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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-K

(MARK ONE)

  /X/    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934.

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                                       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 0-28266

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

                                HEARTPORT, INC.

             (Exact Name of Registrant as Specified in Its Charter)

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

                  200 CHESAPEAKE DRIVE, REDWOOD CITY, CA 94063
               Address of Principal Executive Offices) (Zip Code)

                                 (650) 306-7900
               Registrant's Telephone Number, Including Area Code

        Securities registered pursuant to Section 12(b) of the Act: NONE
    Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK
                                (Title of Class)

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

    Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/  No / /

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

    The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 20, 1998: approximately $192,336,000 (based on the last
reported sale price of $13.50 per share on March 20, 1998 on the Nasdaq National
Market).

    The number of shares of Common Stock outstanding as of March 20, 1998 was
24,967,117.

                      DOCUMENTS INCORPORATED BY REFERENCE

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                               DOCUMENT                                  FORM 10-K REFERENCE
-----------------------------------------------------------------------  -------------------
 Proxy Statement for Registrant's Annual Meeting to be held on May 7,      Part III, Items
                                 1998                                           11-13
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                               TABLE OF CONTENTS

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Part I
           Item 1.     Business...............................................................................          1
           Item 2.     Properties.............................................................................         27
           Item 3.     Legal Proceedings......................................................................         27
           Item 4.     Submission of Matters to a Vote of Security Holders....................................         27

Part II
           Item 5.     Market for Registrant's Common Equity and Related Stockholder Matters..................         27
           Item 6.     Selected Financial Data................................................................         29
           Item 7.     Management's Discussion and Analysis of Financial Condition and Results of
                       Operations.............................................................................         29
           Item 8.     Financial Statements and Supplementary Data............................................        F-1
           Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...       F-15

Part III
           Item 10.    Directors and Executive Officers of the Registrant.....................................      III-1
           Item 11.    Executive Compensation.................................................................      III-3
           Item 12.    Security Ownership of Certain Beneficial Owners and Management.........................      III-3
           Item 13.    Certain Relationships and Related Transactions.........................................      III-3

Part IV
           Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................       IV-1
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    Heartport, the Heartport logo and EndoCPB are registered trademarks of the
Company. Port-Access is a trademark of the Company. Port-Access Partnership is a
service mark of the Company.

                                     PART I

ITEM 1.  BUSINESS.

    The discussion in this Item and elsewhere in this Annual Report on Form 10-K
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Risk Factors."

INTRODUCTION

    Heartport, Inc. ("Heartport" or the "Company") has developed and is
marketing proprietary systems and novel procedures that are designed to enable
cardiac surgeons to perform a wide range of heart surgeries in a minimally
invasive manner through small incisions, or "ports," between the ribs without
the need to crack open the chest as required in conventional heart surgery.
Although fundamentally changing the means of providing access to the heart, the
Company's Port-Access-TM- surgical procedures closely parallel the conventional
procedures that have been used in heart surgery since the mid-1950s. The Company
believes, based on the limited clinical experience to date, that its systems and
procedures have the potential to offer efficacy equal to that of conventional
heart surgery, but with the benefits of reduced trauma and complications,
reduced pain and suffering, shorter hospital stays, reduced convalescence time,
and lower overall cost. The Company believes that its Port-Access systems and
procedures will have a significant impact on the field of heart surgery in the
same way that minimally invasive surgical procedures such as laparoscopy
impacted general surgery and arthroscopy impacted orthopedic surgery. As of
March 16, 1998, the Company believes that over 3,500 Port-Access procedures have
been performed.

    The Company markets its Port-Access systems with a direct sales force in the
United States and Europe. Once a purchase order from a hospital or medical
center is received, the Company trains the surgical team in Port-Access systems
and procedures. The Company has a 50,000 sq. ft. cardiovascular research and
training facility in Utah for training surgical teams.

BACKGROUND

    Cardiovascular disease is the leading cause of death in the United States
and many other developed countries. Two of the principal types of cardiovascular
disease are coronary artery disease ("CAD") and valvular heart disease ("VHD").
In CAD, one or more coronary arteries are narrowed, resulting in the risk of
insufficient blood flow to the heart muscle. In VHD, one or more heart valves
are dysfunctional, resulting in suboptimal pumping of blood. Conventional
open-chest heart surgery (commonly referred to as "open-heart" surgery) is one
of the leading methods of treating CAD, VHD, and other types of cardiovascular
disease.

    Heart surgery is widely regarded as one of the most important medical
advances of the twentieth century. This field of surgery was made possible
during the 1950s by the development of technology that enabled physicians to
perform cardiopulmonary bypass ("CPB") and stop the heart during surgery. CPB
protects the patient by taking over the function of the heart in circulating
oxygenated blood throughout the patient's organs and tissues, thereby permitting
the heart to be safely stopped. The procedure of placing the patient on CPB and
stopping the heart is the standard of care in heart surgery because it offers
several critical advantages. First, stopping the heart allows the surgeon to
achieve a high degree of surgical accuracy and precision, which is directly
related to the length and quality of the patient's life following surgery.
Second, stopping the heart protects the heart muscle during surgery. The stopped
heart requires virtually no blood flow, whereas the beating heart requires a
constant supply of oxygenated blood and will sustain damage if that supply is
interrupted. Third, the majority of cardiac surgery procedures are

                                       1
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extremely difficult to perform if the heart is not stopped. For example, in most
multi-vessel coronary artery bypass surgeries, the heart must be turned and
manipulated to access the three major vascular beds of the heart and to operate
upon the various coronary arteries, a nearly impossible task while the heart is
beating. In valve repair and replacement, the heart itself must be opened to
repair or replace the diseased valve since the valves are located inside the
heart. Opening a beating heart poses a high risk of death. Thus, placing the
patient on CPB and stopping the heart is necessary to enable surgeons to safely
and accurately perform the full range of surgical procedures anywhere on the
surface or the interior of the heart.

    Since heart surgery was pioneered in the mid-1950s, remarkable advances have
occurred in the surgical treatment of cardiovascular disease. CAD is most
effectively treated by CABG procedures, in which an artery or vein is used to
bypass the narrowing in a coronary artery and restore blood flow downstream of
the narrowing. The treatment for VHD involves either repairing the diseased
heart valve, most commonly with the implantation of a prosthetic annuloplasty
ring, or replacing it with a prosthetic mechanical or tissue valve. Until the
introduction of Heartport's technology, CABG and valve repair and replacement
procedures were virtually always performed in a highly invasive surgery in which
the patient's chest is opened widely to gain access to the heart, the patient is
placed on CPB, and the patient's heart is stopped. Worldwide, approximately
800,000 CABG and valve procedures are performed each year in this manner.

    Although highly efficacious, open-chest heart surgery is extremely traumatic
and painful, typically requires a lengthy period of convalescence, and is
expensive. The heart sits in the middle of the chest, protected by skeletal
armor consisting of the sternum or "breast bone," the rib cage, and the spine.
In conventional heart surgery, the heart is accessed by means of a sternotomy,
whereby a surgeon makes a 12-to 18-inch incision in the patient's chest, the
sternum is cut in half with a bone saw, and the rib cage is then spread open
with a steel retractor. The procedure is highly traumatic, resulting in a
lengthy and painful recovery period. In 1995, open-chest heart surgery patients
in the United States remained in the hospital for an average of ten days and
required a significant period of convalescence following discharge. Conventional
cardiac surgery is also expensive, and per-patient charges on average for a CABG
procedure are approximately $40,000 per patient and for a valve procedure are
approximately $50,000 per patient. In addition, substantial costs are incurred
during convalescence. With approximately 400,000 open-chest heart surgeries
performed in the United States each year, the total cost to the U.S. healthcare
system is substantial.

    The development and widespread adoption of minimally invasive surgical
approaches have revolutionized many surgical fields, including general surgery,
orthopedics, gynecology, urology, and neurosurgery. Notable examples include
laparoscopic procedures in the field of general surgery and arthroscopic
procedures in the field of orthopedic surgery. Such procedures are designed to
be as efficacious as conventional surgery, but with substantially reduced
trauma, thereby decreasing complications, reducing pain and suffering, speeding
recovery, and decreasing costs associated with many aspects of patient care.
This movement toward minimally invasive surgery has been driven by advances in
both device technology and surgical technique. A minimally invasive approach is
most advantageous in cases in which significant trauma results from gaining
surgical access to an affected organ or site. Cardiac surgery represents a
particularly significant opportunity for a minimally invasive approach due to
the extreme trauma associated with opening the chest. Heartport has demonstrated
that its Port-Access minimally invasive surgical approach has the potential to
significantly reduce complications, pain and suffering, convalescence, and
expense, while maintaining the high efficacy of conventional open-chest surgery.

    Less-invasive alternatives to conventional heart surgery began to emerge in
the early 1980s. For example, percutaneous transluminal coronary angioplasty
("PTCA"), or balloon angioplasty, was developed as an alternative to CABG
surgery. In a PTCA procedure, the cardiologist inserts a small balloon catheter
into the narrowed coronary artery and inflates the balloon to expand the
narrowed section, thereby increasing the internal diameter of the vessel to
increase blood flow. A PTCA procedure is less traumatic, requires less time in
the hospital, and involves a shorter recuperation period than a conventional

                                       2
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open-chest CABG procedure. As a result, a PTCA procedure in the United States is
less expensive on a per-procedure basis, with costs of approximately $16,000 in
1994. In 1995, approximately 460,000 PTCA procedures were performed in the
United States, and an additional 450,000 such procedures were performed
elsewhere in the world.

    Although PTCA is less invasive than conventional CABG, a major drawback of
PTCA is the high rate of restenosis, or renarrowing of the blood vessel at the
treatment site. Restenosis within six months following a PTCA procedure occurs
at rates ranging from 15% to 50%. The majority of PTCA patients eventually
undergo another PTCA procedure or require CABG surgery. Although the cost of a
single PTCA procedure may be substantially less than a conventional CABG
procedure, a recent study indicated that three years after the procedure, PTCA
has no cost advantage over conventional open-chest CABG due to the need for
subsequent interventions. Furthermore, another recent study concluded that the
quality of life, post intervention, is higher for conventional open-heart
surgery patients because of the follow-up interventions required in PTCA. The
Company believes that the dramatic reduction in trauma associated with the
Port-Access approach will magnify this advantage. More recently, clinicians have
begun to employ mechanical coronary artery stents, metal prostheses designed to
hold open arteries, as a means of preventing restenosis. Although long-term
clinical data is not yet available, stents appear to reduce but not eliminate
the problem of restenosis associated with non-surgical treatment of CAD.

    Restenosis rates for conventional open-chest CABG are significantly lower
than those for non-surgical approaches. Studies indicate that open-chest
coronary artery bypass grafts have 17-year patency rates (the maintenance of
sufficient blood flow through the affected artery) of 92% when the left internal
mammary artery ("IMA") graft is used, 85% when the right IMA graft is used, and
10-year patency rates of approximately 60% when a saphenous vein graft from the
patient's leg is used. In addition, a Duke University study suggests that
patients with three-vessel CAD and patients with severe two-vessel CAD have
improved survival after conventional open-chest CABG surgery in comparison to
PTCA and other medical treatments. Thus, conventional open-chest CABG remains
the preferred treatment for severe CAD because of these higher long-term success
rates.

    Another less-invasive alternative to conventional open-chest CABG surgery is
the use of low-technology surgical tools to perform minimally invasive CABG
surgery on the beating heart. Such beating heart surgery, whether open-chest or
minimally invasive, has generally been, and the Company believes is likely to
continue to be, limited to the small percentage of cases in which the heart does
not need to be opened, turned, or manipulated and in which the patient is able
to tolerate the stress of undergoing heart surgery without the support of CPB
and the benefits resulting from stopping the heart.

    The Company believes that to achieve the high efficacy and patient safety
and broad scope of conventional open-chest cardiac surgery, the patient must be
placed on CPB and the heart stopped. As a result, conventional open-chest heart
surgery represents the standard of care for the treatment of CAD, VHD, and other
cardiac conditions. To date, the only way to place the patient on CPB and stop
the heart has been to crack the patient's chest. Heartport was formed with the
objective of developing a minimally invasive approach to cardiac surgery that
would permit surgeons to perform the full range of highly efficacious cardiac
surgeries, with the patient on CPB and the heart stopped, but without the trauma
associated with a sternotomy and reducing the complications associated with
traditional CPB.

THE HEARTPORT SOLUTION

    Heartport has developed proprietary systems for performing several different
types of minimally invasive heart surgery. These systems and devices have been
cleared or exempted by the Food and Drug Administration ("FDA") for commercial
sale in the United States and by a Notified Body in Europe. Heartport's core
platform is an endovascular cardiopulmonary bypass ("EndoCPB") system, which
allows surgeons to place the patient on CPB and stop and protect the patient's
heart without the need for a sternotomy. Using the Company's EndoCPB-Registered
Trademark- platform and procedure-specific application systems, the

                                       3
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surgeon is able to perform cardiac surgery by accessing the heart through one or
more small incisions, or "ports," placed between the patient's ribs. The
Company's first several application systems comprise reusable and disposable
devices for Port-Access CABG and for Port-Access mitral valve repair and mitral
valve replacement (collectively, "MVR") surgeries. Application systems for
performing additional cardiac surgery procedures, including Port-Access aortic
valve replacement ("AVR"), are also under development. These future systems will
require regulatory clearances or exemptions prior to commercial distribution.
Although fundamentally changing the means of providing access to the heart, the
Port-Access surgical procedures closely parallel the conventional procedures
that have been used in heart surgery since the mid-1950s. The Company believes
that its systems and procedures have the potential to offer efficacy equal to
that of conventional open-chest surgery, but with the benefits of reduced trauma
and complications, reduced pain and suffering, shorter hospital stays, reduced
convalescence time, and lower overall cost. See "Risk Factors--No Assurance of
Market Acceptance" and "--No Assurance of Regulatory Clearance or Approval;
Significant Domestic and International Regulation."

MARKETS AND APPLICATIONS

    Cardiovascular disease is the leading cause of death in the United States
and other developed countries. In the United States, it causes approximately one
million deaths per year, which represents over 40% of all deaths. CAD is one of
the most common forms of cardiovascular disease, affecting more than 13 million
people in the United States. If untreated, CAD can cause a myocardial infarction
or "heart attack." Each year, approximately 1.5 million people experience heart
attacks in the United States, resulting in approximately 500,000 deaths. Each
year on a worldwide basis, approximately 600,000 CAD patients undergo
conventional open-chest CABG surgery, over 800,000 CAD patients undergo PTCA or
other non-surgical interventions, and approximately 200,000 VHD patients undergo
open-chest valve repair or replacement procedures. MVRs represent approximately
30% and AVRs represent approximately 65% of valve surgery procedures.
Per-patient charges of these heart surgery procedures in the United States
averages approximately $16,000 for PTCA, $40,000 for conventional CABG, and
$50,000 for conventional valve surgery. The Company has demonstrated that its
Port-Access EndoCPB platform and procedure-specific Port-Access application
systems provide a minimally invasive surgical alternative for CABG and MVR
procedures.

    CORONARY ARTERY BYPASS GRAFTING--CABG.  Currently, the most efficacious
treatment for CAD is conventional open-chest CABG surgery. In a conventional
open-chest CABG, a 12- to 18-inch incision is made in the patient's chest, the
patient's sternum is cut in half with a bone saw, and the rib cage is spread
open with a steel retractor. Blood is re-routed past a narrowing in one or more
coronary arteries by either grafting an artery from the chest wall to the
coronary artery below the narrowing, or grafting a section of artery or vein
from another part of the body both to the aorta (which serves as a source of
oxygenated blood) and to a point below the narrowed segment on the affected
coronary artery, or both. Using the IMA from the chest wall is the most
efficacious procedure given its long term patency in such open-chest procedures.
The IMA is dissected free from the chest wall and prepared for grafting to the
coronary artery. Large tubes, or cannulae, are inserted directly through the
walls of the heart and the aorta in order to place the patient on CPB, the aorta
is compressed closed with an external cross-clamp, and a catheter is used to
administer the cardioplegic solution that stops the heart. The artery from the
chest wall is then sutured in place on the affected coronary artery, which sits
motionless atop the stopped heart, enabling the highest degree of surgical
accuracy and precision. The patient's chest is closed and the sternum is held
together with steel wire. Afterward, the patient has a long and painful
recovery. In the United States, open-chest CABG patients spend an average of ten
days in the hospital, and the Company estimates that up to two or more days are
spent in the intensive care unit ("ICU"). For some period following surgery, a
ventilator breathes for the patient because the trauma to the rib cage and
sternum makes unassisted breathing extremely painful.

                                       4
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    Each step in the Company's Port-Access CABG procedure parallels a
corresponding step in conventional CABG. Instead of accessing the heart through
a 12- to 18-inch opening in the chest, however, the procedure is accomplished
through small incisions, or "ports" between the patient's ribs. During the
procedure, the Company's EndoCPB-Registered Trademark- System, a series of
proprietary catheters inserted via certain of the patient's peripheral vessels,
circulates oxygenated blood throughout the body and stops and protects the
heart. The Company's Port-Access-TM- CABG System is designed to enable the
surgeon to access the heart and its associated vessels, visualize the interior
of the thoracic cavity, access and prepare the arterial or venous grafts, attach
the grafts to the diseased coronary artery resting motionless atop the stopped
heart, and do various other supporting activities. Upon completion of the
surgical procedure, the heart is allowed to spontaneously resume normal activity
and CPB is discontinued. The patient leaves the operating room with the heart
revascularized in the same manner as in a conventional open-chest CABG
procedure, but with the port incisions sutured closed rather than with the chest
held together with steel wire.

    VALVE REPAIR AND REPLACEMENT.  A leading treatment for VHD is the surgical
replacement or repair of the diseased heart valve. In conventional open-chest
MVR surgery, the heart is accessed via a sternotomy, the patient is placed on
CPB, the patient's heart is stopped, and the heart is drained of blood. The
diseased valve is then accessed through an incision in the left atrium, one of
the upper chambers of the heart, and the valve is either repaired, most commonly
with the implantation of a prosthetic annuloplasty ring, or is removed and
replaced with a mechanical or tissue prosthetic valve.

    Similar to Port-Access CABG, each step in the Company's Port-Access MVR
procedure closely parallels the corresponding step in a conventional MVR
procedure, but no sternotomy is required. The Company's Port-Access-TM- MVR
System utilizes the EndoCPB System to place the patient on CPB, stop and protect
the heart, and empty the heart of blood. The Company's Port-Access MVR System is
designed to permit the surgeon to visualize the interior of the thoracic cavity,
open the left atrium of the heart to gain access to the mitral valve, visualize
the interior of the heart, assess valve function, repair or remove the diseased
valve, size the prosthesis (either a prosthetic heart valve or annuloplasty
ring), deliver and attach the prosthesis, close the heart, allow the heart to
spontaneously resume normal activity, and then discontinue CPB. The patient
leaves the operating room with the heart valve repaired or replaced in the same
manner as in a conventional, open-chest MVR procedure, but with the port
incisions sutured closed rather than the chest held together with steel wire.

    OTHER PROCEDURES.  The Company believes that its Port-Access technology and
approach to cardiac surgery may also enable it to develop systems to treat a
range of cardiovascular disease in addition to CAD and mitral valve diseases.
The Company is currently developing Port-Access systems to treat aortic valve
disease and other cardiac diseases.

STRATEGY

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

    ESTABLISH PORT-ACCESS MINIMALLY INVASIVE CARDIAC SURGERY AS A STANDARD OF
CARE FOR CAD AND VHD. The Company believes that it is the first to design,
develop, and receive FDA-clearance for devices and systems for the minimally
invasive surgical treatment of CAD and VHD. The Company is currently introducing
its proprietary technology to leading cardiac surgery centers in the United
States and Europe. As of March 16, 1998, over 200 cardiac surgery teams had been
trained to perform Port-Access surgery. Prior to shipment, the Company provides
its customers with extensive training on the EndoCPB, Port-Access CABG System
and Port-Access MVR System and procedures at the Heartport Research and Training
Center ("HRTC") in Utah. In addition, the Company intends to support clinically
driven research efforts to prove the efficacy and benefits of Port-Access
minimally invasive cardiac surgery. In this regard, in 1997 the Company
established the Port-Access International Registry, a multi-center registry
designed

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to improve patient outcomes and advance Port-Access minimally invasive cardiac
surgery by sharing aggregate knowledge maintained in the registry database.

    MARKET TO HIGH VOLUME CARDIAC SURGERY CENTERS WITH DIRECT SALES FORCE.  The
cardiac surgery market in the United States and Europe is highly concentrated,
with 300 centers responsible for over 50% of the more than 500,000 open-chest
surgeries performed annually in the two geographies. The Company believes that
rapid penetration of these high volume centers is achievable with a relatively
small direct sales force. As of March 16, 1998 the Company has 22 cardiovascular
sales specialists in the United States and 5 cardiovascular sales specialists in
Europe with extensive experience selling cardiac surgery and cardiology
products.

    PROMOTE PORT-ACCESS PARTNERSHIPS.  The Company has developed a procedural
selling approach to market its systems to cardiac surgeons, called the
Port-Access Partnership-SM-. The Company intends to utilize its Port-Access
Partnership to promote customer loyalty. In the partnership, the Company trains
a center's surgical team, supplies patient and referring physician educational
materials, supports local market media efforts and furnishes proprietary
reusable devices for Port-Access procedures in exchange for a purchase order for
Port-Access disposable products necessary to perform Port-Access cardiac
surgery.

    EXPAND PORT-ACCESS APPLICATIONS BY LEVERAGING CORE TECHNOLOGY.  The Company
has developed its EndoCPB System to enable minimally invasive Port-Access CABG,
Port-Access MVR, and other Port-Access heart surgeries, with the patient on CPB
and the heart stopped. The Company intends to expand the use of its EndoCPB
platform to address other types of heart surgery. See "Risk Factors--No
Assurance of Market Acceptance" and "--No Assurance of Regulatory Clearance or
Approval; Significant Domestic and International Regulation."

    PROTECT AND ENHANCE PROPRIETARY POSITION.  The Company currently holds
issued and allowed patents covering a number of fundamental aspects of the
Company's EndoCPB System and procedure-specific Port-Access systems. As of March
16, 1998, the Company owns 59 issued or allowed United States patents, and one
issued foreign patent. In addition, as of March 16, 1998, the Company has 84
pending United States patent applications and has filed 45 patent applications
that are currently pending in Europe, Japan, Australia, and Canada. The Company
intends to continue to pursue its patent filing strategy and to vigorously
defend its intellectual property position against infringement. See "Risk
Factors--Uncertainty Regarding Patents and Protection of Proprietary Technology;
Risks of Future Litigation."

    TARGET INTERNATIONAL MARKETS.  The Company intends to continue to devote
resources to penetrate international markets given the substantial size and
economic attractiveness of these markets. The Company has received the necessary
regulatory approvals in Europe, and is pursuing approvals in Canada, Australia,
and Asia to market its EndoCPB and Port-Access systems. In addition, the Company
has trained surgical teams from leading centers in England, Scotland, Germany,
France, Spain, Belgium, Sweden, Canada, Australia, India, and Malaysia in the
use of Port-Access techniques. In December 1997 the Company entered into a
distribution, training and supply agreement with Getz Bros. Co., Ltd. ("Getz")
under which Getz will be the Company's exclusive distributor of Port-Access
minimally invasive cardiac surgery systems in Japan. See "Strategic
Relationships."

    COMPLEMENT INTERNAL PRODUCT DEVELOPMENT WITH STRATEGIC ALLIANCES.  The
Company intends to leverage its technology platform through strategic alliances
with corporate partners. In September 1995, the Company formed a strategic
relationship with St. Jude Medical, Inc. ("St. Jude Medical"), the world's
leading producer of prosthetic heart valves, for the joint development of
prosthetic valve and annuloplasty ring delivery systems for Port-Access
delivery. The Company receives royalties from St. Jude Medical upon sale of
certain St. Jude Medical products that incorporate the Company's proprietary
technology. The Company expects to pursue additional strategic relationships
with corporations and research institutions with respect to the research,
development, regulatory approval, manufacturing and marketing of certain of its
potential products and procedures. See "Strategic Relationships."

                                       6
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TECHNOLOGY

    The Company believes it is currently the only company marketing a technology
designed to permit minimally invasive cardiac surgery to be performed on a
stopped heart with CPB support. The Company's systems for minimally invasive
cardiac surgery consist of a common platform, the EndoCPB System, and
procedure-specific application systems comprising proprietary reusable and
disposable devices.

    ENDOVASCULAR CARDIOPULMONARY BYPASS.  The EndoCPB System is a series of
proprietary catheters used to place the patient on CPB and to stop and protect
the heart during cardiac surgery, without performing a sternotomy. There are
five key components: the Endoaortic Clamp-TM-, a saline-filled balloon catheter,
occludes the ascending aorta, stops and cools the heart via delivery of
cardioplegic solution, monitors aortic root pressures, and drains excess blood
from the heart; the Endovenous Drainage-TM- cannula removes deoxygenated blood
from the body; the Endoarterial Return-TM- cannula returns oxygenated blood to
the body; the Endopulmonary Vent-TM- drains excess blood from the heart via the
pulmonary artery; and the Endocoronary Sinus-TM- Catheter provides an
alternative route for delivery of cardioplegic solution. Each component of the
EndoCPB System is positioned within the vascular system via peripheral vascular
access.

    PORT-ACCESS CORONARY ARTERY BYPASS GRAFTING.  The Port-Access CABG System
currently consists of 25-30 reusable and disposable devices designed to perform
the entire CABG procedure in a minimally invasive manner. The system includes
devices for accessing the heart and its associated vessels, visualizing the
interior of the thoracic cavity, accessing and preparing the arterial and venous
grafts, attaching the grafts to the diseased coronary artery, and various other
supporting activities. The devices are designed to permit the surgeon to operate
through ports with the same surgical precision and accuracy as is possible using
conventional cardiac surgical instruments through a sternotomy.

    PORT-ACCESS MITRAL VALVE REPAIR AND MITRAL VALVE REPLACEMENT.  The
Port-Access MVR System currently consists of 25-30 reusable and disposable
devices. This system is designed to be compatible with existing implantable
prosthetic heart valves and prosthetic annuloplasty rings. They permit the
surgeon to perform mitral valve surgery in a minimally invasive manner, and
offer the surgeon the ability to visualize the interior of the thoracic cavity,
open the left atrium of the heart to gain access to the mitral valve, visualize
the interior of the heart, assess valve function, repair or remove the diseased
valve, size the prosthesis (either a prosthetic heart valve or annuloplasty
ring), deliver and attach the prosthesis and close the heart. The Port-Access
MVR System is designed to permit precise and accurate surgery to be performed
through small ports.

    PORT-ACCESS AORTIC VALVE REPLACEMENT AND OTHER PROCEDURES.  The Company is
in the process of developing a Port-Access AVR system. In addition, the Company
is actively developing systems for performing other Port-Access cardiac surgery
procedures. There can be no assurance, however, that any such systems will be
successfully developed, be granted required regulatory clearances or approvals,
or achieve any significant level of market acceptance.

REGULATORY STATUS

    UNITED STATES

    In October 1996, the Company received 510(k) clearance from the FDA to
market its EndoCPB system and several proprietary Class II disposable surgical
devices for its Port-Access surgery systems. In addition, the Company received
premarket notification exemptions clearing its core reusable and disposable
surgical devices to be labeled and used for minimally invasive cardiovascular
surgery. These clearances and exemptions allowed the Company to commercially
launch its Port-Access CABG System and Port-Access MVR System in early 1997.
Since that time the Company has received additional clearances and exemptions
from the FDA for other devices and enhancements to its system.

                                       7
<PAGE>
    The Company continues to submit 510(k) notifications for additional
enhancements to its EndoCPB System and for additional specialty disposable
devices to further enhance performance of the Port-Access CABG and MVR
procedures. Additional 510(k) submissions are planned for 1998 for devices to
facilitate Port-Access procedures other than CABG and MVR. There can be no
assurance that the FDA will act favorably or quickly on the Company's 510(k)
submissions, and significant difficulties and costs may be encountered by the
Company in its efforts to obtain these additional FDA clearances that could
delay or preclude the Company from marketing and selling products for additional
procedures. See "Risk Factors-- No Assurance of Regulatory Clearance or
Approval; Significant Domestic and International Regulations," and "Government
Regulation."

    INTERNATIONAL

    In January 1997, the Company received CE Mark clearance for its EndoCPB
System which allows the sale of its Port-Access CABG and MVR systems in all
countries of the European Union. The Company has also submitted amendments to
its Product Dossiers for enhancements to its EndoCPB System to further enhance
performance of the Port-Access CABG and MVR procedures. Additional CE Mark
submissions are planned for 1998 for devices to facilitate Port-Access
procedures other than CABG and MVR. See "Risk Factors--No Assurance of
Regulatory Clearance or Approval; Significant Domestic and International
Regulations," and "Government Regulation."

SCIENTIFIC ADVISORY BOARD

    The Company has established a Scientific Advisory Board composed of
individuals with expertise in the field of cardiac surgery. The Scientific
Advisory Board periodically reviews the Company's clinical progress and product
development plans and identifies potential applications of the Company's
technology. In addition, members of the Scientific Advisory Board will be
available on an individual basis to consult with the Company as needed. The
members of the Scientific Advisory Board are consultants to the Company and have
substantial constraints on the amount of time they can devote to Company
matters. The members of the Scientific Advisory Board are as follows:

<TABLE>
<CAPTION>
               NAME                                         OCCUPATION/TITLE
----------------------------------  -----------------------------------------------------------------
<S>                                 <C>
William A. Baumgartner, M.D.        Professor of Surgery, Cardiac Surgeon In-Charge, Johns Hopkins
                                    Hospital

Lawrence H. Cohn, M.D.              Professor of Surgery, Harvard Medical School, Chief, Division of
                                    Cardiac Surgery, Brigham and Women's Hospital

Delos M. Cosgrove, M.D.             Chairman, Department of Thoracic and Cardiovascular Surgery, The
                                    Cleveland Clinic Foundation

James L. Cox, M.D.                  Professor and Chairman, Cardiovascular and Thoracic Surgery,
                                    Surgical Director, Georgetown University Cardiovascular
                                    Institute, Georgetown University Medical Center

Bruce A. Reitz, M.D.                Professor and Chairman, Department of Cardiothoracic Surgery,
                                    Stanford University School of Medicine
</TABLE>

STRATEGIC RELATIONSHIPS

    The Company intends to pursue strategic relationships with corporations and
research institutions with respect to the research, development, regulatory
approval, manufacturing, and marketing of certain of its potential products and
procedures.

                                       8
<PAGE>
    ST. JUDE MEDICAL, INC.

    The Company has formed a strategic relationship with St. Jude Medical, the
world's leading producer of prosthetic heart valves, for the joint development
of prosthetic valve and annuloplasty ring delivery systems for Port-Access MVR
and a prosthetic valve system for Port-Access AVR. Under the terms of an
agreement entered into in September 1995 and amended in January 1997, the
Company granted St. Jude Medical a non-exclusive, worldwide, royalty bearing
license to make, use, and sell a minimally invasive prosthetic valve system
incorporating a Port-Access delivery system and a St. Jude Medical valve or
annuloplasty ring prosthesis for use in Port-Access heart valve repair and
replacement procedures. St. Jude Medical has no minimum purchase obligations
under the agreement. In addition, the Company borrowed $3.0 million from St.
Jude Medical. As of December 31, 1996, the entire amount of the loan had been
converted to prepaid royalty payments.

    GETZ BROS. CO., LTD.

    In December 1997, the Company entered into a distribution, training and
supply agreement with Getz Bros. Co., Ltd. ("Getz") under which Getz will be the
Company's exclusive distributor of Port-Access minimally invasive cardiac
surgery systems in Japan. Pursuant to the agreement, Getz is responsible for
obtaining regulatory approvals and government reimbursement in Japan for the
Company's products. Getz is also responsible for marketing and sales, which will
be overseen by a committee of Heartport and Getz representatives. The Company
recognized $1.0 million in fees from Getz upon the execution of this agreement
in December 1997.

    Although the Company intends to pursue additional strategic relationships in
the future, there can be no assurance that the Company will be successful in
establishing or maintaining any such relationships or that any such relationship
will be successful. See "Risk Factors--Reliance on Strategic Relationships."

RESEARCH AND DEVELOPMENT

    The Company believes that its future success will depend in large part on
its ability to develop and introduce clinically advanced Port-Access minimally
invasive cardiac surgery systems that are effective, easy to use, safe, and
reliable. The Company's research and development department focuses upon the
continued development and refinement of its existing Port-Access devices,
systems, and procedures as well as upon the development of new devices, systems,
and procedures for treating other cardiac diseases.

    To date, the Company has developed systems for Port-Access CABG and
Port-Access MVR surgery. A system for Port-Access aortic valve replacement is
currently under development. In collaboration with its clinical advisory board
and consultants, the Company is actively developing methods and devices for
future Port-Access surgical procedures, as well as continuing development of
reusable, disposable, and implantable devices to further refine current
Port-Access procedures. The Company believes that its EndoCPB and Port-Access
technologies are potentially applicable to a wide variety of other cardiac
surgical procedures. There can be no assurance, however, that the Company will
be successful in developing devices or systems for such procedures, or that such
devices or systems, if any, will be granted required regulatory clearances or
approvals, or achieve any significant level of market acceptance. See "Risk
Factors--No Assurance of Market Acceptance" and "--Significant Competition;
Rapid Technological Change."

MANUFACTURING

    The Company is committed to producing high-quality products and expects to
manufacture internally the most proprietary, value-added components and products
and to outsource less critical manufacturing jobs. The Company manufactures its
products at its Redwood City, California, facilities. The Company believes that
its facilities have sufficient capacity to meet the Company's anticipated
manufacturing needs through the end of 1998. See "Item 2 Properties."

                                       9
<PAGE>
    The Company manufactures its products based on forecasted product orders,
and purchases subassemblies and components prior to receipt of purchase orders
from customers. Lead times for materials and components ordered by the Company
vary significantly, and depend on factors such as the business practices of the
specific supplier, contract terms, and general demand for a component at a given
time. Certain components used in the Company's products have long lead times or
must be ordered on non-cancelable terms. As a result, there is a risk of excess
or inadequate inventory if orders do not match forecasts, as well as potential
costs from non-cancelable orders.

    To meet anticipated demand, the Company must increase the rate by which it
manufactures its products. To date the Company's manufacturing activities have
consisted primarily of manufacturing low volume quantities for initial
commercial sales. The manufacture of the Company's products is complex,
involving a number of separate processes and components. The Company does not
have experience in manufacturing its products in higher volume commercial
quantities. Although the Company is scaling up its capacity to produce products
in higher volume, there can be no assurance that it will be able to successfully
scale-up its production to meet commercial demand for its products in a timely
manner. In addition, the Company believes that cost reductions in its
manufacturing operations will be required for it to commercialize its systems on
a profitable basis. Certain manufacturing processes are labor-intensive, and
achieving significant cost reductions will depend, in part, upon reducing the
time required to complete these processes. Medical device manufacturers often
encounter difficulties in scaling up manufacturing of new products, including
problems involving product yields, quality control and assurance, component and
service availability, adequacy of control policies and procedures, lack of
qualified personnel, compliance with FDA regulations, and the need for further
FDA approval of new manufacturing processes and facilities. To date, the Company
has experienced variable yields in scaling up manufacturing of certain of its
product components, and there can be no assurance that such variability will not
continue or will not adversely impact the Company's ability to meet demand for
its products. The Company has considered and will continue to consider as
appropriate the internal manufacture of components currently provided by third
parties, as well as the implementation of new production processes. There can be
no assurance that manufacturing yields or costs will not be adversely affected
by the transition to in-house production or to new production processes when
such efforts are undertaken, and that such a transition would not materially and
adversely affect the Company's business, financial condition, and results of
operations. While the Company has received ISO 9001 certification, to date, the
FDA has not inspected the Company's compliance with Good Manufacturing Practices
("GMP") requirements, which include testing, control, and documentation
requirements, although the Company expects such inspections to be made in the
near future. There can be no assurance that FDA GMP requirements will be met.

    The Company uses or relies on certain components and services used in its
devices that are provided by sole source suppliers. The qualification of
additional or replacement vendors for certain components or services is a
lengthy process. Any significant supply interruption would have a material
adverse effect on the Company's ability to manufacture its products and,
therefore, a material adverse effect on its business, financial condition, and
results of operations. See "Risk Factors--Limited Manufacturing Experience;
Dependence on Key Suppliers."

    The regulatory clearances received to date by the Company require compliance
with FDA regulations for GMP. Even after the FDA has cleared or approved a
device, it will periodically inspect the manufacturing facilities and processes
for compliance with GMP. In addition, in the event that additional manufacturing
sites are added or manufacturing processes are changed, such new facilities and
processes are also subject to FDA inspection for compliance with GMP. The
Company's manufacturing facilities and processes have not yet been inspected by
the FDA for compliance with GMP. See "Risk Factors--No Assurance of Regulatory
Clearance or Approval; Significant Domestic and International Regulation."

                                       10
<PAGE>
SALES, MARKETING, TRAINING, AND DISTRIBUTION

    The Company's EndoCPB and Port-Access systems in the United States are
marketed both to cardiac surgeons and to cardiac surgery centers. In the United
States, there are approximately 900 cardiac surgery centers and approximately
2,500 cardiac surgeons. The Company believes it can market its products in the
United States with a moderately sized direct sales organization. Outside the
United States, there are approximately 2,500 cardiac surgeons. In Europe, the
Company is building a direct sales force. In Japan, the Company intends to
market and sell its products through its exclusive distribution, training and
supply agreement with Getz. In other geographic regions the Company will
evaluate direct and indirect sales channels as appropriate. The Company
currently has a limited sales and marketing organization in the United States
and Europe. Establishment of a sales force capable of effectively
commercializing the Company's EndoCPB and Port-Access systems will require
substantial efforts and require significant management and financial resources.
There can be no assurance that the Company will be able to establish such a
sales capability on a timely basis, if at all. See "Risk Factors--Limited Sales,
Marketing, and Distribution Experience."

    The Company has developed a procedural selling approach to market its
systems to cardiac surgeons, called the Port-Access Partnership-SM-. The Company
intends to utilize its Port-Access Partnership to promote customer loyalty. In
the partnership, Heartport trains a center's surgical team, supplies patient and
referring physicians educational materials, supports local market media efforts
and furnishes proprietary reusable devices for Port-Access procedures in
exchange for a purchase order for Port-Access disposable products necessary to
perform Port-Access cardiac surgery.

    The effective and rapid training of surgical teams in the use of Heartport's
systems and devices is critical to the Company's efforts to develop its
business. To that end, in October 1996, the Company acquired substantially all
of the assets of Utah Biomedical Test Laboratory ("UBTL"). UBTL's Utah facility
was established in the early 1970s to be the home of the United States
government's artificial heart program. This 50,000 square foot facility, now
called the Heartport Research and Training Center ("HRTC"), is a
state-of-the-art cardiovascular research and training center. Surgical teams
began training at HRTC in January 1997. The Company also plans to work with
selected cardiac surgery centers to enhance the Company's technology and broaden
its applicability to treat CAD, VHD, and other cardiovascular diseases. In
addition, the Company intends to support rigorous, clinically driven research
efforts to prove the efficacy and benefits of Port-Access minimally invasive
cardiac surgery. In this regard, in 1997 the Company established the Port-Access
International Registry, a multi-center registry designed to improve patient
outcomes and advance Port-Access minimally invasive cardiac surgery by sharing
aggregate knowledge maintained in the registry database.

    The Company's sales and marketing strategy includes developing and
maintaining a close working relationship with its customers in order to assess
and satisfy their needs for products and services. The Company meets with its
Scientific Advisory Board and other clinical consultants periodically to share
ideas regarding the marketplace, existing products, products under development,
and existing or proposed research projects.

COMPETITION

    The Company expects that the market for minimally invasive cardiac surgery,
which is currently in the early stages of development, will become intensely
competitive. Competitors are likely to include a variety of different companies
that currently specialize in devices for conventional cardiac surgery, as well
as those that specialize in non-cardiac minimally invasive surgery. The Company
believes that a number of large companies, including Baxter International Inc.,
the Ethicon Endosurgery division of Johnson & Johnson, Genzyme Corporation,
Guidant Corporation, Medtronic, Inc., United States Surgical Corporation, and
others with significantly greater financial, manufacturing, marketing,
distribution, and technical resources and experience than the Company, may be
focusing on the development of minimally invasive cardiac

                                       11
<PAGE>
surgery technology. In addition, new companies have been and are likely to
continue to be started to pursue opportunities in this market. Several companies
have announced interest in and development of products for the minimally
invasive cardiac surgery field. For example, there are companies pursuing
minimally invasive cardiac surgery on a beating heart, which, if successful,
could materially adversely affect the Company's ability to establish a market
for its technology.

    Cardiovascular diseases that can be treated with the Company's Port-Access
systems can also be treated by pharmaceuticals or other medical devices and
procedures, including PTCA, intravascular stents, atherectomy catheters and
lasers. Many of these alternative treatments are widely accepted in the medical
community and have a long history of use. In addition, technological advances
with other therapies for heart disease such as drugs or future innovations in
cardiac surgery techniques could make such other therapies more effective or
lower in cost than the Company's Port-Access procedures and could render the
Company's technology obsolete. There can be no assurance that physicians will
use Port-Access procedures to replace or supplement established treatments, such
as conventional open-chest heart surgery and PTCA, or that the Company's
Port-Access systems will be competitive with current or future technologies.
Such competition could have a material adverse effect on the Company's business,
financial condition, and results of operations. Any product developed by the
Company that gains regulatory approval will have to compete for market
acceptance and market share. An important factor in such competition may be the
timing of market introduction of competitive products. Accordingly, the relative
speed with which the Company can develop products, complete clinical testing and
regulatory approval processes, train physicians in the use of its products, gain
reimbursement acceptance, and supply commercial quantities of the product to the
market are expected to be important competitive factors. In addition, the
Company believes that the primary competitive factors in the market for
Port-Access systems will be safety, efficacy, ease of use, quality and
reliability, cost-effectiveness, training support, innovation, breadth of
product line, and price. The Company also believes that physician relationships
and customer support are important competitive factors. The Company has
experienced delays in completing the development and introduction of new
products, product variations and product features, and there can be no assurance
that such delays will not continue or recur in the future. Such delays could
result in a loss of market acceptance and market share. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors. Failure to do so would have a material adverse effect
upon the Company's business, financial condition, and results of operations. See
"Risk Factors--Significant Competition; Rapid Technological Change."

GOVERNMENT REGULATION

    UNITED STATES

    The Company's Port-Access systems are regulated in the United States as
medical devices. As such, the Company is subject to extensive regulation by the
FDA. Pursuant to the Federal Food, Drug, and Cosmetic Act of 1938, as amended,
and the regulations promulgated thereunder (the "FDC Act"), the FDA regulates
the clinical testing, manufacture, labeling, distribution and promotion of
medical devices. Noncompliance with applicable requirements can result in, among
other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure of the government
to grant pre market clearance or premarketmarket approval for devices,
withdrawal of marketing approvals, a recommendation by the FDA that the Company
not be permitted to enter into government contracts and criminal prosecution.
The FDA also has the authority to request repair, replacement or refund of the
cost of any device manufactured or distributed by the Company.

    In the United States, medical devices are classified into one of three
classes, Class I, II, or III, on the basis of the controls deemed by the FDA to
be necessary to reasonably ensure their safety and effectiveness. Class I
devices are subject to general controls (e.g., labeling, premarket notification
and adherence to GMPs). Class II devices are subject to general controls and to
special controls (e.g., performance standards, postmarket surveillance, patient
registries, and FDA guidelines). Generally, Class III devices

                                       12
<PAGE>
are those that must receive premarket approval by the FDA to ensure their safety
and effectiveness (e.g., life-sustaining, life-supporting and implantable
devices, or new devices which have not been found substantially equivalent to
legally marketed devices), and require clinical testing to ensure safety and
effectiveness and FDA approval prior to marketing and distribution. A premarket
approval ("PMA") application usually must be filed if the proposed device is not
substantially equivalent to a legally marketed predicate device or if it is a
Class III device for which the FDA has called for such applications.

    Before a new device can be introduced into the market, the manufacturer must
generally obtain marketing clearance through a premarket notification under
Section 510(k) of the FDC Act or a PMA application under Section 515 of the FDC
Act. A 510(k) clearance typically will be granted if the submitted information
establishes that the device is "substantially equivalent" to a legally marketed
Class I or II medical device or to a Class III medical device for which the FDA
has not called for PMAs. A 510(k) notification must contain information to
support a claim of substantial equivalence, which may include laboratory test
results or the results of clinical studies of the device in humans. Commercial
distribution of a device for which a 510(k) notification is required can begin
only after the FDA issues an order finding the device to be "substantially
equivalent" to a predicate device. The FDA has recently been requiring a more
rigorous demonstration of substantial equivalence than in the past and is more
likely to require the submission of human clinical trial data. It generally
takes from four to twelve months from the date of submission to obtain FDA
clearance of a 510(k) notification, but it may take longer. The FDA may
determine that a proposed device is not substantially equivalent to a legally
marketed device, or that additional information is needed before a substantial
equivalence determination can be made. A PMA application usually must be filed
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 that
typically includes extensive data, including preclinical and human clinical
trial data to demonstrate the safety and efficacy of the device. Under recent
amendments to the FDC Act, a person who obtains a "not substantially equivalent"
determination after submitting a 510(k) notification has the option of
requesting a review of that automatic Class III classification, and must provide
data and information to the FDA to support the requested classification of the
device into Class I or Class II. If the FDA determines the device should remain
in Class III, a PMA will be required. A "not substantially equivalent"
determination, or a request for additional information, could delay the market
introduction of new products that fall into this category. See "Risk Factors--No
Assurance of Regulatory Clearance or Approval; Significant Domestic and
International Regulation."

    If human clinical trials of a device are required in support of either a
510(k) notification or a PMA application, and the device presents a "significant
risk," the sponsor of the trial (usually the manufacturer or the distributor of
the device) is required to file an investigational device exception ("IDE")
application with the FDA prior to commencing human clinical trials. A
"significant risk" device is defined to include a device that is an implant, is
life-supporting or life-sustaining, or is of substantial importance in
diagnosing or treating disease or preventing impairment of human health, and
that presents a potential for serious risk to the health, safety, or welfare of
the patient. The IDE application must be supported by data, typically including
the results of animal and laboratory testing. If the IDE application is approved
by the FDA and one or more appropriate institutional review boards ("IRBs"),
human clinical trials may begin at a specific number of investigational sites
with a specific number of patients, as approved by the FDA. If the device
presents a "nonsignificant risk" to the patient, a sponsor may begin the
clinical trial after obtaining approval for the study by one or more appropriate
IRBs, but not the FDA. Sponsors of clinical trials are permitted to charge for
those devices distributed in the course of the study provided such compensation
does not exceed recovery of the costs of manufacture, research, development and
handling. An IDE supplement must be submitted to and approved by the FDA before
a sponsor or an investigator may make a change to the investigational plan that
may affect its scientific soundness or the rights, safety or welfare of human
subjects.

                                       13
<PAGE>
    A PMA application must also contain the results of all relevant bench tests,
laboratory and animal studies, a complete description of the device and its
components, and a detailed description of the methods, facilities and controls
used to manufacture the device. In addition, the submission must include the
proposed labeling, advertising literature and training methods (if required).
Upon receipt of a PMA application, the FDA makes a threshold determination as to
whether the application is sufficiently complete to permit a substantive review.
If the FDA determines that the PMA application is sufficiently complete to
permit a substantive review, the FDA will accept the application for filing.
Once the submission is accepted for filing, the FDA begins an in-depth review of
the PMA application. An FDA review of a PMA application generally takes one to
three years from the date the PMA application is accepted for filing, but may
take significantly longer. The review time is often significantly extended by
the FDA asking for more information or clarification of information already
provided in the submission. During the review period, an advisory committee,
typically a panel of clinicians, will likely be convened to review and evaluate
the application and provide recommendations to the FDA as to whether the device
should be approved. The FDA is not bound by the recommendations of the advisory
panel. Toward the end of the PMA application review process, the FDA generally
will conduct an inspection of the manufacturer's facilities to ensure that the
facilities are in compliance with the applicable GMP requirements.

    If the FDA's evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA will either issue an approval letter or an
"approvable letter" containing a number of conditions which must be met in order
to secure final approval of the PMA application. When and if those conditions
have been fulfilled to the satisfaction of the FDA, the agency will issue an
approval of the PMA application, authorizing commercial marketing of the device
for certain indications. If the FDA's evaluation of the PMA application or
manufacturing facilities is not favorable, the FDA will deny approval of the PMA
application or issue a "not approvable letter." The FDA may also determine that
additional clinical trials are necessary, in which case the PMA could be delayed
for several years while additional clinical trials are conducted and submitted
in an amendment to the PMA application. The PMA process can be expensive,
uncertain, and lengthy, and a number of devices for which FDA approval has been
sought by other companies have never been approved for marketing.

    Use of a medical device for applications not covered in a 510(k)
notification or a PMA, or modifications to a device that has been cleared to
market through a 510(k) notification or an approved PMA, its labeling, or its
manufacturing process, may require submission of a new 510(k) notification, a
new PMA application, or a PMA application supplement. New 510(k) notifications,
PMA applications, or PMA supplements often require the submission of the same
type of information required for the original submission except that it is
generally limited to that information needed to support the proposed change from
the product covered by the original submission.

    Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA, including record-keeping requirements and reporting of adverse
experiences with the use of the device. Device manufacturers are required to
register their establishments and list their devices with the FDA and certain
state agencies, and are subject to periodic inspections by the FDA and certain
state agencies. The FDC Act requires devices to be manufactured in accordance
with GMP regulations that impose certain procedural and documentation
requirements upon the Company with respect to manufacturing and quality
assurance activities. Toward the end of the clearance or approval process, the
FDA generally will conduct an inspection of the manufacturer's facilities to
ensure that the facilities are in compliance with the applicable GMP
requirements. New quality system regulations were enacted in 1997 which effected
major changes in device GMP regulations. The FDA is currently implementing these
changes to the GMP regulations that, among other things, require design controls
and maintenance of service records, and will likely increase the cost of
complying with GMP 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

                                       14
<PAGE>
unapproved uses. The Company and its products are also subject to a variety of
state laws and regulations in those states or localities where its products are
or will be marketed. Any applicable state or local regulations may hinder the
Company's ability to market its products in those states or localities. The
Company is also subject to numerous federal, state and local laws relating to
such matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control, and disposal of hazardous or potentially
hazardous substances. There can be no assurance that the Company will not be
required to incur significant costs to comply with such laws and regulations now
or in the future.

    Changes in existing requirements or adoption of new requirements or policies
could adversely affect the ability of the Company to comply with regulatory
requirements. Failure to comply with regulatory requirements could have a
material adverse effect on the Company's business, financial condition, and
results of operations. There can be no assurance that the Company will not be
required to incur significant costs to comply with laws and regulations in the
future. See "Risk Factors--No Assurance of Regulatory Clearance or Approval;
Significant Domestic and International Regulation."

    INTERNATIONAL

    In order for the Company to market Port-Access systems in Europe, Japan and
certain other foreign jurisdictions, the Company must obtain required regulatory
approvals and clearances and otherwise comply with extensive regulations
regarding safety and manufacturing processes and quality. These regulations,
including the requirements for approvals or clearance to market and the time
required for regulatory review, vary from country to country. There can be no
assurance that the Company will obtain regulatory approvals in such countries or
that it will not be required to incur significant costs in obtaining or
maintaining its foreign regulatory approvals. Delays in receipt of approvals to
market the Company's products, failure to receive these approvals or future loss
of previously received approvals could have a material adverse effect on the
Company's business, financial condition, and results of operations.

    The time required to obtain approval for sale in foreign countries may be
longer or shorter than that required for FDA approval, and the requirements may
differ. In addition, there may be foreign regulatory barriers other than
premarket approval, and the FDA must approve exports of devices that require a
PMA but are not yet approved domestically. The current rules provide that, in
order to obtain FDA export approval, the Company must provide the FDA with
documentation from the medical device regulatory authority of the importing
country stating that the import of the device is not a violation of that
country's medical device laws.

    The European Community has promulgated rules that require that medical
products receive by mid-1998 the right to affix the CE Mark, an international
symbol of adherence to quality assurance standards and compliance with
applicable European medical device directives. The Company received the CE Mark
in January 1997, which allows it to sell its Port-Access CABG System and
Port-Access MVR System in member countries of the European Union. Although the
European directives are intended to insure free movement within the European
Union of medical devices that bear the CE Mark, some European countries have
imposed additional requirements for approvals or premarket notifications. In
addition, regulatory authorities in European countries can demand evidence on
which conformity assessments for CE-Marked devices are based and in certain
circumstances can prohibit the marketing of products that bear the CE Mark. Many
European countries maintain systems to control the purchase and reimbursement of
medical equipment under national health care programs, and the CE Mark does not
affect these systems.

    The Company's products have not received regulatory approval in Japan, nor
have they been approved for government reimbursement in Japan.

                                       15
<PAGE>
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

    The Company believes that its competitive position will be dependent in
significant part on its ability to protect its intellectual property. The
Company's policy is to seek to protect its proprietary position by, among other
methods, filing United States and foreign patent applications related to its
technology, inventions and improvements that are important to the development of
its business. As of March 16, 1998, the Company owns 59 issued or allowed United
States patents, and one issued foreign patent. In addition, as of March 16, 1998
the Company has 84 pending United States patent applications, and has filed 45
patent applications that are currently pending in Europe, Japan, Australia, and
Canada. There can be no assurance that the Company's issued patents, or any
patents that may be issued in the future, will effectively protect the Company's
technology or provide a competitive advantage. There can be no assurance that
any of the Company's patents or patent applications will not be challenged,
invalidated, or circumvented in the future. In addition, there can be no
assurance that competitors, many of which have substantially more resources than
the Company and have made substantial investments in competing technologies,
will not seek to apply for and obtain patents that will prevent, limit or
interfere with the Company's ability to make, use, or sell its products either
in the United States or internationally.

    The Company also relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants, and
advisors to execute confidentiality and assignment of inventions agreements in
connection with their employment, consulting, or advisory relationships with the
Company. There can be no assurance, however, that these agreements will not be
breached or that the Company will have adequate remedies for any breach.
Furthermore, no assurance can be given that competitors will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's proprietary technology, or that the
Company can meaningfully protect its rights in unpatented proprietary
technology.

    Patent applications in the United States are maintained in secrecy until
patents issue, and patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Patents issued and patent applications filed
relating to medical devices are numerous and there can be no assurance that
current and potential competitors and other third parties have not filed or in
the future will not file applications for, or have not received or in the future
will not receive, patents or obtain additional proprietary rights relating to
products or processes used or proposed to be used by the Company. The Company is
aware of patents issued to third parties that contain subject matter related to
the Company's technology. Based, in part, on advice of its patent counsel, the
Company believes that the technologies employed by the Company in its devices
and systems do not infringe the claims of any such patents. There can be no
assurance, however, that third parties will not seek to assert that the
Company's devices and systems infringe their patents or seek to expand their
patent claims to cover aspects of the Company's technology.

    The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular, has
been characterized by substantial competition and litigation regarding patent
and other intellectual property rights. Any such claims, whether with or without
merit, could be time-consuming and expensive to respond to and could divert the
Company's technical and management personnel. The Company may be involved in
litigation to defend against claims of infringement by other patent holders, to
enforce patents issued to the Company, or to protect trade secrets of the
Company. If any relevant claims of third-party patents are upheld as valid and
enforceable in any litigation or administrative proceeding, the Company could be
prevented from practicing the subject matter claimed in such patents, or would
be required to obtain licenses from the patent owners of each such patent, or to
redesign its products or processes to avoid infringement. There can be no
assurance that such licenses would be available or, if available, would be
available on terms acceptable to the Company or that the Company would be
successful in any attempt to redesign its products or processes to avoid
infringement.

                                       16
<PAGE>
Accordingly, an adverse determination in a judicial or administrative proceeding
or failure to obtain necessary licenses could prevent the Company from
manufacturing and selling its products, which would have a material adverse
effect on the Company's business, financial condition, and results of
operations. The Company intends to vigorously protect and defend its
intellectual property. Costly and time-consuming litigation brought by the
Company may be necessary to enforce patents issued to the Company, to protect
trade secrets or know-how owned by the Company or to determine the
enforceability, scope and validity of the proprietary rights of others. See
"Risk Factors--Uncertainty Regarding Patents and Protection of Proprietary
Technology; Risks of Future Litigation."

THIRD-PARTY REIMBURSEMENT

    The Company expects that sales volumes and prices of the Company's products
will be heavily dependent on the availability of reimbursement from third-party
payors and that individuals seldom, if ever, will be willing or able to pay
directly for the costs associated with the use of the Company's products. The
Company's products typically are purchased by clinics, hospitals, and other
users, which bill various third-party payors, such as governmental programs and
private insurance plans, for the healthcare services provided to their patients.
Third-party payors carefully review and increasingly challenge the prices
charged for medical products and services. Reimbursement rates from private
companies vary depending on the procedure performed, the third-party payor, the
insurance plan, and other factors. Medicare reimburses hospitals a prospectively
determined fixed amount for the costs associated with an in-patient
hospitalization based on the patient's discharge diagnosis, and reimburses
physicians a prospectively determined fixed amount based on the procedure
performed, regardless of the actual costs incurred by the hospital or physician
in furnishing the care and unrelated to the specific devices used in that
procedure. Medicare and other third-party payors are increasingly scrutinizing
whether to cover new products and the level of reimbursement for covered
products.

    In foreign markets, reimbursement is obtained from a variety of sources,
including governmental authorities, private health insurance plans, and labor
unions. In most foreign countries, there are also private insurance systems that
may offer payments for alternative therapies. Although not as prevalent as in
the United States, health maintenance organizations are emerging in certain
European countries. The Company may need to seek international reimbursement
approvals, although there can be no assurance that any such approvals will be
obtained in a timely manner or at all. Failure to receive international
reimbursement approvals could have an adverse effect on market acceptance of the
Company's products in the international markets in which such approvals are
sought.

    The Company believes that reimbursement in the future will be subject to
increased restrictions such as those described above, both in the United States
and in foreign markets. The Company believes that the overall escalating cost of
medical products and services has led to and will continue to lead to increased
pressures on the health care industry, both foreign and domestic, to reduce the
cost of products and services, including products offered by the Company. There
can be no assurance as to either United States or foreign markets that
third-party reimbursement and coverage will be available or adequate, that
current reimbursement amounts will not be decreased in the future or that future
legislation, regulation, or reimbursement policies of third-party payors will
not otherwise adversely affect the demand for the Company's products or its
ability to sell its products on a profitable basis, particularly if the
Company's systems are more expensive than competing cardiac surgery procedures.
If third-party payor coverage or reimbursement is unavailable or inadequate, the
Company's business, financial condition, and results of operations could be
materially adversely affected. See "Risk Factors--Limitations on Third-Party
Reimbursement."

                                       17
<PAGE>
EMPLOYEES

    As of December 31, 1997, the Company had a total of 393 employees. The
Company maintains compensation, benefit, equity participation, and work
environment policies intended to assist in attracting and retaining qualified
personnel. The Company believes that the success of its business will depend, in
significant part, on its ability to attract and retain such personnel. None of
the Company's employees is represented by a collective bargaining agreement, nor
has the Company experienced any work stoppage. The Company considers its
relations with its employees to be good.

RISK FACTORS

    This Annual Report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from those discussed in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, the following:

    EARLY STAGE OF UTILIZATION; NO ASSURANCE OF SAFETY AND EFFICACY

    The Company's EndoCPB System, Port-Access CABG System, and Port-Access MVR
System and related devices are at an early stage of clinical utilization, and
there can be no assurance as to their clinical safety and efficacy. Port-Access
minimally invasive cardiac surgery has many of the risks of open-chest heart
surgery, including bleeding from the wound or internal organs, irregular
heartbeat, formation of blood clots and related complications, infection, heart
attack, heart failure, stroke, and death. Port-Access minimally invasive cardiac
surgery also has additional risks compared to open-chest surgery, including
tearing or splitting of major blood vessels, damage to blood vessels in the
groin, and groin pain. Although there can be no assurance in this regard, the
Company believes, based on the limited clinical experience to date, that
mortality and morbidity rates associated with Port-Access surgical procedures
are comparable to mortality and morbidity rates experienced with conventional
open-chest procedures. If, with further experience, any of the Company's systems
do not prove to be safe and effective or if the Company is otherwise unable to
commercialize them successfully, the Company's business, financial condition,
and results of operations will be materially adversely affected and the
Company's business could cease.

    NO ASSURANCE OF MARKET ACCEPTANCE

    There can be no assurance that the Company's EndoCPB and Port-Access systems
will gain any significant degree of market acceptance among physicians,
patients, and health care payors. The Company believes that physicians'
acceptance and healthcare payors' reimbursement of Port-Access procedures will
be essential for market acceptance of its systems, and there can be no assurance
that any such recommendations or approvals will be obtained. Physicians will not
recommend Port-Access procedures unless they conclude, based on clinical data,
ease of use, operative time and other factors, that Port-Access procedures are
an attractive alternative to other treatments for cardiovascular disease. Most
patients with cardiovascular disease first consult with a cardiologist, who may
treat the patient with pharmaceuticals or non-surgical interventions such as
percutaneous transluminal coronary angioplasty ("PTCA") and intravascular
stents, or may refer the patient to a cardiac surgeon for open-chest surgery.
Cardiologists may not recommend Port-Access procedures until such time, if any,
as Port-Access procedures can be successfully demonstrated to be as safe and
cost-effective as other accepted treatments. In addition, cardiac surgeons may
elect not to recommend Port-Access procedures until such time, if any, as the
efficacy of the Company's Port-Access procedures can be successfully
demonstrated as compared to conventional, open-chest surgery methods, which have
become widely adopted by cardiac surgeons since the initial use of such surgery
in the mid-1950s. Even if the clinical efficacy of Port-Access procedures is
established, cardiologists, cardiac surgeons, and other physicians may elect not
to recommend the procedures for any number of other reasons. The Company
believes that procedure volume by trained cardiac surgery teams has been
negatively impacted by ease of use issues, the significant physician learning
curve, and longer procedure

                                       18
<PAGE>
times associated with Port-Access surgery. Although the Company has recently
re-focused its training and sales efforts on addressing these issues, there can
be no assurance that it will be successful in increasing procedure volume or
that the products will obtain any significant degree of market acceptance.
Failure of the Company to increase procedural volume by trained teams or failure
of the Company's products to achieve significant market acceptance would have a
material adverse effect on the Company's business, financial condition, and
results of operations.

    FLUCTUATIONS IN OPERATING RESULTS

    Results of operations may vary significantly from quarter to quarter and
year to year depending upon numerous factors, including the following: demand
for the Company's products; the number of cardiac surgery teams trained in the
use of the Company's systems and the number of procedures performed by those
teams; the number of hospitals that begin using the Company's products; the
ability of the Company to manufacture, test and deliver its products in
commercial volumes; health care reform and reimbursement policies; delays
associated with the FDA and other regulatory approval processes; changes in
pricing policies by the Company or its competitors; the number, timing, and
significance of product enhancements and new product announcements by the
Company and its competitors; the ability of the Company to develop, introduce,
and market new and enhanced versions of the Company's products on a timely
basis; customer order deferrals in anticipation of enhancements or new products
offered by the Company or its competitors; product quality problems; personnel
changes; and the level of international sales. In addition, the Company's
operating results are affected by seasonality (principally during each fourth
quarter due to fewer operating days and fewer elective cardiovascular surgeries
scheduled over the holidays). Furthermore, the Company is continuing to develop
its direct sales force. The timing of such development and the rate at which new
sales people become productive could also cause material fluctuations in the
Company's quarterly operating results.

    Operating results have been and will continue to be difficult to forecast.
Future revenue, if any, is also difficult to forecast because the market for
minimally invasive cardiac surgery systems is rapidly evolving, because of the
inherent risks associated with new medical device technology, and due to the
uncertainty as to whether the Company's efforts to increase procedure volume by
trained cardiac surgery teams will be successful. Accordingly, the Company
believes that period-to-period comparisons of its operating results are not
necessarily meaningful and should not be relied upon as indications of future
performance. Failure by the Company, for any reason, to increase revenue from
sales of its products would have a material adverse effect on the Company's
business, operating results, and financial condition. Due to the foregoing
factors, it is likely that in some future quarter the Company's operating
results will be below the expectations of public market analysts and investors.
In such event, the price of the Company's Common Stock would likely be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Research and Development,"
"Manufacturing," "Competition," "Government Regulation," and "Third-Party
Reimbursement."

    CUSTOMER CONCENTRATION

    Approximately 36% of the Company's net sales in 1997 were derived from sales
to 20 customers. However, the Company believes that these customers actually
performed a substantially higher percentage of the Port-Access procedures
performed during 1997. The Company believes that during 1998 this customer
concentration will continue as the Company focuses on strengthening its
relationships with active, higher volume customers. There can be no assurance
that the Company's principal customers will continue to purchase products from
the Company at current levels, if at all. The loss of, or a significant adverse
change in, the relationship between the Company and any major customer would
have a material adverse effect on the Company's business, financial condition
and results of operations.

                                       19
<PAGE>
    RISKS ASSOCIATED WITH NEW SURGICAL PROCEDURE; EXTENSIVE TRAINING
     REQUIREMENTS

    Use of the Company's EndoCPB System, Port-Access CABG System, and
Port-Access MVR System to date has shown that, as with any novel surgical
procedure, there is a substantial learning process involved for surgeons and
other members of the cardiac surgery team. Typically, a significant amount of
time and effort spent in training as well as completion of a number of
Port-Access procedures is required before a cardiac surgery team becomes
proficient with the Company's products. In addition, certain patients requiring
heart surgery cannot be treated with the present Port-Access systems, depending
upon their anatomy, what kind of condition they have and how severe it is. These
patients include people with severe peripheral vascular disease
(arteriosclerosis), a poorly functioning aortic valve, an enlarged heart, or
certain types of chest scarring. Broad use of the Company's systems will require
extensive training of numerous physicians, and the time required to begin and
complete such training could adversely affect market acceptance. There can be no
assurance that the Company will be able to rapidly train physicians in numbers
sufficient to generate adequate demand for the Company's products and systems.
Any delay in training or delay in trained surgical teams' ability to become
proficient with the Company's products would have a material adverse effect on
the demand for the Company's products and systems and, therefore, a material
adverse effect on its business, financial condition, and results of operations.

    LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON KEY SUPPLIERS

    To meet anticipated demand, the Company must increase the rate by which it
manufactures its products. To date, the Company's manufacturing activities have
consisted primarily of manufacturing low volume quantities for initial
commercial sales. The manufacture of the Company's products is complex,
involving a number of separate processes and components. The Company does not
have experience in manufacturing its products in higher volume commercial
quantities. Although the Company is scaling up its capability to produce
products in higher volume, there can be no assurance that it will be able to
successfully scale-up its production to meet commercial demand for its products
in a timely manner. In addition, the Company believes that cost reductions in
its manufacturing operations will be required for it to commercialize its
systems on a profitable basis. Certain manufacturing processes are
labor-intensive, and achieving significant cost reductions will depend, in part,
upon reducing the time required to complete these processes. Medical device
manufacturers often encounter difficulties in scaling up manufacturing of new
products, including problems involving product yields, quality control and
assurance, component and service availability, adequacy of control policies and
procedures, lack of qualified personnel, compliance with FDA regulations, and
the need for further FDA approval of new manufacturing processes and facilities.
To date, the Company has experienced variable yields in scaling up manufacturing
of certain of its product components, and there can be no assurance that such
variability will not continue or will not adversely impact the Company's ability
to meet demand for its products. The Company has considered and will continue to
consider as appropriate the internal manufacture of components currently
provided by third parties, as well as the implementation of new production
processes. There can be no assurance that manufacturing yields or costs will not
be adversely affected by the transition to in-house production or to new
production processes when such efforts are undertaken, and that such a
transition would not materially and adversely affect the Company's business,
financial condition, and results of operations. Although the Company has
received ISO 9001 certification, to date, the FDA has not inspected the
Company's compliance with GMP requirements, which include testing, control, and
documentation requirements, although the Company expects such inspections to be
made in the near future. There can be no assurance that FDA GMP requirements
will be met. See "Manufacturing."

    The Company uses or relies on a number of components and services used in
its devices that are provided by sole source suppliers. Although the Company is
in the process of identifying alternative sources for certain of such components
and services, the qualification of additional or replacement vendors for certain
components or services is a lengthy process. Any significant supply interruption
would have a

                                       20
<PAGE>
material adverse effect on the Company's ability to manufacture its products
and, therefore, a material adverse effect on its business, financial condition,
and results of operations.

    The Company manufactures its products based on forecasted product orders,
and purchases subassemblies and components prior to receipt of purchase orders
from customers. Lead times for materials and components ordered by the Company
vary significantly, and depend on factors such as the business practices of the
specific supplier, contract terms, and general demand for a component at a given
time. Certain components used in the Company's products have long lead times or
must be ordered on non-cancelable terms. As a result, there is a risk of excess
or inadequate inventory if orders do not match forecasts, as well as potential
costs from non-cancelable orders.

    The Company plans to move its present Redwood City, California operations,
including its manufacturing operations, to a new Redwood City facility in late
1998. Although the Company is preparing to make this move in a manner designed
to mitigate the impact on its manufacturing operations, there can be no
assurance that it will be able to successfully transition its manufacturing
process to the new facility in a manner that does not materially and adversely
affect its business, financial condition, and results of operations.

    SIGNIFICANT COMPETITION; RAPID TECHNOLOGICAL CHANGE

    The Company expects that the market for minimally invasive cardiac surgery,
which is currently in the early stages of development, will be intensely
competitive. Competitors are likely to include a variety of different companies
that currently specialize in devices for conventional cardiac surgery, as well
as those that specialize in non-cardiac minimally invasive surgery. The Company
believes that a number of large companies, including Baxter International Inc.,
the Ethicon Endosurgery division of Johnson & Johnson, Genzyme Corporation,
Guidant Corporation, Medtronic, Inc., United States Surgical Corporation and
others with significantly greater financial, manufacturing, marketing,
distribution, and technical resources and experience than the Company, may be
focusing on the development of minimally invasive cardiac surgery technology. In
addition, new companies have been and will continue to be formed to pursue
opportunities in this market. Several companies have announced interest in and
development of products for the minimally invasive cardiac surgery field. For
example, there are companies pursuing minimally invasive cardiac surgery on a
beating heart, which, if successful, could materially adversely affect the
Company's ability to establish a market for its technology.

    Cardiovascular diseases that can be treated with the Company's Port-Access
systems can also be treated by pharmaceuticals or other medical devices and
procedures including PTCA, intravascular stents, atherectomy catheters and
lasers. Many of these alternative treatments are widely accepted in the medical
community and have a long history of use. In addition, technological advances
with other therapies for heart disease such as drugs or future innovations in
cardiac surgery techniques could make such other therapies more effective or
lower in cost than the Company's Port-Access procedures and could render the
Company's technology obsolete. There can be no assurance that physicians will
use Port-Access procedures to replace or supplement established treatments, such
as conventional open-chest heart surgery, PTCA, or intravascular stents, or that
the Company's Port-Access systems will be competitive with current or future
technologies. Such competition could have a material adverse effect on the
Company's business, financial condition, and results of operations.

    The Company's current products and any future products developed by the
Company that gain regulatory clearance or approval will have to compete for
market acceptance and market share. An important factor in such competition may
be the timing of market introduction of competitive products. Accordingly, the
relative speeds with which the Company can develop products, complete clinical
testing and regulatory approval processes, train physicians in the use of its
products, gain reimbursement acceptance, and supply commercial quantities of the
product to the market are expected to be important competitive factors. The
Company has in the past experienced delays in completing the development and

                                       21
<PAGE>
introduction of new products, product variations and product features, and there
can be no assurance that such delays will not continue or recur in the future.
Such delays could result in a loss of market acceptance and market share. There
can be no assurance that the Company will be able to compete successfully
against current and future competitors. Failure to do so would have a material
adverse effect upon the Company's business, financial condition, and results of
operations. See "Competition."

    SUBSTANTIAL FUTURE LOSSES AND FUTURE CAPITAL REQUIREMENTS

    Since its inception in May 1991, the Company has been engaged in the
research and development of minimally invasive cardiac surgery systems and
related technology. In December 1996, the Company commercially introduced its
Port-Access systems and is now engaged in extensive physician training and
selling activities. Through its Port-Access Partnership program, the Company has
adopted a sales model in which the Company trains a center's surgical team,
supplies patient and referring physician educational materials, supports local
market media efforts and furnishes proprietary reusable devices for Port-Access
procedures in exchange for a purchase order for Port-Access disposable products
necessary to perform Port-Access cardiac surgery.

    The Company has only generated revenue from the sale of products since
December 1996, and it has been unprofitable since inception. For the period from
inception to December 31, 1997, the Company has incurred cumulative net losses
of approximately $101.9 million. For at least the next 18 months, the Company
expects to continue to incur significant losses. There can be no assurance that
the Company will achieve or sustain profitability in the future. Failure to
achieve significant commercial revenues or profitability would have a material
adverse effect on the Company's business, financial condition, and results of
operations.

    The Company believes that it may require additional debt and/or equity
financing. The Company's future liquidity and capital requirements will depend
upon numerous factors, including but not limited to the following: the extent to
which the Company's products gain market acceptance; the timing and costs of
future product introductions; the extent of the Company's ongoing research and
development programs; the costs of training physicians to become proficient in
the use of the Company's products and procedures; the costs of expanding
manufacturing capacity; the costs of developing marketing and distribution
capabilities; the progress and scope of clinical trails required for any future
products; the timing and costs of filing future regulatory submissions; the
timing and costs required to receive both domestic and international
governmental approvals for any future products; and the costs of protecting and
defending its intellectual property. Issuance of additional equity or
convertible debt securities could result in dilution to stockholders. There can
be no assurance that additional financing will be available on terms acceptable
to the Company, or at all. The Company's inability to fund its capital
requirements would have a material adverse effect on the Company's business,
financial condition, and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

    UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY;
     RISKS OF FUTURE LITIGATION

    The Company believes that its competitive position will be dependent in
significant part on its ability to protect its intellectual property. The
Company's policy is to seek to protect its proprietary position by, among other
methods, filing United States and foreign patent applications related to its
technology, inventions, and improvements that are important to the development
of its business. As of March 16, 1997, the Company owns 59 issued or allowed
United States patents, and one issued foreign patent. In addition, as of March
16, 1998, the Company has 84 pending United States patent applications and has
filed 45 patent applications that are currently pending in Europe, Japan,
Australia, and Canada. There can be no assurance that the Company's issued
patents, or any patents that may be issued in the future, will effectively
protect the Company's technology or provide a competitive advantage. There can
be no assurance that any of the Company's patents or patent applications will
not be challenged, invalidated, or circumvented in the future. In addition,
there can be no assurance that competitors, many of which have

                                       22
<PAGE>
substantially more resources than the Company and have made substantial
investments in competing technologies, will not seek to apply for and obtain
patents that will prevent, limit, or interfere with the Company's ability to
make, use, or sell its products either in the United States or internationally.

    The Company also relies upon trade secrets, technical know-how, and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants, and
advisors to execute confidentiality and assignment of inventions agreements in
connection with their employment, consulting, or advisory relationships with the
Company. There can be no assurance, however, that these agreements will not be
breached or that the Company will have adequate remedies for any breach.
Furthermore, no assurance can be given that competitors will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's proprietary technology, or that the
Company can meaningfully protect its rights in unpatented proprietary
technology.

    Patent applications in the United States are maintained in secrecy until
patents issue, and patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Patents issued and patent applications filed
relating to medical devices are numerous and there can be no assurance that
current and potential competitors and other third parties have not filed or in
the future will not file applications for, or have not received or in the future
will not receive, patents or obtain additional proprietary rights relating to
products or processes used or proposed to be used by the Company. The Company is
aware of patents issued to third parties that contain subject matter related to
the Company's technology. Based, in part, on advice of its patent counsel, the
Company believes that the technologies employed by the Company in its devices
and systems do not infringe the claims of any such patents. There can be no
assurance, however, that third parties will not seek to assert that the
Company's devices and systems infringe their patents or seek to expand their
patent claims to cover aspects of the Company's technology.

    The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular, has
been characterized by substantial competition and litigation regarding patent
and other intellectual property rights. Any such claims, whether with or without
merit, could be time-consuming and expensive to respond to and could divert the
Company's technical and management personnel. The Company may be involved in
litigation to defend against claims of infringement by other patent holders, to
enforce patents issued to the Company, or to protect trade secrets of the
Company. If any relevant claims of third-party patents are upheld as valid and
enforceable in any litigation or administrative proceeding, the Company could be
prevented from practicing the subject matter claimed in such patents, or would
be required to obtain licenses from the patent owners of each such patent, or to
redesign its products or processes to avoid infringement. There can be no
assurance that such licenses would be available or, if available, would be
available on terms acceptable to the Company or that the Company would be
successful in any attempt to redesign its products or processes to avoid
infringement. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
the Company from manufacturing and selling its products, which would have a
material adverse effect on the Company's business, financial condition, and
results of operations. The Company intends to vigorously protect and defend its
intellectual property. Costly and time-consuming litigation brought by the
Company may be necessary to enforce patents issued to the Company, to protect
trade secrets or know-how owned by the Company, or to determine the
enforceability, scope, and validity of the proprietary rights of others. There
can be no assurance that such litigation if commenced by the Company, would be
successful. See "Intellectual Property and Other Proprietary Rights" and
"Competition."

                                       23
<PAGE>
    RELIANCE ON STRATEGIC RELATIONSHIPS

    The Company intends to pursue strategic relationships with corporations and
research institutions with respect to the research, development, regulatory
approval, and marketing of certain of its potential products and procedures. The
Company's future success may depend, in part, on its relationships with third
parties, including, for example, the Company's relationships with St. Jude
Medical, Inc. and Getz Bros. Co., Ltd., their strategic interest in the
potential products or procedures under development and, eventually, their
success in marketing such products or procedures or willingness to purchase any
such products. The Company anticipates that these third parties may have the
unilateral right to terminate any such relationship without significant penalty.
There can be no assurance that the Company will be successful in establishing or
maintaining any such strategic relationships in the future or that any such
relationships will be successful. See "Strategic Relationships."

    RISK OF PRODUCT LIABILITY

    The Company faces an inherent and significant business risk of exposure to
product liability claims in the event that the use of its products results in
personal injury or death and there can be no assurance that the Company will not
experience any material product liability losses in the future. Also, in the
event that any of the Company's products prove to be defective, the Company may
be required to recall or redesign such products. The Company maintains limited
insurance against certain product liability claims, but there can be no
assurance that such coverage will continue to be available on terms acceptable
to the Company or that such coverage will be adequate for any liabilities
actually incurred. A successful claim brought against the Company in excess of
available insurance coverage, or any claim or product recall that results in
significant adverse publicity against the Company, may have a material adverse
effect on the Company's business, financial condition, and results of
operations.

    LIMITED SALES, MARKETING, AND DISTRIBUTION EXPERIENCE

    The Company currently has a limited sales and marketing organization in the
United States and Europe and believes that it must expand its direct sales force
to effectively market its products. Establishment of a sales force capable of
effectively commercializing the Company's EndoCPB and Port-Access systems will
require substantial efforts and require significant management and financial
resources. There can be no assurance that the Company will be able to establish
and maintain such a sales capability on a timely basis. See "Sales, Marketing,
Training, and Distribution."

    DEPENDENCE ON KEY PERSONNEL

    The Company's future business and operating results depend in significant
part upon the continued contributions of its key technical and senior management
personnel, many of whom would be difficult to replace and certain of whom
perform important functions for the Company beyond those functions suggested by
their respective job titles or descriptions. The Company's business and future
operating results also depend in significant part upon its ability to attract
and retain qualified management, manufacturing, technical, marketing, and sales
and support personnel for its operations. Competition for such personnel is
intense, particularly in the geographic region of California where the Company's
principal office is located, and there can be no assurance that the Company will
be successful in attracting or retaining such personnel. The loss of any key
employee, the failure of any key employee to perform in his or her current
position, or the Company's inability to attract and retain skilled employees, as
needed, could materially adversely affect the Company's business, financial
condition, and results of operations.

    NO ASSURANCE OF REGULATORY CLEARANCE OR APPROVAL; SIGNIFICANT DOMESTIC AND
     INTERNATIONAL REGULATION

    The Company's individual devices are subject to regulatory clearances or
approvals by the FDA. The Company believes that most of its devices and systems
will be subject to United States regulatory clearance

                                       24
<PAGE>
through the 510(k) premarket notification process rather than a more extensive
PMA submission. Although the Company has received clearance from the FDA to
market the EndoCPB System and several proprietary Class II disposable surgical
devices for its Port-Access CABG and MVR surgery systems in the United States,
securing FDA approvals and clearances for additional Port-Access devices and
other products under development by the Company will require submission to the
FDA of extensive technical information and may require submission of extensive
clinical data. There can be no assurance that the FDA will act favorably or
quickly on the Company's 510(k) or other submissions, and significant
difficulties and costs may be encountered by the Company in its efforts to
obtain FDA clearance that could delay or preclude the Company from marketing and
selling its products in the United States. Furthermore, there can be no
assurance that the FDA will not request additional data, require that the
Company conduct further clinical studies, or require a more extensive PMA
submission, causing the Company to incur substantial costs and delays. The
Company's business, financial condition, and results of operations are
critically dependent upon FDA clearance or approval of the Company's systems.
Failure to obtain such clearances or approvals, or to obtain such clearances or
approvals on a timely basis, would have a material adverse effect on the
Company's business, financial condition, and results of operations, and could
result in postponement of the commercialization of the Company's products or
even cessation of the Company's business in the United States.

    Sales of medical devices outside of the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approval for sale in foreign countries may be longer or
shorter than that required for FDA clearance or approval, and the requirements
may differ. Although the Company's EndoCPB System and Port-Access CABG and MVR
Systems bear the CE Mark under the European Community medical device directive,
some European countries may impose additional requirements for commercialization
of those products. Other products under development by the Company will require
additional approvals or assessments, and there can be no assurance that these
approvals or assessments will be received on a timely basis, if at all. Most
other countries in which the Company intends to operate either do not currently
regulate medical systems or have minimal regulatory requirements, although these
countries may adopt more extensive regulations in the future that could impact
the Company's ability to market its systems. In addition, significant costs and
requests for additional information may be encountered by the Company in its
efforts to obtain regulatory approvals. Any such events could substantially
delay or preclude the Company from marketing its systems internationally.

    In addition, the FDA and certain foreign regulatory authorities impose
numerous other requirements with which medical device manufacturers must comply.
Product approvals can be withdrawn for failure to comply with regulatory
standards or because of the occurrence of unforeseen problems following initial
marketing. The Company will also be required to adhere to applicable FDA
regulations setting forth current GMP requirements, which include testing,
control, and documentation requirements. Ongoing compliance with GMP and other
applicable regulatory requirements is monitored through periodic inspections by
state and federal agencies, including the FDA, and by comparable agencies in
other countries. To date, the FDA has not inspected the Company's compliance
with GMP requirements, although the Company expects such inspections to be made
in the near future. Failure to comply with applicable regulatory requirements
can result in fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, denial or withdrawal of
premarket clearance or premarket approval for devices, and criminal prosecution.
Furthermore, changes in existing regulations or adoption of new regulations or
policies could delay or even prevent the Company from obtaining future
regulatory approvals or clearances. For example, the FDA is currently
implementing new quality system regulations, that, among other things, require
design controls and maintenance of service records, and will likely increase the
cost of complying with GMP requirements. Such revisions could have a material
adverse effect on the Company's business, financial condition, and results of
operations. See "Government Regulation."

                                       25
<PAGE>
    LIMITATIONS ON THIRD-PARTY REIMBURSEMENT

    The Company expects that sales volumes and prices of the Company's products
will be heavily dependent on the availability of reimbursement from third-party
payors and that individuals seldom, if ever, will be willing or able to pay
directly for the costs associated with the use of the Company's products. The
Company's products are typically purchased by clinics, hospitals, and other
users, which bill various third-party payors, such as governmental programs and
private insurance plans, for the healthcare services provided to their patients.
Third-party payors carefully review and increasingly challenge the prices
charged for medical products and services. Reimbursement rates from private
companies vary depending on the procedure performed, the third-party payor, the
insurance plan, and other factors. Medicare reimburses hospitals a prospectively
determined fixed amount for the costs associated with an in-patient
hospitalization based on the patient's discharge diagnosis, and reimburses
physicians a prospectively determined fixed amount based on the procedure
performed, regardless of the actual costs incurred by the hospital or physician
in furnishing the care and unrelated to the specific devices used in that
procedure. Medicare and other third-party payors are increasingly scrutinizing
whether to cover new products and the level of reimbursement for covered
products.

    In foreign markets, reimbursement is obtained from a variety of sources,
including governmental authorities, private health insurance plans, and labor
unions. In most foreign countries, there are also private insurance systems that
may offer payments for alternative therapies. Although not as prevalent as in
the United States, health maintenance organizations are emerging in certain
European countries. The Company may need to seek international reimbursement
approvals, although there can be no assurance that any such approvals will be
obtained in a timely manner or at all. Failure to receive international
reimbursement approvals could have an adverse effect on market acceptance of the
Company's products in the international markets in which such approvals are
sought.

    The Company believes that reimbursement in the future will be subject to
increased restrictions such as those described above, both in the United States
and in foreign markets. The Company believes that the overall escalating cost of
medical products and services has led to and will continue to lead to increased
pressures on the health care industry, both foreign and domestic, to reduce the
cost of products and services, including products offered by the Company. There
can be no assurance as to either United States or foreign markets that
third-party reimbursement and coverage will be available or adequate, that
current reimbursement amounts will not be decreased in the future or that future
legislation, regulation, or reimbursement policies of third-party payors will
not otherwise adversely affect the demand for the Company's products or its
ability to sell its products on a profitable basis, particularly if the
Company's systems are more expensive than competing cardiac surgery procedures.
If third-party payor coverage or reimbursement is unavailable or inadequate, the
Company's business, financial condition, and results of operations could be
materially adversely affected. See "Third-Party Reimbursement."

    PRICE VOLATILITY OF COMMON STOCK

    The Company's stock price has been, and is likely to continue to be, highly
volatile. The market price of the Company's Common Stock has fluctuated
substantially in recent periods, rising from $21.00 at the Company's initial
public offering on April 25, 1996 to a high of $43.75 on May 15, 1996 and to a
low of $12.50 on February 2, 1998. On March 20, 1998 the price of the Company's
Common Stock was $13.50. The market price of the shares of Common Stock may be
significantly affected by factors such as actual or anticipated fluctuations in
the Company's operating results, announcements of technological innovations, new
products or new contracts by the Company or its competitors, developments with
respect to patents or proprietary rights, conditions and trends in the medical
device and other technology industries, adoption of new accounting standards
affecting the medical device industry, changes in financial estimates by
securities analysts, general market conditions, and other factors. In addition,
the stock market has experienced extreme price and volume fluctuations that have
particularly affected the market price for many high technology companies and
that have often been unrelated to the operating performance of these

                                       26
<PAGE>
companies. These broad market fluctuations may adversely affect the market price
of the Company's Common Stock, and there can be no assurance that the market
price of the Common Stock will not decline. In the past, following periods of
volatility in the market price of a particular company's securities, securities
class action litigation has often been brought against that company. Such
litigation, if brought against the Company, could result in substantial costs
and a diversion of management's attention and resources.

    POSSIBLE ACQUISITIONS

    The Company may make acquisitions of complementary businesses, products and
technology in the future, and regularly evaluates such opportunities. Product
and technology acquisitions entail numerous risks, including difficulties in the
assimilation of acquired operations and products, diversion of management's
attention to other business concerns, amortization of acquired intangible assets
and potential loss of key employees of acquired companies. The Company's
management has had limited experience in assimilating acquired organizations and
products into the Company's operations. No assurance can be given as to the
ability of the Company to integrate successfully any operations, personnel or
products that might be acquired in the future, and the failure of the Company to
do so could have a material adverse effect on the Company's results of
operations.

    CONTROL BY PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS

    The present directors, executive officers, and principal stockholders of the
Company and their affiliates beneficially own approximately 45% of the
outstanding Common Stock. As a result, these stockholders will be able to
continue to exert significant influence over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. Such concentration of ownership may have the effect of
delaying or preventing a change in control of the Company.

    EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF RIGHTS PLAN,
     CERTIFICATE OF INCORPORATION, BYLAWS, AND DELAWARE LAW

    The Company's Board of Directors has the authority to issue up to 20,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting and conversion rights of such
shares, without any further vote or action by the Company's stockholders. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. The issuance of Preferred Stock could have the effect of making
it more difficult for a third party to acquire a majority of the outstanding
voting stock of the Company. Other than the Series A Preferred Stock issuable
under the stockholder rights plan, the Company has no current plans to issue
shares of Preferred Stock. In addition, the Company's Certificate of
Incorporation provides for a classified Board of Directors such that
approximately only one-third of the members of the Board are elected at each
annual meeting of stockholders. Classified Boards may have the effect of
delaying, deferring, or discouraging changes in control of the Company. Further,
the Company has adopted a stockholder rights plan that, in conjunction with
certain provisions of the Company's Certificate of Incorporation and Bylaws and
of Delaware law, could delay or make more difficult a merger, tender offer, or
proxy contest involving the Company.

                                       27
<PAGE>
ITEM 2.  PROPERTIES.

    The Company's principal administrative, sales, manufacturing, and research
and development facility occupies approximately 85,000 square feet in four
adjacent buildings in an office park in Redwood City, California, pursuant to
leases which expire between April 1999 and July 1999. The Company has entered
into a 12 year lease for a 133,000 square foot building under construction in
Redwood City, California. The Company plans to move its present Redwood City
operations to this new facility upon completion, which is currently scheduled
for late 1998. The Heartport Research and Training Center occupies approximately
50,000 square feet in Utah. The initial term of the lease on this facility
expires in December 2001.

ITEM 3.  LEGAL PROCEEDINGS.

    The Company is not a party to any material legal proceedings.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

    None.

                                       28
<PAGE>
                                    PART II

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

    The Company's Common Stock has traded publicly on the Nasdaq National Market
under the symbol "HPRT" since April 26, 1996. The Company's initial public
offering price was $21.00 per share. The following table sets forth, for the
periods indicated, the high and low closing sale prices for the Company's Common
Stock as reported by the Nasdaq National Market.

<TABLE>
<CAPTION>
                                                                                         HIGH        LOW
                                                                                       ---------  ---------
<S>                                                                                    <C>        <C>
YEAR ENDED DECEMBER 31, 1996:
  Second Quarter (from April 26, 1996, the first trading date).......................  $   41.00  $   26.88
  Third Quarter......................................................................      30.25      21.25
  Fourth Quarter.....................................................................      36.50      22.88

YEAR ENDED DECEMBER 31, 1997:
  First Quarter......................................................................      31.88      21.38
  Second Quarter.....................................................................      26.00      17.63
  Third Quarter......................................................................      25.13      16.63
  Fourth Quarter.....................................................................      29.75      18.38

YEAR-ENDED DECEMBER 31, 1998
  First Quarter (through March 20, 1998).............................................      23.75      12.50
</TABLE>

    On March 20, 1998, the last sale price of the Company's Common Stock as
reported by the Nasdaq National Market was $13.50 per share. There were 345
holders of record of the Company's Common Stock as of March 20, 1998. See "Risk
Factors--Price Volatility of Common Stock"

    The Company has never declared or paid cash dividends on its Common Stock
and currently does not anticipate paying cash dividends in the foreseeable
future. In addition, the Company's debt facility restricts the ability to pay
cash dividends.

                                       29
<PAGE>
    As required by Rule 463, the Registrant provides the following information
with respect to the use of proceeds from the sale of its Common Stock on April
25, 1996, pursuant to a registration statement filed with and declared effective
by the Commission ($ in thousands):

<TABLE>
<C>        <S>                                                                    <C>
      (i)  The offering has terminated; the offering did not terminate before the sale of all
           securities required.

     (ii)  The managing underwriters of the offering were:

               Morgan Stanley & Co. Incorporated
               Goldman, Sachs & Co.
               Alex. Brown & Sons Incorporated
               Cowen & Company

    (iii)  Class of securities registered:                                        Common Stock

     (iv)  Amount registered:                                                     5,750,000
                                                                                  Shares
           Aggregate price of offering amount registered:                         $120,750
           Amount sold:                                                           5,750,000
                                                                                  Shares
           Aggregate offering price of amount sold:                               $120,750

      (v)  Estimated amount of expenses incurred for the Issuers' account in
           connection with the issuance and distribution of the securities:       $ 9,949

     (vi)  Estimated net offering proceeds:                                       $110,801

    (vii)  Estimated use of net offering proceeds through December 31, 1997:
           Construction of plant, building and facilities                         $  6,254
           Purchase and installation of machinery and equipment                   $  8,470
           Purchase of real estate                                                $     0
           Acquisition of other businesses                                        $     0
           Repayment of indebtedness                                              $   925
           Working capital                                                        $ 72,111
           Short-term investments                                                 $ 15,713
           Money Market funds                                                     $  7,328
</TABLE>

                                       30
<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA.

    The following selected financial data should be read in conjunction with the
Company's financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein. The statement of operations data for the three years
in the period ended December 31, 1997, and the balance sheet data at December
31, 1997 and 1996 are derived from the audited financial statements included
elsewhere herein. The statement of operations data for the years ended December
31, 1994 and 1993, and the balance sheet data at December 31, 1995, 1994 and
1993 are derived from audited financial statements not included herein.

<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31,
                                                         ---------------------------------------------------------
                                                            1997         1996        1995       1994       1993
                                                         -----------  ----------  ----------  ---------  ---------
                                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                      <C>          <C>         <C>         <C>        <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales..............................................  $    23,421  $      624  $       --  $      --  $      --
Cost of sales..........................................       15,395         561          --         --         --
                                                         -----------  ----------  ----------  ---------  ---------
Gross profit...........................................        8,026          63          --         --         --
Operating expenses:
  Research and development.............................       18,005      21,059       8,477      4,207      1,493
  Selling, general and administrative..................       43,005      11,223       1,229        734        364
  Patent acquisition...................................           --       5,216          --         --         --
                                                         -----------  ----------  ----------  ---------  ---------
Loss from operations...................................      (52,984)    (37,435)     (9,706)    (4,941)    (1,857)
Interest income........................................        6,563       3,973         542        120         58
Interest expense and other.............................       (4,910)       (592)       (189)        --         --
                                                         -----------  ----------  ----------  ---------  ---------
Net loss...............................................  $   (51,331) $  (34,054) $   (9,353) $  (4,821) $  (1,799)
                                                         -----------  ----------  ----------  ---------  ---------
                                                         -----------  ----------  ----------  ---------  ---------
Basic and diluted net loss per share (pro forma in 1996
  and 1995)............................................  $     (2.29) $    (1.79) $    (0.78)
                                                         -----------  ----------  ----------
                                                         -----------  ----------  ----------
Supplemental net loss per share data (unaudited)(1)....  $     (2.08) $    (1.52) $    (0.62)
                                                         -----------  ----------  ----------
                                                         -----------  ----------  ----------

CONSOLIDATED BALANCE SHEET DATA:
Current assets.........................................  $   124,848  $   94,226  $   12,692  $   1,721  $     696
Working capital........................................      113,923      87,561      11,234      1,089        505
Total assets...........................................      142,810     101,852      14,266      2,621        983
Long-term obligations, less current portion............       89,868       4,717       4,034         61         10
Accumulated deficit....................................     (101,930)    (50,599)    (16,545)    (7,192)    (2,371)
Total stockholders' equity.............................       42,017      90,470       8,775      1,928        781
</TABLE>

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

(1) Supplemental net loss per share data (unaudited) is computed assuming
    nonvested shares were outstanding for the purposes of calculating basic and
    diluted net loss per share in 1997 and pro forma net loss per share in 1996
    and 1995. For additional disclosures related to nonvested shares, see Note 6
    to the financial statements.

                                       31
<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

OVERVIEW

    Since its inception in May 1991, Heartport has been engaged in the research
and development of Port-Access minimally invasive cardiac surgery systems and
related technology. In December 1996, the Company commercially introduced its
Port-Access systems and since that time has engaged in extensive surgical team
training, marketing and selling activities, and continued research and
development. Through its "Port-Access Partnership" program, the Company has
adopted a procedural sales model in which the Company trains a center's surgical
team, supplies patient and referring physician educational materials, supports
local market media efforts and furnishes proprietary reusable devices for
Port-Access procedures in exchange for a purchase order for Port-Access
disposable products necessary to perform Port-Access cardiac surgery.

    The Company has only been generating revenue from the sale of products since
December 1996, and it has been unprofitable since inception. For the period from
inception to December 31, 1997, the Company has incurred cumulative net losses
of approximately $101.9 million. For at least the next 18 months, the Company
expects to continue to incur significant losses.

    The foregoing and the discussion appearing elsewhere in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contain forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Risk Factors--Early Stage of
Utilization; No Assurance of Safety and Efficacy," "--No Assurance of Market
Acceptance," "--Risks Associated with New Surgical Procedure; Extensive Training
Requirements," "--Customer Concentration," "--Fluctuations in Operating
Results," and "--Limited Manufacturing Experience; Dependence on Key Suppliers."

RESULTS OF OPERATIONS

    NET SALES.  Net sales were $23.4 million and $0.6 million in the years ended
December 31, 1997 and 1996, respectively. There were no comparable sales in the
year ended December 31, 1995 as the Company commenced product sales in December
1996. Included in net sales for the year ended December 31, 1997, is a $1.0
million fee received from Getz Bros. Co., Ltd., who will act as the exclusive
distributor of the Company's products in Japan. International net sales
represented 12% of net sales in 1997. The Company estimates that approximately
one-third of total 1997 net sales represented shipments that remained in
customer inventory at December 31, 1997 against purchase orders under the
Port-Access Partnership program. Net sales consist primarily of sales of the
Company's disposable devices in its EndoCPB, Port-Access CABG and Port-Access
MVR systems. Revenue from product sales is recognized upon product shipment.

    COST OF SALES.  Cost of sales was $15.4 million in the year ended December
31, 1997, compared to $0.6 million in 1996. Cost of sales consists primarily of
material, labor and overhead costs associated with manufacturing the Company's
disposable and reusable devices in its EndoCPB, Port-Access CABG, and
Port-Access MVR systems.

    As cost of sales includes the cost of the Company's reusable devices, for
which the Company receives no corresponding revenue under the Company's
Port-Access Partnership sales model, the Company's gross margin may vary
significantly based upon the mix of reusable and disposable devices shipped.
During periods where net sales to new centers in the Port-Access Partnership
program constitute a significant percentage of total net sales, and as a result,
reusable devices shipped by the Company account for a significant percentage of
total devices shipped, the Company's gross profit will be adversely impacted.
Gross margin was 34% and 10% in 1997 and 1996, respectively. The increase
primarily reflects efficiencies obtained as a result of higher production volume
in the first full year of product sales.

                                       32
<PAGE>
    RESEARCH AND DEVELOPMENT EXPENSES.  Research and development expenses were
$18.0 million, $21.1 million and $8.5 million in the years ended December 31,
1997, 1996 and 1995, respectively. The decrease in 1997 from 1996 was primarily
due to manufacturing development costs incurred in 1996 for the design,
construction and testing of pre-production prototypes and models and other
related pre-launch costs. The increase in 1996 from 1995 was attributable to an
increase in physician training and in manufacturing expenses related to the
production of products for physician training and clinical trials, as well as to
an increase in research and development staffing. Heartport has maintained a
significant level of research and development spending directed towards product
improvements and new product development and anticipates that it will continue
to devote substantial resources to research and development activities.

    Research and development expenses consist primarily of personnel costs,
consulting fees and other costs in support of product development, clinical
trials, and regulatory submissions, as well as costs incurred in producing
products for research and development activities, the cost of acquiring
intellectual property, and the cost of prosecuting United States and foreign
patent applications relating to the Company's technology. In addition, prior to
commercialization of the Company's products, costs incurred in physician
training were included in the Company's research and development expenses.

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and
administrative expenses increased to $43.0 million in 1997 from $11.2 million in
1996 and $1.2 million in 1995. These increases were primarily due to the hiring
of additional sales, marketing and administrative personnel, higher physician
training costs, increased expenses necessary to support the Company's product
launch and ongoing sales activities, and higher expenses necessary to manage and
support the Company's increased scale of operations. Use of the Company's
products requires a substantial training curriculum both at the Heartport
Research and Training Center and at each customer's hospital. These costs are
accounted for as sales and marketing expenses and will continue to be
significant. The Company believes that its selling, general and administrative
expenses will increase substantially as it continues to expand its physician
training activities, build its sales force, marketing staff and administrative
staff, and incur other costs in connection with commercialization of its
products and the support of its growing operations.

    Selling, general and administrative expenses consist primarily of costs for
sales, marketing and administrative personnel, as well as legal, accounting and
other professional fees. Since commercialization of the Company's products,
physician training costs have also been included in the Company's selling,
general and administrative expenses.

    PATENT ACQUISITION EXPENSES.  Patent acquisition expenses consist of the
cost to acquire a United States patent, several pending U.S. Patent
applications, and related rights from Endosurgical Development Corporation in
July 1996 in exchange for shares of Common Stock and cash. Patent and other
intellectual property acquisitions deemed to be in the normal course of business
are accounted for as research and development expenses.

    INTEREST INCOME.  Interest income increased to $6.6 million in 1997 from
$4.0 million in 1996 and $0.5 million in 1995. The increase in each year was
primarily due to the Company's higher average investment balances resulting from
the Company's initial public offering in 1996 and the issuance of convertible
subordinated notes in 1997.

    INTEREST EXPENSE AND OTHER.  Interest expense and other increased to $4.9
million in 1997 from $0.6 million in 1996 and $0.2 million in 1995. The increase
in 1997 was primarily attributable to interest expense related to the Company's
convertible subordinated notes that were issued in April 1997.

    INCOME TAXES.  Due to operating losses and the inability to recognize the
benefits therefrom, there is no provision or benefit for income taxes for 1997,
1996 or 1995.

                                       33
<PAGE>
    Realization of deferred tax assets is dependent on future earnings, if any,
the amount and timing of which are uncertain. Accordingly, a valuation allowance
has been established in an amount equal to the net deferred tax assets of the
Company to reflect these uncertainties.

    At December 31, 1997, the Company had net operating loss carryforwards of
approximately $93.0 million for federal income tax purposes and $59.0 million
for state income tax purposes, which will expire at various dates through 2012
if not utilized. The Company also has research and development tax credit
carryforwards available to reduce future federal and state income taxes, if any,
of approximately $1.3 million and $1.2 million, respectively, which will expire
in the years 2007 through 2012 if not used. The Internal Revenue Code of 1986
and state tax statutes contain provisions that may limit the net operating loss
carryforwards and research and development credits available for use in any
given year should certain events occur, including additional sales of equity
securities and other changes in ownership. Such events could limit the eventual
utilization of these carryforwards. See Note 7 of Notes to Consolidated
Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

    Since inception, Heartport has funded its operations and investments in
property and equipment primarily through the private sale of preferred stock,
totaling approximately $25.1 million, through an initial public offering of
Common Stock in April 1996, totaling approximately $110.8 million, and through a
private placement of convertible subordinated notes to qualified institutional
investors in April 1997, totaling approximately $82.8 million. The Company also
has a $25.0 million debt facility with a commercial bank. No amount was
outstanding under this facility at December 31, 1997. At December 31, 1997,
Heartport had approximately $112.6 million in cash, cash equivalents, and
short-term investments. Working capital totaled $113.9 million at December 31,
1997.

    Net cash used in operating activities was approximately $51.8 million, $28.6
million and $8.4 million in 1997, 1996 and 1995, respectively. For such periods,
net cash used in operating activities resulted primarily from increasing net
losses. For 1997, net cash used in operating activities also resulted from
increases in accounts receivable of $5.4 million which reflect the Company's
increasing product sales. Net cash used in investing activities was
approximately $30.5 million, $57.3 million and $5.0 million in 1997, 1996 and
1995, respectively. Net cash used in investing activities in 1997 was primarily
attributable to net purchases of $20.4 million of short-term investments as a
result of increased cash balances and additions of $10.2 million of property and
equipment to outfit manufacturing and training facilities. Net cash provided by
financing activities was approximately $84.7 million, $111.9 million and $20.4
million in 1997, 1996 and 1995, respectively. The net cash provided in 1997 was
primarily attributable to net proceeds of $82.8 million from the sale of
convertible subordinated notes and net cash provided in 1996 was primarily
attributable to the Company's initial public offering of Common Stock.

    Capital expenditures for equipment and leasehold improvements to support the
Company's expanded operations increased to $10.2 million in 1997 from $6.1
million in 1996 and $0.9 million in 1995. The expenditures in 1997 were
primarily related to training facility improvements, acquisition of equipment
for research and development and the expansion of the Company's manufacturing
capacity and facilities. The expenditures in 1996 were primarily related to the
acquisition of equipment for research and development and physician training and
the expansion of the Company's administrative facilities and manufacturing
capacity. In September 1997, the Company entered into a 12-year lease for a
133,000 square foot building which is currently under construction. The Company
plans to move its present operations to this new facility in late 1998. The
Company expects that its capital expenditures in 1998 will be higher than 1997
primarily due to this new facility. The Company believes that it has the
financial resources through its current level of liquid assets and credit
facilities to meet business requirements in 1998.

                                       34
<PAGE>
              ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                HEARTPORT, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                                PAGE
                                                                                                                -----
<S>                                                                                                          <C>
Report of Ernst & Young LLP, Independent Auditors..........................................................         F-2

Consolidated Balance Sheets................................................................................         F-3

Consolidated Statements of Operations......................................................................         F-4

Consolidated Statements of Stockholders' Equity............................................................         F-5

Consolidated Statements of Cash Flows......................................................................         F-6

Notes to Consolidated Financial Statements.................................................................         F-7
</TABLE>

                                      F-1
<PAGE>
               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Heartport, Inc.

    We have audited the accompanying consolidated balance sheets of Heartport,
Inc. as of December 31, 1997 and 1996, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1997. Our audits also included the financial
statement schedule listed in the Index at Item 14(a)(2). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

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

    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Heartport, Inc. at December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

                                          ERNST & YOUNG LLP

San Jose, California
January 26, 1998

                                      F-2
<PAGE>
                                HEARTPORT, INC.

                          CONSOLIDATED BALANCE SHEETS

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                                 DECEMBER 31,
                                                                                            ----------------------
                                                                                               1997        1996
                                                                                            ----------  ----------
<S>                                                                                         <C>         <C>
                                                      ASSETS
Current assets:
  Cash and cash equivalents...............................................................  $   35,805  $   33,445
  Short-term investments..................................................................      76,780      56,407
  Accounts receivable, net of allowances of $923 in 1997 ($98 in 1996)....................       5,925         550
  Inventories.............................................................................       4,878       2,107
  Other current assets....................................................................       1,460       1,717
                                                                                            ----------  ----------
Total current assets......................................................................     124,848      94,226
                                                                                            ----------  ----------
Property and equipment:
  Equipment...............................................................................       8,967       4,908
  Furniture and fixtures..................................................................       1,924       1,372
  Leasehold improvements..................................................................       6,991       1,699
                                                                                            ----------  ----------
                                                                                                17,882       7,979
  Accumulated depreciation and amortization...............................................       4,474       1,584
                                                                                            ----------  ----------
                                                                                                13,408       6,395
Other assets..............................................................................       4,554       1,231
                                                                                            ----------  ----------
Total assets..............................................................................  $  142,810  $  101,852
                                                                                            ----------  ----------
                                                                                            ----------  ----------

                                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable........................................................................  $    4,752  $    4,570
  Accrued compensation and related benefits...............................................       4,324       1,433
  Accrued interest........................................................................       1,042          --
  Current portion of long-term debt.......................................................         807         662
                                                                                            ----------  ----------
Total current liabilities.................................................................      10,925       6,665
                                                                                            ----------  ----------
Noncurrent liabilities:
  Long-term debt, less current portion....................................................      86,842       1,334
  Other long-term liabilities.............................................................          65         383
  Deferred royalty income.................................................................       2,961       3,000
                                                                                            ----------  ----------
Total noncurrent liabilities..............................................................      89,868       4,717
                                                                                            ----------  ----------
Commitments
Stockholders' equity:
  Preferred stock, $0.001 par value; 20,000 shares authorized, none issued and
    outstanding...........................................................................          --          --
  Common stock, $0.001 par value:
    Authorized shares--100,000
    Issued and outstanding shares--24,902 in 1997 (24,415 in 1996)........................          25          24
  Additional paid-in capital..............................................................     144,824     142,018
  Notes receivable from stockholders......................................................        (902)       (973)
  Accumulated deficit.....................................................................    (101,930)    (50,599)
                                                                                            ----------  ----------
Total stockholders' equity................................................................      42,017      90,470
                                                                                            ----------  ----------
Total liabilities and stockholders' equity................................................  $  142,810  $  101,852
                                                                                            ----------  ----------
                                                                                            ----------  ----------
</TABLE>

                            See accompanying notes.

                                      F-3
<PAGE>
                                HEARTPORT, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                     YEARS ENDED DECEMBER 31,
                                                                                ----------------------------------
                                                                                   1997        1996        1995
                                                                                ----------  ----------  ----------
<S>                                                                             <C>         <C>         <C>
Net sales.....................................................................  $   23,421  $      624  $       --
Cost of sales.................................................................      15,395         561          --
                                                                                ----------  ----------  ----------
Gross profit..................................................................       8,026          63          --
Operating expenses:
  Research and development....................................................      18,005      21,059       8,477
  Selling, general and administrative.........................................      43,005      11,223       1,229
  Patent acquisition..........................................................          --       5,216          --
                                                                                ----------  ----------  ----------
Loss from operations..........................................................     (52,984)    (37,435)     (9,706)
Interest income...............................................................       6,563       3,973         542
Interest expense and other....................................................      (4,910)       (592)       (189)
                                                                                ----------  ----------  ----------
Net loss......................................................................  $  (51,331) $  (34,054) $   (9,353)
                                                                                ----------  ----------  ----------
                                                                                ----------  ----------  ----------
Basic and diluted net loss per share (pro forma in 1996 and 1995).............  $    (2.29) $    (1.79) $    (0.78)
                                                                                ----------  ----------  ----------
                                                                                ----------  ----------  ----------
</TABLE>

                             See accompanying notes

                                      F-4
<PAGE>
                                HEARTPORT, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                   CONVERTIBLE PREFERRED
                                                           STOCK                  COMMON STOCK        ADDITIONAL
                                                  ------------------------  ------------------------    PAID-IN       NOTES
                                                    SHARES       AMOUNT       SHARES       AMOUNT       CAPITAL    RECEIVABLE
                                                  -----------  -----------  -----------  -----------  -----------  -----------
<S>                                               <C>          <C>          <C>          <C>          <C>          <C>
Balance at December 31, 1994....................       6,671    $       7        5,959    $       6    $   9,151    $     (44)
  Issuances of convertible preferred stock......       2,566            2           --           --       15,982           --
  Issuances of preferred stock warrants.........          --           --           --           --           29           --
  Exercises of common stock options.............          --           --        3,093            3        1,211       (1,049)
  Issuances of common stock.....................          --           --           32           --           22           --
  Net loss......................................          --           --           --           --           --           --
                                                  -----------         ---   -----------         ---   -----------  -----------
Balance at December 31, 1995....................       9,237            9        9,084            9       26,395       (1,093)
  Conversion of convertible preferred stock into
    common stock................................      (9,237)          (9)       9,237            9           --           --
  Repurchases of common stock...................          --           --         (184)          --          (69)          69
  Payments of stockholders' notes receivable....          --           --           --           --           --           51
  Exercises of common stock options.............          --           --          327           --           67           --
  Issuances of common stock.....................          --           --        5,951            6      115,425           --
  Issuances of warrants.........................          --           --           --           --          200           --
  Net loss......................................          --           --           --           --           --           --
                                                  -----------         ---   -----------         ---   -----------  -----------
Balance at December 31, 1996....................          --           --       24,415           24      142,018         (973)
  Payments of stockholders' notes receivable....          --           --           --           --           --           71
  Exercises of common stock options.............          --           --          413           --          940           --
  Issuances of common stock.....................          --           --           74            1        1,563           --
  Issuances of stock options to non-employees...          --           --           --           --          303           --
  Net loss......................................          --           --           --           --           --           --
                                                  -----------         ---   -----------         ---   -----------  -----------
Balance at December 31, 1997....................          --    $      --       24,902    $      25    $ 144,824    $    (902)
                                                  -----------         ---   -----------         ---   -----------  -----------
                                                  -----------         ---   -----------         ---   -----------  -----------

<CAPTION>

                                                                    TOTAL
                                                  ACCUMULATED   STOCKHOLDERS'
                                                    DEFICIT        EQUITY
                                                  ------------  -------------
<S>                                               <C>           <C>
Balance at December 31, 1994....................   $   (7,192)    $   1,928
  Issuances of convertible preferred stock......           --        15,984
  Issuances of preferred stock warrants.........           --            29
  Exercises of common stock options.............           --           165
  Issuances of common stock.....................           --            22
  Net loss......................................       (9,353)       (9,353)
                                                  ------------  -------------
Balance at December 31, 1995....................      (16,545)        8,775
  Conversion of convertible preferred stock into
    common stock................................           --            --
  Repurchases of common stock...................           --            --
  Payments of stockholders' notes receivable....           --            51
  Exercises of common stock options.............           --            67
  Issuances of common stock.....................           --       115,431
  Issuances of warrants.........................           --           200
  Net loss......................................      (34,054)      (34,054)
                                                  ------------  -------------
Balance at December 31, 1996....................      (50,599)       90,470
  Payments of stockholders' notes receivable....           --            71
  Exercises of common stock options.............           --           940
  Issuances of common stock.....................           --         1,564
  Issuances of stock options to non-employees...           --           303
  Net loss......................................      (51,331)      (51,331)
                                                  ------------  -------------
Balance at December 31, 1997....................   $ (101,930)    $  42,017
                                                  ------------  -------------
                                                  ------------  -------------
</TABLE>

                            See accompanying notes.

                                      F-5
<PAGE>
                                HEARTPORT, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                     YEARS ENDED DECEMBER 31,
                                                                                ----------------------------------
                                                                                   1997        1996        1995
                                                                                ----------  ----------  ----------
<S>                                                                             <C>         <C>         <C>
OPERATING ACTIVITIES
Net loss......................................................................  $  (51,331) $  (34,054) $   (9,353)
Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation and amortization...............................................       2,896       1,084         330
  Common stock and warrants issued for services rendered and certain
    technology................................................................         459       4,355          --
  Compensation related to stock options.......................................         303         183          --
  Loss on disposal of equipment...............................................         262          --          --
  Changes in operating assets and liabilities:
    Accounts receivable.......................................................      (5,375)       (550)         --
    Inventories...............................................................      (2,771)     (2,107)         --
    Other assets..............................................................          --      (2,666)        103
    Accounts payable, accrued expenses, and other liabilities.................       3,758       5,201         541
                                                                                ----------  ----------  ----------
Net cash used in operating activities.........................................     (51,799)    (28,554)     (8,379)
                                                                                ----------  ----------  ----------

INVESTING ACTIVITIES
Purchases of short-term investments...........................................     (90,166)   (120,629)     (5,198)
Maturities and sales of short-term investments................................      69,793      69,420       1,092
Purchases of property and equipment...........................................     (10,165)     (6,104)       (875)
                                                                                ----------  ----------  ----------
Net cash used in investing activities.........................................     (30,538)    (57,313)     (4,981)
                                                                                ----------  ----------  ----------

FINANCING ACTIVITIES
Proceeds from issuances of preferred stock....................................          --          --      15,984
Proceeds from issuances of common stock.......................................       2,045     111,159         165
Proceeds from payments of stockholders' notes receivable......................          71          51          --
Proceeds from long-term borrowings............................................      83,240       1,155       4,519
Repayment of long-term borrowings.............................................        (659)       (465)       (261)
                                                                                ----------  ----------  ----------
Net cash provided by financing activities.....................................      84,697     111,900      20,407
                                                                                ----------  ----------  ----------
Net increase in cash and cash equivalents.....................................       2,360      26,033       7,047
Cash and cash equivalents at beginning of year................................      33,445       7,412         365
                                                                                ----------  ----------  ----------
Cash and cash equivalents at end of year......................................  $   35,805  $   33,445  $    7,412
                                                                                ----------  ----------  ----------
                                                                                ----------  ----------  ----------

SUPPLEMENTAL DISCLOSURES OF CASH INFORMATION
Cash paid for interest........................................................  $    3,573  $      346  $      182

NONCASH FINANCING ACTIVITIES
Issuance of preferred stock warrants in connection with debt financing........  $       --  $       --  $       29
Issuance of common stock for notes receivable.................................  $       --  $       --  $    1,049
Issuance of common stock for technology.......................................  $       --  $    4,155  $       22
Repurchase of common stock through forgiveness of notes receivable from
  stockholders................................................................  $       --  $       69  $       --
Conversion of long-term debt to deferred royalty income.......................  $       --  $    3,000  $       --
Conversion of preferred stock to common stock.................................  $       --  $        9  $       --
</TABLE>

                            See accompanying notes.

                                      F-6
<PAGE>
                                HEARTPORT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    BASIS OF PRESENTATION

    Heartport, Inc. (the Company) is engaged principally in the research,
development, manufacturing and sale of minimally invasive cardiac surgery
systems and related technology. The Company's customers are cardiac surgery
centers in the United States and Europe. The consolidated accounts include the
accounts of Heartport, Inc. and its wholly owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated.

    Certain amounts for 1996 and 1995 have been reclassified to conform to the
1997 financial statement presentation.

    USE OF ESTIMATES

    The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

    CASH AND CASH EQUIVALENTS

    The Company considers all highly liquid investments with insignificant
interest rate risk and with an original maturity of three months or less when
purchased to be cash equivalents.

    REVENUE RECOGNITION

    The Company recognizes product revenue upon shipment. Deferred royalty
income includes advances received but unearned under an agreement with St. Jude
Medical, Inc. Fees from distribution right agreements are recognized as relevant
contractual milestones are attained.

    ADVERTISING

    The Company expenses advertising costs as incurred. For the years ended
December 31, 1997, 1996 and 1995 advertising expenses were $504,000, $67,000 and
$0, respectively.

    CONCENTRATIONS OF CREDIT RISK

    Financial instruments that subject the Company to credit risk consist
principally of investments and accounts receivable. By policy, the Company
places its investments only with high credit quality financial institutions and
corporations and, other than its investments in U.S. Government Treasury
instruments, limits the amounts invested in any one institution or type of
investment vehicle. In addition, the Company performs credit evaluations of its
customers' financial condition and generally requires no collateral. At December
31, 1997, approximately 15% of accounts receivable related to a distribution
agreement (see Note 5), and no direct customer represented more than 4% of the
total accounts receivable balance. During 1997 and 1996, sales to international
customers were approximately 12% and 26% of net sales, respectively. All sales
are denominated in U.S. dollars.

    FAIR VALUE OF FINANCIAL INSTRUMENTS

    The fair value of investments is based on quoted market prices or pricing
models using current market rates (see Note 3).

                                      F-7
<PAGE>
                                HEARTPORT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    The fair value of the Company's long-term debt is estimated using a
discounted cash flow analysis based on the Company's current incremental
borrowing rate for similar types of borrowing arrangements (see Note 4).

    INVESTMENTS

    All investments are designated as available-for-sale. Available-for-sale
securities are carried at fair value with unrealized gains and losses, net of
tax, reported in a separate component of stockholders' equity. The amortized
cost of available-for-sale debt securities is adjusted for the amortization of
premiums and the accretion of discounts to maturity. Such amortization is
included in interest income. Realized gains and losses and declines in value
judged to be other-than-temporary on available-for-sale securities are included
in investment income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income.

    INVENTORIES

    Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Inventories at December 31 were as follows:

<TABLE>
<CAPTION>
                                                                               1997       1996
                                                                             ---------  ---------
                                                                                (IN THOUSANDS)
<S>                                                                          <C>        <C>
Materials and purchased parts..............................................  $   2,235  $   1,625
Work in progress...........................................................        456         84
Finished goods.............................................................      2,187        398
                                                                             ---------  ---------
Total inventories..........................................................  $   4,878  $   2,107
                                                                             ---------  ---------
                                                                             ---------  ---------
</TABLE>

    PROPERTY AND EQUIPMENT

    Property and equipment are stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets, ranging from
three to nine years or over the term of the lease, if shorter. Amortization of
assets recorded under capital leases is included in depreciation expense.

    NET LOSS PER SHARE

    In 1997, the Financial Accounting Standards Board issued Statement No. 128,
EARNINGS PER SHARE. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary and fully diluted earnings per share, outstanding nonvested shares are
not included in the computations of basic and diluted earnings per share until
the time-based vesting restriction has lapsed. However, for the purposes of
computing diluted earnings per share in periods with a profit, the dilutive
effect of outstanding nonvested shares is included using the treasury stock
method. For periods with a profit, basic earnings per share excludes the
dilutive effect of options, warrants, and convertible securities that would have
been included in the primary earnings per share calculation. In addition, in
February 1998, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 98, EARNINGS PER SHARE. Staff Accounting Bulletin No. 98 affected
the treatment of certain stock and warrants ("cheap stock") issued within a
one-year period prior to an initial public offering. Upon

                                      F-8
<PAGE>
                                HEARTPORT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the adoption of Statement 128, the staff generally does not continue to believe
that such stock and warrants should be treated as outstanding for all reporting
periods. Earnings per share amounts presented have been restated to conform to
the Statement 128 and Staff Accounting Bulletin No. 98 requirements. The
following table sets forth the computation of net loss per share:

<TABLE>
<CAPTION>
                                                                             1997        1996        1995
                                                                          ----------  ----------  ----------
                                                                           (IN THOUSANDS, EXCEPT PER SHARE
                                                                                       AMOUNTS)
<S>                                                                       <C>         <C>         <C>
Numerator for basic, diluted and pro forma net loss per share:
  Net loss..............................................................  $  (51,331) $  (34,054) $   (9,353)

Denominator:
  Weighted-average common shares........................................      24,687      19,502       6,873
  Weighted-average nonvested shares subject to repurchase...............      (2,266)     (3,362)     (3,163)
                                                                          ----------  ----------  ----------
Denominator for basic and diluted net loss per share....................      22,421      16,140       3,710
                                                                          ----------
                                                                          ----------
Convertible preferred shares............................................                   2,910       8,237
                                                                                      ----------  ----------
Denominator for pro forma net loss per share............................                  19,050      11,947
                                                                                      ----------  ----------
                                                                                      ----------  ----------
Basic and diluted net loss per share....................................  $    (2.29)
                                                                          ----------
                                                                          ----------
Pro forma net loss per share............................................              $    (1.79) $    (0.78)
                                                                                      ----------  ----------
                                                                                      ----------  ----------
</TABLE>

    The Company has securities outstanding that could dilute basic earnings per
share in the future that were not included in the computation of diluted net
loss per share in the periods presented as their effect is antidilutive. For
additional disclosures regarding potentially dilutive stock options, warrants,
nonvested shares, convertible debentures and convertible preferred stock, see
Notes 4 and 6.

    Pro forma net loss per share has been computed as above and also assumes the
conversion of convertible preferred shares not included above that automatically
converted upon the completion of the Company's initial public offering (using
the if-converted method) from the original date of issuance.

    Outstanding nonvested shares represent shares subject to repurchase at the
option of the Company. Supplemental net loss per share data (unaudited) computed
assuming nonvested shares were outstanding for the purposes of calculating basic
and diluted net loss per share in 1997 and pro forma net loss per share in 1996
and 1995 is $(2.08), $(1.52), and $(0.62), respectively.

    STOCK-BASED COMPENSATION

    The Company accounts for employee stock options using the intrinsic value
method in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Under APB 25, when the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. In accordance with SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company has adopted the pro forma
disclosure of accounting for employee options under the fair value method. For
options or other stock based compensation issued to non-employees, the Company
recognizes compensation expense under the fair value method.

                                      F-9
<PAGE>
                                HEARTPORT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    NEW ACCOUNTING STANDARDS

    In June 1997, the Financial Accounting Standards Board issued Statement No.
130, REPORTING COMPREHENSIVE INCOME. This statement requires that all items that
are to be required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This statement is effective
for fiscal years beginning after December 15, 1997, and will be adopted by the
Company for the year ended December 31, 1998.

    In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS 131 is
effective for fiscal years beginning after December 15, 1997, and will be
adopted by the Company for the year ended December 31, 1998. The adoption of
SFAS 131 will have no impact on the Company's consolidated results of
operations, financial position or cash flows.

2.  COMMITMENTS

    The Company leases its facilities under noncancelable operating leases that
expire in the years 1999 through 2010. Rental expense was $1,937,000, $959,000
(net of sublease income of $14,000), and $435,000 (net of sublease income of
$161,000) for the years ended December 31, 1997, 1996 and 1995, respectively.

    The future minimum lease payments as of December 31, 1997 were as follows:

<TABLE>
<CAPTION>
                                                                                      (IN
                                                                                  THOUSANDS)
                                                                                 -------------
<S>                                                                              <C>
1998...........................................................................    $   2,230
1999...........................................................................        4,521
2000...........................................................................        4,071
2001...........................................................................        4,166
2002...........................................................................        3,706
Thereafter.....................................................................       31,064
                                                                                 -------------
                                                                                   $  49,758
                                                                                 -------------
                                                                                 -------------
</TABLE>

                                      F-10
<PAGE>
                                HEARTPORT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3.  INVESTMENTS

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

<TABLE>
<CAPTION>
                                                                           1997        1996
                                                                        ----------  ----------
                                                                            (IN THOUSANDS)
<S>                                                                     <C>         <C>
Money market funds....................................................  $    2,014  $    7,959
Commercial paper......................................................      27,398      18,289
Auction rate preferred stock..........................................       6,600       8,000
Corporate notes.......................................................      29,718      35,462
U.S. government agency securities.....................................      39,990      12,945
Mortgage backed securities............................................       2,222          --
                                                                        ----------  ----------
Total available-for-sale investments..................................     107,942      82,655
Amounts classified as cash equivalents................................     (31,162)    (26,248)
                                                                        ----------  ----------
Short-term investments................................................  $   76,780  $   56,407
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>

    There were no material realized or unrealized gains or losses in any
category of investment in 1997, 1996 or 1995.

    The estimated fair value of investments in debt securities at December 31,
1997, by contractual maturity, were as follows:

<TABLE>
<CAPTION>
                                                                                      (IN
                                                                                  THOUSANDS)
                                                                                 -------------
<S>                                                                              <C>
Due in 1 year or less..........................................................   $    85,645
Due in 1-2 years...............................................................        20,075
                                                                                 -------------
                                                                                      105,720
Mortgage-backed securities.....................................................         2,222
                                                                                 -------------
Total investments in debt securities...........................................   $   107,942
                                                                                 -------------
                                                                                 -------------
</TABLE>

4.  DEBT

    Debt at December 31 was as follows:

<TABLE>
<CAPTION>
                                                                             1997       1996
                                                                           ---------  ---------
                                                                              (IN THOUSANDS)
<S>                                                                        <C>        <C>
Convertible subordinated notes, due in 2004 at 7.25%.....................  $  86,250  $      --
Equipment financing and other debt.......................................      1,399      1,996
                                                                           ---------  ---------
Total long-term debt.....................................................     87,649      1,996
Current portion of long-term debt........................................       (807)      (662)
                                                                           ---------  ---------
Long-term debt, less current portion.....................................  $  86,842  $   1,334
                                                                           ---------  ---------
                                                                           ---------  ---------
</TABLE>

    In April 1997, the Company issued an aggregate principal amount of $86.3
million of convertible subordinated notes. The notes are due in 2004, bear
annual interest at 7.25%, and are convertible at the option of the holder into
the Company's common stock at a price of $28.958 per share. Issuance costs of

                                      F-11
<PAGE>
                                HEARTPORT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4.  DEBT (CONTINUED)
approximately $3.4 million are included in other assets and are being amortized
over the life of the notes. The carrying value of the Company's long-term debt
approximates its fair value.

    As of December 31, 1997, aggregate debt maturities were as follows (in
thousands):

<TABLE>
<S>                                                                  <C>
1998...............................................................  $     807
1999...............................................................        428
2000...............................................................        122
2001...............................................................         33
Thereafter.........................................................     86,259
                                                                     ---------
                                                                     $  87,649
                                                                     ---------
                                                                     ---------
</TABLE>

    As of December 31, 1997, the Company has an unused credit facility with a
commercial bank of $15.0 million. In March 1998, the credit facility was
extended to $25.0 million. The annual commitment fee is 0.25% for the unused
portion of the line of credit.

5.  DISTRIBUTION AGREEMENT

    In December 1997, the Company entered into an agreement with Getz Bros. Co.,
Ltd. to assign exclusive rights to distribute the Company's products in Japan.
During 1997, the Company recognized $1.0 million in non-refundable fees upon the
signing of the agreement. Additional non-refundable fees can be received and
earned upon the achievement of certain milestones, including product approval
and certification in Japan.

6.  STOCKHOLDERS' EQUITY

    NONVESTED SHARES

    At December 31, 1997, 1,912,000 shares of outstanding common stock owned by
employees of and consultants to the Company were subject to repurchase, at the
option of the Company, at the original purchase price in the event of the
termination of their employment or consulting relationship.

    STOCK OPTION PLANS

    Under the 1993 Stock Option Plan (the 1993 Plan), the Company may grant
incentive and nonstatutory stock options to purchase up to 6,720,000 shares of
common stock to directors, employees and consultants. Options may be granted at
an exercise price of not less than 85% of the fair value of the stock at the
date of grant for nonstatutory stock options and 100% of the fair value of the
stock at the date of grant for incentive stock options as determined by the
Board of Directors. Generally, options vest under such conditions as determined
by the Board of Directors, typically over a five year period, and expire after
ten years. During 1996, the Company adopted the 1996 Stock Option Plan (the 1996
Plan), under which the Company reserved 2,110,000 shares of common stock for
issuance to employees, consultants and directors of the Company in addition to
the 3,390,000 shares incorporated from the 1993 plan. The Company had 607,000
shares available for grant under the plans as of December 31,1997.

    In addition, during 1996 the Company issued 940,000 nonstatutory options
outside of the plans to employees.

                                      F-12
<PAGE>
                                HEARTPORT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
                                                                      OUTSTANDING OPTIONS
                                                                 ------------------------------
                                                                                    WEIGHTED
                                                                    NUMBER OF        AVERAGE
                                                                     SHARES         EXERCISE
                                                                 (IN THOUSANDS)       PRICE
                                                                 ---------------  -------------
<S>                                                              <C>              <C>
December 31, 1994..............................................         1,558       $    0.22
  Options granted..............................................         3,586       $    0.44
  Options exercised............................................        (3,093)      $    0.39
  Options canceled.............................................           (48)      $    0.21
                                                                       ------          ------
December 31, 1995..............................................         2,003       $    0.34
  Options granted..............................................         3,100       $   16.39
  Options exercised............................................          (327)      $    0.20
  Options canceled.............................................          (399)      $    2.62
                                                                       ------          ------
December 31, 1996..............................................         4,377       $   12.02
  Options granted..............................................         1,933       $   20.64
  Options exercised............................................          (413)      $    2.26
  Options canceled.............................................          (629)      $   10.84
                                                                       ------          ------
December 31, 1997..............................................         5,268       $   16.08
                                                                       ------          ------
                                                                       ------          ------
</TABLE>

<TABLE>
<CAPTION>
                                                                                    WEIGHTED
                                                                    NUMBER OF        AVERAGE
                                                                     SHARES         EXERCISE
                                                                 (IN THOUSANDS)       PRICE
                                                                 ---------------  -------------
<S>                                                              <C>              <C>
Options exercisable at:
  December 31, 1995............................................           845       $    0.27
  December 31, 1996............................................           801       $    3.21
  December 31, 1997............................................         1,530       $    9.88
</TABLE>

    The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1997:

<TABLE>
<CAPTION>
                                                  OPTIONS OUTSTANDING
                                       -----------------------------------------    OPTIONS EXERCISABLE
                                                       WEIGHTED                   ------------------------
                                                        AVERAGE       WEIGHTED                  WEIGHTED
                                                       REMAINING       AVERAGE                   AVERAGE
              RANGE OF                  NUMBER OF     CONTRACTUAL     EXERCISE     NUMBER OF    EXERCISE
           EXERCISE PRICES               SHARES          LIFE           PRICE       SHARES        PRICE
-------------------------------------  -----------  ---------------  -----------  -----------  -----------
                                                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                    <C>          <C>              <C>          <C>          <C>
$ 0.06 - $ 7.50......................       1,636            7.5      $    3.79        1,079    $    4.70
$ 7.51 - $15.00......................         185            8.2      $   12.62           60    $   12.53
$15.01 - $25.00......................       2,566            9.1      $   20.26          275    $   21.63
$25.01 - $35.00......................         816            8.9      $   26.51           97    $   26.71
$35.01 - $45.00......................          65            8.4      $   38.81           19    $   38.85
                                                              --
                                            -----                    -----------       -----   -----------
                                            5,268            8.5      $   16.08        1,530    $    9.88
                                                              --
                                                              --
                                            -----                    -----------       -----   -----------
                                            -----                    -----------       -----   -----------
</TABLE>

                                      F-13
<PAGE>
                                HEARTPORT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6.  STOCKHOLDERS' EQUITY (CONTINUED)
    STOCK BASED COMPENSATION

    Pro forma information regarding net loss and net loss per share is required
by SFAS 123, which also requires that the information be determined as if the
Company had accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions:

<TABLE>
<CAPTION>
                                                                   1997       1996       1995
                                                                 ---------  ---------  ---------
<S>                                                              <C>        <C>        <C>
Expected dividend yield........................................         0%         0%         0%
Expected stock price volatility................................        65%        67%        67%
Risk-free interest rate........................................      5.35%      5.97%      5.97%
Expected life of options.......................................    3 years    3 years    3 years
</TABLE>

    The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

    For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had the
Company elected to recognize compensation expense based on the fair value of the
options granted at grant dates as prescribed by SFAS No. 123, net loss and loss
per share would have been increased to the pro forma amounts indicated in the
table below (in thousands except per share amounts):

<TABLE>
<CAPTION>
                                                               1997        1996        1995
                                                            ----------  ----------  ----------
<S>                                                         <C>         <C>         <C>
Net loss--as reported.....................................  $  (51,331) $  (34,054) $   (9,353)
Net loss--pro forma.......................................  $  (62,112) $  (38,166) $   (9,501)
Loss per share--as reported...............................  $    (2.29) $    (1.79) $    (0.78)
Loss per share--pro forma.................................  $    (2.77) $    (2.00) $    (0.80)
</TABLE>

    The weighted average fair value of options granted in 1997, 1996 and 1995
was $9.75, $7.41 and $0.22 per share, respectively.

    The pro forma effect on net income for 1997 is not representative of the pro
forma effect on net income in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1995.

    STOCK PURCHASE PLAN

    Under the 1996 Employee Stock Purchase Plan (the Purchase Plan), employees
may purchase common stock at the lower of 85% of the fair market value of the
common stock at the beginning or end of each six month offering period of up to
an aggregate total of 240,000 shares of the Company's common

                                      F-14
<PAGE>
                                HEARTPORT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6.  STOCKHOLDERS' EQUITY (CONTINUED)
stock. During the years ended December 31, 1997 and 1996, 53,000 and 19,000
shares, respectively, were issued under the Purchase Plan.

    SHAREHOLDER RIGHTS PLAN

    On March 26, 1996, the Board of Directors of the Company declared a dividend
of one preferred share purchase right (Right) for each outstanding share of
common stock outstanding on the effective date of the Offering. Each Right will
entitle stockholders to purchase 1/1000 of a share of Series A Junior
participating preferred stock of the Company, a designated series of preferred
stock for which each 1/1000 of a share has economic attributes and voting rights
equivalent to one share of the Company's common stock, at an exercise price of
$0.001 per share. The Rights only become exercisable in certain limited
circumstances involving acquisitions of or tender offers for 20% or more of the
Company's capital stock. At any time prior to the announcement of any such
acquisition or offer, the Rights are redeemable by the Company at a price of
$0.001 per Right. For a limited period of time after the announcement of any
such acquisition or offer, each Right becomes exercisable or, at the discretion
of Board, may be exchanged for one share of common stock per Right. The Rights
expire in the year 2006.

    COMMON STOCK RESERVED

    At December 31, 1997, the Company has reserved shares of common stock for
future issuances as follows:

<TABLE>
<CAPTION>
                                                                                 (IN THOUSANDS)
                                                                                 ---------------
<S>                                                                              <C>
Stock option plans.............................................................         4,935
Stock options outside the plans................................................           940
Stock purchase plan............................................................           168
Stock warrants.................................................................            18
                                                                                        -----
    Total......................................................................         6,061
                                                                                        -----
                                                                                        -----
</TABLE>

    STOCK SPLIT

    On April 25, 1996, the Company effected a 1.6-for-1 split of the Company's
common stock. All outstanding share and per share amounts have been
retroactively adjusted to reflect the stock split.

7.  INCOME TAXES

    Due to operating losses and the inability to recognize the benefits
therefrom, there is no provision or benefit for income taxes for 1997, 1996 or
1995.

    Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax

                                      F-15
<PAGE>
                                HEARTPORT, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7.  INCOME TAXES (CONTINUED)
purposes. Significant components of the Company's deferred tax assets as of
December 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                                           1997        1996
                                                                        ----------  ----------
                                                                            (IN THOUSANDS)
<S>                                                                     <C>         <C>
Deferred tax assets:
  Net operating loss carryforwards....................................  $   34,300  $   16,900
  Tax credit carryforwards............................................       2,400         900
  Capitalized research and development................................         400         500
  Acquired patent.....................................................       1,900       1,800
  Other temporary differences.........................................       2,600         600
                                                                        ----------  ----------
    Total deferred tax assets.........................................      41,600      20,700
Valuation allowance...................................................     (41,600)    (20,700)
                                                                        ----------  ----------
Net deferred tax assets...............................................  $       --  $       --
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>

    Approximately $1.7 million of the valuation allowance is attributable to tax
deductions, the benefit of which will be credited to additional paid in capital
when realized. Realization of deferred tax assets is dependent upon future
earnings, the timing and amount of which are uncertain. Accordingly, a valuation
allowance, in an amount equal to the net deferred tax asset as of December 31,
1997 and 1996 has been established to reflect these uncertainties. The increases
in the valuation allowance were approximately $20.9 million, $13.9 million and
$3.9 million for fiscal years 1997, 1996 and 1995, respectively.

    As of December 31, 1997, the Company had net operating loss carryforwards
for federal and California tax purposes of approximately $93.0 million and $59.0
million, respectively, which will expire from 1999 through 2012. As of December
31, 1997, the Company also had research and development tax credit carryforwards
of approximately $1.3 million and $1.2 million, respectively, for federal and
California tax purposes, which will expire in years 2007 through 2012 if not
used.

    Utilization of net operating loss and credit carryforwards may be subject to
an annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.

8.  PATENT ACQUISITION

    Patent acquisition expenses consist of the cost to acquire a United States
patent, several pending U.S. patent applications, and related rights from
Endosurgical Development Corporation in July 1996 in exchange for shares of
Common Stock and cash.

9.  EMPLOYEE BENEFIT PLAN

    The Company has a savings plan which qualifies under Section 401(k) of the
Internal Revenue Code. Under the plan, participating employees may defer up to
20% of their pre-tax salary, up to statutory limits. All regular U.S. employees
are eligible to participate. The Company currently does not match employee
contributions made to the savings plan.

                                      F-16
<PAGE>
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

    Not applicable.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

OFFICERS AND DIRECTORS

    The officers and directors of the Company, and their ages as of December 31,
1997, are as follows:

<TABLE>
<CAPTION>
                 NAME                        AGE                                POSITION
---------------------------------------      ---      ------------------------------------------------------------
<S>                                      <C>          <C>
Wesley D. Sterman, M.D.                          37   President, Chief Executive Officer, Director, and Co-Founder
Richard B. Brewer                                46   Chief Operating Officer
John H. Stevens, M.D.                            37   Chief Technical Officer, Director and Co-Founder
David B. Singer                                  35   Senior Vice President and Chief Financial Officer
Bradford J. Shafer                               37   General Counsel and Secretary
Steven E. Johnson                                39   Senior Vice President of Manufacturing
Casey M. Tansey                                  40   Senior Vice President of Sales and Marketing
Hanson S. Gifford, III                           37   Vice President of Research and Development
Luis J. Jimenez                                  42   Vice President of Quality Assurance and Regulatory Affairs
C. Richard Neely, Jr.                            43   Vice President, Finance and Controller
Ajit S. Shah, Ph.D.                              37   Vice President of Corporate Development
Lawrence C. Siegel, M.D.                         40   Vice President of Clinical Affairs
Robert V. Gunderson, Jr.(2)                      46   Director
Joseph S. Lacob(2)                               42   Director
Petri T. Vainio, M.D., Ph.D.(1)                  38   Director
Steven C. Wheelwright, Ph.D.(1)(2)               54   Director
</TABLE>

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

(1) Member of Compensation Committee

(2) Member of Audit Committee

    WESLEY D. STERMAN, M.D. founded the Company with Dr. Stevens in May, 1991,
and has served as a director and the Company's President and Chief Executive
Officer since that time. Prior to founding the Company, Dr. Sterman was founder,
President and Chief Executive Officer of EndoVascular Technologies, Inc., a
medical device manufacturer, from July, 1989 to September, 1991. Dr. Sterman has
B.S. degrees both in Biology and in Chemistry from Stanford University. Dr.
Sterman received an M.D. from the Stanford University School of Medicine and an
M.B.A. from the Graduate School of Business at Stanford University, where he was
an Arjay Miller Scholar.

    RICHARD B. BREWER has been Chief Operating Officer of the Company since
January 22, 1997 and served as Executive Vice President of Operations of the
Company since February, 1996. Prior to joining the Company, Mr. Brewer served in
various capacities with Genentech, Inc., a biotechnology company, from 1984 to
1995, most recently as Senior Vice President, U.S. Sales and Marketing,
Genentech Europe Ltd., and Genentech Canada, Inc. Mr. Brewer earned a B.S. from
Virginia Polytechnic Institute and an M.B.A. from Northwestern University.

                                     III-1
<PAGE>
    JOHN H. STEVENS, M.D. founded the Company with Dr. Sterman in May, 1991, and
has been a director of the Company since that time. Dr. Stevens joined Heartport
as Chief Technical Officer in July, 1997 and has been Consulting Assistant
Professor of Cardiac Surgery at Stanford University School of Medicine since
that time. From August, 1996 until he joined the Company, Dr. Stevens was
Assistant Professor of Cardiothoracic Surgery at Stanford and prior to that he
served as Chief Resident of the Department of Cardiothoracic Surgery at
Stanford, and as Senior Registrar in Cardiothoracic Surgery at the Great Ormond
Street Hospital for Sick Children in London, England from July, 1995 to March,
1996. Dr. Stevens earned B.U.S. and B.S. degrees in Communications and
Psychology from the University of Utah and an M.D. from Stanford University.

    DAVID B. SINGER has been Senior Vice President, Finance and Chief Financial
Officer of the Company since June, 1996. Prior to joining the Company, Mr.
Singer served as President, Chief Executive Officer and a Director of
Affymetrix, Inc., a genomics and diagnostic company. From November, 1990 to
February, 1993, Mr. Singer served in various senior management roles of Affymax
N.V., a biotechnology company, including Vice President, Finance and Treasurer.
From 1988 to 1990, Mr. Singer was an assistant to various senior officers of
Baxter Healthcare Corporation ("Baxter"), a medical supply company. Mr. Singer
serves on the Board of Directors of Affymetrix, Inc. Mr. Singer holds a B.A.
from Yale University and an M.B.A. from the Graduate School of Business at
Stanford University.

    BRADFORD J. SHAFER has been General Counsel and Secretary of the Company
since July, 1996. From July, 1985 until July, 1996, he was an attorney with the
law firm of Brobeck, Phleger & Harrison LLP, where he was a partner since
January, 1993. Mr. Shafer holds a B.A. from the University of the Pacific and a
J.D. from the University of California, Hastings College of the Law.

    STEVEN E. JOHNSON has been Senior Vice President of Manufacturing of the
Company since January 1998 and prior to that was Vice President of Manufacturing
of the Company since August, 1994. Prior to joining the Company, Mr. Johnson
served in various capacities with Advanced Cardiovascular Systems, Inc., a
medical device company, from 1983 to 1994, most recently as Vice President,
Manufacturing. Mr. Johnson earned a B.S. in Industrial Engineering from GMI
Engineering and Management Institute.

    CASEY M. TANSEY has been Senior Vice President of Sales and Marketing of the
Company since January 1998 and prior to that was Vice President of Sales and
Marketing of the Company since December, 1995. From 1988 until joining the
Company in 1995, Mr. Tansey served in various capacities with the Edwards C.V.S.
Division of Baxter. Mr. Tansey's most recent position at Baxter/Edwards was Vice
President, North American Sales. Mr. Tansey earned a B.S. in Business
Administration and an M.B.A. from the College of Notre Dame.

    HANSON S. GIFFORD, III, has been Vice President of Research and Development
of the Company since February, 1996. Prior to that time, Mr. Gifford served as
the Company's Director of Research and Development beginning in July, 1993. From
1992 to 1993, he served as Managing Director of Bavaria Medizin Technologie,
GmbH, a German medical device company. From 1990 to 1991, he served as President
of Cardiovascular Therapeutic Technologies, Inc., a medical device company. From
1985 to 1990, he served in various research and development, clinical research,
and marketing capacities at Devices for Vascular Intervention, Inc., a medical
device company. Mr. Gifford earned a B.S. in Mechanical Engineering from Cornell
University.

    LUIS J. JIMENEZ has been Vice President, Quality Assurance and Regulatory
Affairs of the Company since September, 1997. Prior to joining the Company, Mr.
Jimenez was employed by Boston Scientific Corporation (formerly Heart
Technology, Inc.) from 1993 to 1997, most recently as Senior Director, Program
Management/Quality. Mr. Jimenez served in various quality assurance and quality
engineering capacities with Baxter International, Inc. from 1984 to 1993. Mr.
Jimenez earned a B.S. from the University of Puerto Rico and an M.B.A. from the
University of Southern California, Los Angeles.

                                     III-2
<PAGE>
    C. RICHARD NEELY, JR. has been Vice President, Finance and Controller of the
Company since December, 1996. Prior to joining the Company, Mr. Neely served as
Vice President and Chief Financial Officer of Sanmina Corporation, an
electronics manufacturing company, from April, 1996 to August, 1996. Mr. Neely
served in various capacities with Advanced Micro Devices, Inc., a semiconductor
company, from 1980 to April, 1996, most recently as Director and Group
Controller. Mr. Neely earned a B.A. in Economics from Whitman College and a
M.B.A. from the University of Chicago.

    LAWRENCE C. SIEGEL, M.D. has been Vice President of Clinical Affairs of the
Company since November, 1996. Prior to joining the Company, Dr. Siegel served in
various capacities with the Stanford University School of Medicine from 1986 to
1996, most recently as Associate Professor of Anesthesia and Chief of
Cardiovascular Anesthesiology. Dr. Siegel earned a B.S. in Electrical
Engineering from Massachusetts Institute of Technology and a M.D. from Harvard
Medical School. Dr. Siegel is a board certified anesthesiologist.

    AJIT S. SHAH, PH.D. has been Vice President of Corporate Development of the
Company since April, 1997. Prior to joining the Company, Dr. Shah served in
various capacities with Stanford Research Institute (SRI International) from
1988 to 1997, most recently as the Executive Director of the Advanced Technology
Division. Dr. Shah earned a B.S. in Mechanical Engineering from the University
of California, Berkeley, a M.S. from Stanford University in Electrical
Engineering and a Ph.D. in Biomedical Engineering awarded jointly by the School
of Medicine, University of California, San Francisco and College of Engineering,
University of California, Berkeley.

    ROBERT V. GUNDERSON, JR. has been a director of the Company since May, 1995.
Mr. Gunderson has been a partner of the law firm of Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP, since its formation in September, 1995.
From May, 1988, until September, 1995, Mr. Gunderson was a partner of the law
firm of Brobeck, Phleger & Harrison, LLP. Mr. Gunderson holds an M.A. from
Stanford University, an M.B.A. in finance from the Wharton School, University of
Pennsylvania and a J.D. from the University of Chicago.

    JOSEPH S. LACOB has been a director of the Company since April, 1992. Mr.
Lacob is a general partner of Kleiner Perkins Caufield & Byers ("Kleiner
Perkins"), a venture capital firm he joined in 1987. Prior to joining Kleiner
Perkins, he was Marketing Manager for Cetus Corporation, a biotechnology
company. Mr. Lacob serves as Chairman of the Board of Directors of CellPro,
Inc., and is a director of Cardima, Inc., Corixa Corporation, Microcide
Pharmaceuticals, Inc., Pharmacyclics, Inc., and five privately held companies.
Mr. Lacob holds a B.S. in Biochemistry from the University of California at
Irvine, a Masters in Public Health from the University of California at Los
Angeles, and an M.B.A. from the Graduate School of Business at Stanford
University.

    PETRI T. VAINIO, M.D., PH.D. has been a director of the Company since April,
1992. Dr. Vainio is a general partner of Sierra Ventures, a venture capital firm
he joined in 1988. He currently serves on the Board of Directors of Symphonix
Devices, Inc., a medical device company, and six privately held companies. Dr.
Vainio holds M.D. and Ph.D. degrees from the University of Helsinki, Finland,
and an M.B.A. from the Graduate School of Business at Stanford University.

    STEVEN C. WHEELWRIGHT, PH.D. has been a director of the Company since
January, 1995. Dr. Wheelwright currently serves as a senior associate dean at
the Graduate School of Business, Harvard University, where he has been a
professor since July, 1988. Dr. Wheelwright also served as a professor of the
Graduate School of Business, Harvard University, from August, 1985, to August,
1986. From August, 1986 to August, 1988, Dr. Wheelwright served as a professor
at the Graduate School of Business at Stanford University. Dr. Wheelwright is
also a member of the Board of Directors of Quantum Corporation, a mass storage
device company, T.J. International Corporation, an engineered wood products
company, and Franklin Covey, an organizational tools company.

                                     III-3
<PAGE>
ITEM 11.  EXECUTIVE COMPENSATION.

    The information required by this item is incorporated by reference to the
Proxy Statement for the Registrant's Annual Meeting of Stockholders.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

    The information required by this item is incorporated by reference to the
Proxy Statement for the Registrant's Annual Meeting of Stockholders.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

    The information required by this item is incorporated by reference to the
Proxy Statement for the Registrant's Annual Meeting of Stockholders.

                                     III-4
<PAGE>
                                    PART IV

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

(a)(1)  EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO.                                               DESCRIPTION
-----------  -----------------------------------------------------------------------------------------------------
<C>          <S>
    2.1+     Agreement and Plan of Merger dated April 3, 1995, for the reincorporation merger of Stanford Surgical
             Technology, Inc., a California corporation, into Heartport, Inc., a Delaware corporation.
    3.1+     Restated Certificate of Incorporation.
    3.2+     Bylaws of the Registrant.
    4.1      Reference is made to Exhibits 3.1 and 3.2.
    4.2+     Specimen Common Stock certificate.
    4.3+     Third Amended and Restated Rights Agreement among Registrant and the Founders and Investors specified
             therein dated April 17, 1995.
    4.4#     Rights Agreement between the Registrant and the First National Bank of Boston dated April 25, 1996.
   10.1+     Form of Indemnification Agreement entered into by and between Registrant and its officers and
             directors.
   10.2+     1993 Stock Option Plan and forms of agreements thereunder.
   10.3#     1996 Stock Option Plan as amended and restated October 21, 1996.
   10.4#     Employee Stock Purchase Plan, as amended and restated October 21, 1996.
   10.5+     Real Property Lease between the Registrant and Metropolitan Insurance Company dated September 21,
             1992, as amended.
   10.6+     Equipment Financing Agreement between the Registrant and Lease Management Services, Inc. dated
             February 23, 1995.
   10.7+*    Agreement between the Company and St. Jude Medical, Inc. dated September 11, 1995.
   10.8#     Third Amendment to Lease Agreement between Heartport Research and Training Center, Inc. and
             University of Utah Research Foundation dated as of October 25, 1996.
   10.9#*    Amendment to agreement between Registrant and St. Jude Medical, Inc. dated January 31, 1997.
   10.10     Amended and Restated Loan and Security Agreement dated March 20, 1998 between the Registrant, Silicon
             Valley Bank and Banque Nationale de Paris.
   10.11     Industrial Build-To-Suit Lease dated September 19, 1997 between Registrant and Chestnut Bay LLC.
             (without exhibits)
   10.12     First Amendment to Industrial Build-To-Suit Lease dated February 10, 1998 between Registrant and
             Chestnut Bay LLC.
   23.1      Consent of Ernst & Young LLP, Independent Auditors.
   27.1      Financial Data Schedule
</TABLE>

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

*   Confidential treatment has been requested for certain portions of this
    exhibit. Omitted portions have been filed separately with the Securities and
    Exchange Commission.

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

#  Previously filed.

                                      IV-1
<PAGE>
(a)(2)  SCHEDULES

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

<TABLE>
<CAPTION>
  SCHEDULE NO.                   DESCRIPTION
-----------------  ---------------------------------------
<S>                <C>
           II      Valuation and Qualifying Accounts
</TABLE>

    All other schedules are not applicable.

(b)  REPORTS ON FORM 8-K

    No reports on Form 8-K were filed by the Registrant during the quarter ended
December 31, 1996.

(c)  EXHIBITS

    See paragraph (a).

                                      IV-2
<PAGE>
                                   SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, in Redwood City, California, on this 27th day of March, 1998.

                                HEARTPORT, INC.

                                By:             /s/ DAVID B. SINGER
                                     -----------------------------------------
                                                  David B. Singer
                                             SENIOR VICE PRESIDENT AND
                                              CHIEF FINANCIAL OFFICER

                               POWER OF ATTORNEY

    KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints, Wesley D. Sterman and David B. Singer,
and each of them, his true and lawful attorneys-in-fact and agents with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto and all documents in connection
therewith with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

    Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-K has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated:

          SIGNATURE                       TITLE                    DATE
------------------------------  --------------------------  -------------------

                                President, Chief Executive
 /s/ WESLEY D. STERMAN, M.D.      Officer and Director
------------------------------    (Principal Executive        March 27, 1998
   Wesley D. Sterman, M.D.        Officer)

                                Senior Vice President and
     /s/ DAVID B. SINGER          Chief Financial Officer
------------------------------    (Principal Financial and    March 27, 1998
       David B. Singer            Accounting Officer)

 /s/ ROBERT V. GUNDERSON, JR.
------------------------------  Director                      March 27, 1998
   Robert V. Gunderson, Jr.

     /s/ JOSEPH S. LACOB
------------------------------  Director                      March 27, 1998
       Joseph S. Lacob

  /s/ JOHN H. STEVENS, M.D.
------------------------------  Director                      March 27, 1998
    John H. Stevens, M.D.

  /s/ PETRI T. VAINIO, M.D.,
            PH.D.
------------------------------  Director                      March 27, 1998
 Petri T. Vainio, M.D., Ph.D.

  /s/ STEVEN C. WHEELWRIGHT,
            PH.D.
------------------------------  Director                      March 27, 1998
 Steven C. Wheelwright, Ph.D.

                                      IV-3
<PAGE>
                                  SCHEDULE II
                                HEARTPORT, INC.
                       VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                                                   ADDITIONS
                                                                      BALANCE     CHARGED TO
                                                                     BEGINNING     COSTS AND                   BALANCE END
                                                                     OF PERIOD     EXPENSES      DEDUCTIONS     OF PERIOD
                                                                    -----------  -------------  -------------  -----------
                                                                                        (IN THOUSANDS)
<S>                                                                 <C>          <C>            <C>            <C>
Year Ended December 31, 1997
  Allowance for doubtful accounts.................................   $      33     $     281      $      --     $     314
  Allowance for sales returns.....................................   $      65     $     589      $      45     $     609
Year Ended December 31, 1996
  Allowance for doubtful accounts.................................   $      --     $      33      $      --     $      33
  Allowance for sales returns.....................................   $      --     $      65      $      --     $      65
Year Ended December 31, 1995
  Allowance for doubtful accounts.................................   $      --     $      --      $      --     $      --
</TABLE>

                                      IV-4