 13.1 to this report.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

     The information required by this item is incorporated by reference to 
the portion of the Registrant's 1998 annual report to stockholders entitled 
"Management's Discussion and Analysis of Financial Condition and Results of 
Operations" and included in Exhibit 13.1 to this report.
     
                                       22
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The information required by this item is incorporated by reference to 
the portion of the Registrant's 1998 annual report to stockholders entitled 
"Management's Discussion and Analysis of Financial Condition and Results of 
Operations--Financial Risk Management" and included in Exhibit 13.1 to this 
report.
     
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The information required by this item is incorporated by reference to 
the portion of the Registrant's 1998 annual report to stockholders entitled 
"1998 Financial Review" and included in Exhibit 13.1 to this report.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

     Not applicable.

                                       23

<PAGE>

                                      PART III
                                          
     Certain information required by Part III is omitted from this Report on 
Form 10-K in that the Registrant will file a definitive proxy statement 
within 120 days after the end of its fiscal year pursuant to Regulation 14A 
with respect to the 1999 Annual Meeting of Stockholders (the "Proxy 
Statement") to be held May 4, 1999 and certain information included therein 
is incorporated herein by reference.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this item relating to directors is 
incorporated by reference to the information under the caption "Proposal No. 
1 -- Election of Directors" in the Proxy Statement.

     The executive officers of the Registrant, who are elected by the board 
of directors, are as follows: 

<TABLE>
<CAPTION>

     Name                Age                      Position
------------------      -----      ---------------------------------------------
<S>                     <C>        <C>
Richard M. Ferrari       45        President, Chief Executive Officer and Director
Jeffrey G. Gold          51        Executive Vice President and Chief Operating
                                   Officer
Steven M. Van Dick       44        Vice President, Finance and Administration and 
                                   Chief Financial Officer
Michael J. Billig        48        Vice President, Regulatory, Quality and Clinical
                                   Research
Geoffrey D. Dillon       44        Vice President, Sales and Marketing
Richard A. Lotti         42        Vice President, Business Development
Charles S. Taylor        44        Vice President and Chief Technical Officer
</TABLE>

          
     RICHARD M. FERRARI  joined CTS as Chief Executive Officer and a Director 
in June 1995 and was elected President in August 1995.  From January 1991 
until joining the Company, he was President and Chief Executive Officer of 
CardioVascular Imaging Systems, Inc. ("CVIS"), a manufacturer of 
intravascular ultrasound systems, which is currently a subsidiary of Boston 
Scientific Corporation.  From March 1990 until joining CVIS, he served as 
President and Acting Chief Executive Officer of Medstone International, Inc., 
a manufacturer of lithotripsy equipment for treatment of gall and kidney 
stones.  From 1981 to February 1990, he was employed with ADAC Laboratories, 
a supplier of diagnostic imaging equipment, serving most recently as 
Executive Vice President and General Manager responsible for the Nuclear 
Medicine, Digital Cardiology, Information Management and Radiation Therapy 
business units. Mr. Ferrari currently serves on the boards of several 
privately held companies.  Mr. Ferrari holds an M.B.A. from the University of 
South Florida.

     JEFFREY G. GOLD joined the Company as Executive Vice President in March 
of 1997 and was elected Chief Operating Officer in July of 1997. From 1978 
through 1996 he held various positions with Cordis Corporation, a 
manufacturer of cardiovascular devices. From 1993 to 1996 Mr. Gold was 
President of Cordis Endovascular Systems, Inc., a supplier of devices for 
interventional neuroradiology. Mr. Gold served Cordis as Vice President of 
Research & Development from 1991 to 1993, and as Vice President of 
Manufacturing from 1986 to 1991. Mr. Gold holds an Industrial Engineering 
degree from Northeastern University and an MBA from the University of Florida.

                                       24

<PAGE>

     STEVE M. VAN DICK joined the Company as Vice President of Finance and 
Administration and Chief Financial Officer in April 1996.  From March 1995 
until April 1996, Mr. Van Dick was Vice President of Finance and 
Administration and Chief Financial Officer of Perclose, Inc., a manufacturer 
of minimally invasive systems for the surgical closure of arterial access 
sites in catheterization procedures.  From September 1993 until March 1995, 
he was Vice President of Finance and Chief Financial Officer of CVIS.  From 
1992 until joining CVIS, Mr. Van Dick was Vice President, Finance and Chief 
Financial Officer of Imatron, Inc., a manufacturer of specialized medical 
equipment.  From 1987 until joining Imatron, he held various positions with 
ADAC Laboratories, serving as Vice President of Finance since 1988 and as 
Chief Financial Officer since 1991.  Mr. Van Dick holds an M.B.A. from Santa 
Clara University and is a Certified Public Accountant.

     MICHAEL J. BILLIG joined CTS as Vice President of Regulatory, Clinical 
and Quality in February 1996.  From January 1989 until joining the Company, 
Mr. Billig served as Vice President, Regulatory, Clinical and Quality of 
Cardiometrics, Inc., a company that manufactures and markets intravascular 
Doppler ultrasound systems for measuring blood flow.  From June 1987 to 
February 1989, he served as Director, Regulatory Affairs and Quality 
Assurance of Cardiometrics, Inc.

     GEOFFREY D. DILLON joined the Company as Vice President, Global Sales in 
August 1997 and was made Vice President, Sales and Marketing in March 1998. 
From February 1997 until joining the Company, Mr. Dillon was Vice President, 
Sales and Marketing of Quest Medical Inc.'s Cardiovascular Systems Division, 
a manufacturer of cardiac surgery specialty products.  From May 1996 to 
February 1997, Mr. Dillon was Vice President, Marketing of Quest Medical 
Inc.'s Cardiovascular Systems Division.  From May 1995 to May 1996, Mr. 
Dillon was President of Dilstar, Inc., an exclusive sales and marketing 
agency for H.D.N.A. of North America, a high definition television network.  
From January 1994 to April 1995, Mr. Dillon was Director of Marketing for the 
Micro-Endo Division of Sofamor-Danek Group, a manufacturer of spinal implants 
and spinal endoscopy systems.  From 1983 to December 1993, Mr. Dillon held 
various positions with Storz Instrument Company, a manufacturer of various 
medical devices, serving as Product Manager, Surgical Specialties Division 
since 1990.  Mr. Dillon holds a BA degree from Ashland University.

     RICHARD A. LOTTI joined the Company as Vice President, Business 
Development in December of 1997.  From June 1994 to July 1997, Mr. Lotti was 
a Vice President of the NeuroCare Group and the General Manager of Camino 
NeuroCare, the market leader in intracranial neuromonitoring.  From January 
1990 to February 1994, Mr. Lotti held various product development management 
positions with Sorin Biomedical, previously Pfizer-Shiley, a manufacturer of 
cardiopulmonary bypass devices and heart valve implants. Mr. Lotti served as 
director of the cardiopulmonary business since February 1992.  Prior to 1990, 
Mr. Lotti held positions in operations, product development and international 
operations at Alcon Surgical and Johnson and Johnson.  He holds a BSME and an 
MBA from Rensselaer Polytechnic Institute.

     CHARLES S. TAYLOR, the founder of CTS, has been with Informed Creation, 
the predecessor company to CTS, since its inception in November 1993, and has 
served as Vice President, Chief Technical Officer and Director since the 
Company's incorporation in June 1995.  From June 1992 until November 1993, 
Mr. Taylor was a member of the research and development group at Stanford 
Surgical Technologies, Inc., now Heartport, Inc., a public company that 
develops and markets instruments for cardiac surgical procedures.  From 
January 1992 to May 1992, Mr. Taylor managed the establishment of a new 
development group for Eli Lilly's Medical Instrument Systems division, the 
Technology Development Center ("TDC"), which develops surgical devices for 
vascular intervention procedures. From May 1986 to December 1991, he was an 
Engineer and Manager for Advanced Cardiovascular Systems, Inc. where he 
directed teams of engineers developing new manufacturing technologies and 
custom research and development equipment.

                                       25

<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

     The information required by this item is incorporated by reference to 
the information under the caption "Executive Compensation" in the Proxy 
Statement.
     
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item is incorporated by reference to 
the information under the caption "Share Ownership of Directors, Officers and 
Certain Beneficial Owners" in the Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item is incorporated by reference to the
information under the caption "Certain Transaction" in the Proxy Statement.

                                       26

<PAGE>

                                      PART IV
                                          
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (a)  1.  Financial Statements
               
               The following Consolidated Financial Statements of CardioThoracic
               Systems, Inc.  and Report of  Independent Accountants are
               incorporated by reference in the respective portions of the
               Registrant's 1998 annual report to stockholders included in
               Exhibit 13.1 to the report:
               
                   Consolidated Balance Sheets; January 1, 1999 and January 2, 
                   1998
                   
                   Consolidated Statements of Operations; Years ended January 1,
                   1999, January 2, 1998 and December 31, 1996
                        
                   Consolidated Statements of Stockholders' Equity; Years ended
                   January 1, 1999, January 2, 1998 and December 31, 1996
                        
                   Consolidated Statements of Cash Flows; Years ended January 1,
                   1999, January 2, 1998 and December 31, 1996
                        
                   Notes to Consolidated Financial Statements
                        
                   Report of Independent Accountants
               
           2.  Financial Statement Schedules
     
               All financial statement schedules are omitted because they are
               not applicable or the required information is shown in the
               Consolidated Financial Statements or the notes thereto.
     

           3.  Exhibits
          
               Refer to (c) below.

     (b)  Reports on Form 8 - K.

          The Company was not required to and did not file any reports on Form
          8-K during the three months ended January 1, 1999.

     (c)  Exhibits

<TABLE>
<CAPTION>
        Exhibit
          No.            Description                             
         -----    ---------------------------------------------------------------
         <S>      <C>                  
          3.2(1)  Restated Certificate of Incorporation.
                  
          3.3(7)  Bylaws (as amended).

          3.4(4)  Certificate of Designations of Rights, Preferences and  
                  Privileges of Series A Participating Preferred Stock
</TABLE>

                                       27

<PAGE>
<TABLE>
         <S>      <C>                  
          3.5(4)  Preferred Shares Rights Agreement, dated as of February 14, 
                  1997.

          3.6(7)  Certificate of Amendment to Restated Certificate of 
                  Incorporation.
                  
          4.1(1)  Specimen Common Stock Certificate.
                  
         10.1(1)  Form of Indemnification Agreement between the Company and 
                  each of its directors and officers.
                  
         10.2(8)  Incentive Stock Plan and forms of Agreements thereunder (as 
                  amended).

         10.3(1)  Director Option Plan and form of Director Stock Option 
                  Agreement thereunder.
                  
         10.4(1)  Employee Stock Purchase Plan and forms of agreements 
                  thereunder.
                  
         10.5(5)  Nonstatutory Stock Option Plan and form of Nonstatutory Stock 
                  Option Agreement thereunder (as amended).
                  
         10.6(1)  Form of Employment, Confidential Information and Invention 
                  Assignment Agreement.
                  
         10.8(1)  Consulting Agreement, dated June 30, 1995, between the 
                  Company and Federico Benetti, M.D.
                  
         10.9(1)  Assignment Agreement, dated June 30, 1995 (as amended by 
                  Amendment Agreement dated August 31, 1995), between the 
                  Company and Federico Benetti, M.D.
                  
        10.10(1)  Employment Letter Agreement, dated September 5, 1995, between 
                  the Company and Charles S. Taylor.
                  
        10.11(1)  Assignment Agreement, dated September 7, 1995, between the 
                  Company and Charles S. Taylor.
                  
        10.12(1)  Shareholder Rights Agreement dated September 8, 1995 (as 
                  amended January 3, 1996) between the Company and certain  
                  holders of the Registrant's securities.
                  
        10.13(1)  Letter Agreement regarding Heartport trade secret 
                  allegations, dated October 11, 1995, between the Company and 
                  Charles S. Taylor.
                  
        10.14(1)  Assignment, Assumption of Lease and Consent, dated November 
                  9, 1995, between the Company and Cardiovascular Concepts, 
                  Inc. ("CVC") for the premises located at 3260 Alpine Road, 
                  Portola Valley, California 94028.
                  
        10.17(1)  Consent to Assignment, dated December 22, 1995, among the 
                  Company, Viking Partners, Inc. ("Viking"), CVC and Fogarty 
                  Engineering, Inc. for the premises located at 3260 Alpine 
                  Road, Portola Valley, California 94028.
                  
        10.19(1)  First Amendment to Assignment, Assumption of Lease and 
                  Consent, dated December 22, 1995, between the Company and CVC 
                  for the premises located at 3260 Alpine Road, Portola Valley, 
                  California 94028.
                  
        10.21(1)  Consulting Agreement, dated February 21, 1996, between the 
                  Company and Thomas J. Fogarty, M.D.
                  
        10.22(1)  Development and License Agreement, dated February 19, 1996, 
                  between the Company and Enable Medical Corp.
                  
        10.23(1)  Employment Letter Agreement, dated March 15, 1996, between 
                  the Company and Steve M. Van Dick.

        10.24(1)  Lease dated March 29, 1996 for space located at 10600 North 
                  Tantau Avenue, Cupertino, California between the Company and 
                  Spieker Properties,
</TABLE>

                                       28

<PAGE>
<TABLE>
         <S>      <C>                  
                  L.P.
        10.27(2)  Employment Agreement, dated April 19, 1996, between the 
                  Company and Steve Van Dick.

        10.29(2)  Promissory Note for $35,000 dated May 20, 1996, between the 
                  Company and Michael Billig.

        10.31(3)  Promissory Note for $750,000 and Security Agreement dated 
                  August 16, 1996, between the Company and Richard Ferrari.

        10.32(5)  Promissory Note for $200,000 dated December 3, 1996, between 
                  the Company and Steve Van Dick.

        10.33(6)  Employment Letter Agreement, dated February 25, 1997, between 
                  the Company and Jeffrey Gold.

        10.34(7)  Employment Letter Agreement, dated July 17, 1997, between the 
                  Company and Geoffrey Dillon.

        10.35(7)  Employment Letter Agreement, dated November 24, 1997, between 
                  the Company and Richard Lotti.

        10.36(8)  1998 Nonstatutory Stock Option Plan and forms of Agreements 
                  thereunder.

        10.37(9)  1998 Employee Stock Purchase Plan and forms of agreements 
                  thereunder.

            13.1  Portions of Annual Report to Stockholders incorporated by 
                  reference.

            23.1  Consent of PricewaterhouseCoopers LLP, Independent 
                  Accountants

            27.1  Financial Data Schedule
</TABLE>

---------------------
(1)  Incorporated herein by reference to the same-numbered exhibit previously
     filed with the Company's Registration Statement on Form S-1 (Registration
     No. 333-1840).

(2)  Incorporated herein by reference to the same-numbered exhibit previously
     filed with the Company's Form 10-Q for the period ended June 30, 1996.

(3)  Incorporated herein by reference to the same-numbered exhibit previously
     filed with the Company's Form 10-Q for the period ended September 30, 1996.

(4)  Incorporated herein by reference to the Company's Registration Statement on
     Form 8-A, filed with the Securities and Exchange Commission on February 28,
     1997.

(5)  Incorporated herein by reference to the same-numbered exhibit previously
     filed with the Company's Form 10-K for the period ended December 31, 1996.

(6)  Incorporated herein by reference to the same-numbered exhibit previously
     filed with the Company's Form 10-Q for the period ended June 27, 1997.

(7)  Incorporated herein by reference to the same-numbered exhibit previously
     filed with the Company's Form 10-K for the period ended January 2, 1998.

(8)  Incorporated herein by reference to the Company's Registration Statement on
     Form S - 8, filed with the Securities and Exchange Commission on May 27,
     1998.

(9)  Incorporated herein by reference to the Company's Registration Statement on
     Form S - 8, filed with the Securities and Exchange Commission on January
     22, 1999.

                                       29

<PAGE>

SIGNATURES


     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.



Date:  March  30, 1999                  CARDIOTHORACIC SYSTEMS, INC.



                                         /S/ Richard M. Ferrari               
                                        --------------------------------------
                                        Richard M. Ferrari
                                        President and Chief Executive Officer

                                       30

<PAGE>

     KNOW ALL PERSONS BY THESE PRESENTS,  that each person whose signature 
appears below constitutes and appoints Richard M. Ferrari and Steve M. Van 
Dick, jointly and severally, his or her attorneys-in-fact, and each with the 
power of substitution, for him or her in any and all capacities, to sign any 
amendments to this Report on Form 10-K, and to file the same, with exhibits 
thereto and other documents in connection therewith, with the Securities and 
Exchange Commission, hereby ratifying and confirming all that each of said 
attorneys-in-fact, or his or her substitute or substitutes, may do or cause 
to be done by virtue thereof.
     
     Pursuant to the requirements of the Securities and Exchange Act of 1934, 
this Report has been signed below by the following persons on behalf of the 
Registrant and in the capacities and on the date indicated. 

<TABLE>
<S>                                <C>                                     <C>
/S/ Richard M. Ferrari             President, Chief Executive              March 30, 1999
-------------------------          Officer and Director
Richard M. Ferrari

/S/  Steven M. Van Dick            Vice President of Finance and           March 30, 1999
-------------------------          and Administration and Chief
Steven M. Van Dick                 Financial Officer (Principal
                                   Financial and Accounting Officer)

/S/  Charles S. Taylor             Vice President and Chief Technical      March 30, 1999
-------------------------          Officer and Director
Charles S. Taylor

/S/  Thomas J. Fogarty, M.D.       Director                                March 30, 1999
----------------------------
Thomas J. Fogarty, M.D.

/S/  Jack W. Lasersohn             Director                                March 30, 1999
----------------------------
Jack W. Lasersohn

/S/  Thomas C. McConnell           Director                                March 30, 1999
----------------------------
Thomas C. McConnell

/S/  Robert C. Bellas              Director                                March 30, 1999
----------------------------
Robert C. Bellas, Jr.

/S/  Philip M. Young               Director                                March 30, 1999
----------------------------
Philip M. Young
</TABLE>
                                       31

<PAGE>


                                   EXHIBIT INDEX
<TABLE>
<CAPTION>
           Exhibit
             No.               Description                             
            ----- ---------------------------------------------------------------
            <S>   <C>                  
            13.1  Portions of Annual Report to Stockholders incorporated by 
                  reference.

            23.1  Consent of PricewaterhouseCoopers LLP, Independent 
                  Accountants

            27.1  Financial Data Schedule
</TABLE>

                                       32