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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

     Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended June 29, 2002

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: 1-8145

THORATEC CORPORATION
(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (925) 847-8600

     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 No

     As of August 12, 2002, registrant had 56,517,048 shares of common stock outstanding.

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THORATEC CORPORATION AND SUBSIDIARIES
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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THORATEC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)
(in thousands)

See notes to condensed consolidated financial statements.

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THORATEC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)
(in thousands, except per share data)

See notes to condensed consolidated financial statements.

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THORATEC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)
(in thousands)

See notes to condensed consolidated financial statements.

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THORATEC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)
(in thousands)

See notes to condensed consolidated financial statements.

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THORATEC CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

     The interim condensed consolidated financial statements of Thoratec Corporation, referred to as “we”, “our”,“Thoratec”, or our “Company” have been prepared and presented in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission, or the SEC, without audit and, in our opinion, reflect all adjustments necessary (consisting only of normal recurring adjustments) to present fairly our financial position at June 29, 2002 and December 29, 2001, our results of operations for the three-month and six-month periods ended June 29, 2002 and June 30, 2001 and cash flows for the six-month periods ended June 29, 2002 and June 30, 2001. Certain information and footnote disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The accompanying financial statements should be read in conjunction with our fiscal 2001 consolidated financial statements filed with the SEC in our Annual Report on Form 10-K.

     Our merger with Thermo Cardiosystems Inc., or TCA, was completed on February 14, 2001, which we refer to as the Merger. Because the Merger was treated as a reverse acquisition, the 2001 condensed consolidated financial information presented herein includes the financial results of TCA for the entire three and six-month periods ended June 30, 2001 and the financial results of Thoratec for the post-merger period from February 14, 2001 through June 30, 2001. The operating results for any interim period are not necessarily indicative of the results that may be expected for any future period.

     The preparation of our condensed consolidated financial statements included herein necessarily requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the consolidated balance sheet dates and the reported amounts of revenues and expenses for the periods presented.

     We have made certain reclassifications of 2001 amounts to conform to the current presentation.

2. Merger of Thoratec and TCA

     As a result of the Merger, $76.9 million relating to in-process research and development, or IPR&D, was expensed in the first quarter of 2001. The write-off of IPR&D related to projects that were in development, had not reached technological feasibility, had no alternative future use and for which successful development was uncertain. Current estimates and assumptions related to the valuation of IPR&D remain materially consistent with our initial estimates performed at the time of the Merger.

     The fair value of Thoratec’s net assets have been estimated for purposes of allocating the purchase price. The purchase price and allocation of purchase price as of June 29, 2002 are summarized as follows (in thousands):

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3. New Accounting Pronouncements

     As of the beginning of fiscal year 2002, we adopted Statement of Financial Accounting Standards, or SFAS, No. 142, “Goodwill and Other Intangible Assets”, which addresses the financial accounting and reporting standards for the acquisition of intangible assets outside of a business combination and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill be separately disclosed from other intangible assets in the statement of financial position, and no longer be amortized but tested for impairment on a periodic basis. The provisions of this accounting standard also require the completion of a transitional impairment test within six months of adoption, with any impairments identified treated as a cumulative effect of a change in accounting principle. We have completed our transitional goodwill impairment test as of December 30, 2001 and determined that no adjustment to the carrying value of the goodwill was needed. On an ongoing basis, absent any impairment indicators, we expect to perform a goodwill impairment test during the fourth quarter of each year.

     In accordance with SFAS No. 142, we discontinued the amortization of goodwill effective as of the beginning of fiscal year 2002. In addition, we reassessed the useful lives of our identifiable intangible assets and determined that the lives were appropriate.

     The following table presents the impact of adopting SFAS No. 142 on net loss and net loss per share had the standard been in effect for the three and six months ended June 30, 2001:

     In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs, including legal obligations. We are required to adopt SFAS No. 143 at the beginning of fiscal year 2003. We are currently evaluating the impact of the adoption of SFAS No. 143.

     In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, effective for fiscal years beginning after December 31, 2001. Under the new rules, the criteria required for classifying an asset as held-for-sale have been significantly changed. Assets held-for-sale are stated at the lower of their fair values or carrying amounts, and depreciation is no longer recognized. In addition, the expected future operating losses from discontinued operations will be displayed in discontinued operations in the period in which the losses are incurred rather than as of the measurement date. More dispositions will qualify for discontinued operations treatment in the statement of operations under the new rules. We adopted SFAS No. 144 at the beginning of fiscal year 2002. The adoption of SFAS No. 144 did not have any impact on our financial position, results of operations or cash flows.

     In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, which, among other things, changed the presentation of gains and losses on the extinguishment of debt. Any gain or loss on extinguishment of debt that does not meet the criteria in APB Opinion 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, shall be included in operating earnings and not presented separately as an extraordinary item. We will adopt SFAS No. 145 at the beginning of fiscal year 2003. We are currently evaluating the impact of this statement on our financial position, results of operations, and cash flows. If adoption of this standard results in our gains and losses on the extinguishment of our debt being included in operating earnings, we will reclassify the extraordinary loss incurred this year of $0.5 million to operating earnings as of the date of adoption.

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     In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue , or EITF, No. 94-3 "Liability Regonition for Certain Employee Termination Benefits and Other Costs to Exit on Activity (including Certain Costs Incurred in a Restructuring)". The Company will adopt the provisions of SFAS No. 146 for restructuring activities initiated after December 31,2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost was recognized at the date of the Company’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized.

4. Inventories

     Inventories consist of the following (in thousands):

5. Property, Plant and Equipment

     Property, plant, and equipment consist of the following (in thousands):

6. Goodwill and Other Intangible Assets

     The change in the carrying amount of goodwill, which is only attributable to our Cardiovascular business segment, for the six-month period ended June 29, 2002 was as follows (in thousands):

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     The components of identifiable intangible assets, consisting primarily of patents and trademarks, developed technology and core technology, which are included in purchased intangible assets on the consolidated balance sheets, are as follows (in thousands):

     As of the beginning of fiscal 2002, the purchased intangible asset associated with the assembled workforce was reclassified to goodwill. At the time of the reclassification, the gross carrying amount and accumulated amortization of the assembled workforce intangible asset was $2.6 million and $0.4 million, respectively.

     Amortization expense related to identifiable intangible assets for each of the three and six-month periods ended June 29, 2002 and June 30, 2001 was $3.1 million, $6.2 million, $3.2 million, and $4.8 million, respectively. Estimated amortization expense for the remainder of fiscal 2002 is $6.2 million and $12.4 million for each of the five succeeding years. The purchased intangible assets have estimated useful lives of eight to twenty years.

7. Subordinated Convertible Debentures

     On March 11, 2002 we completed the redemption of our outstanding subordinated convertible debentures at par plus accrued interest using restricted cash and cash equivalents of approximately $45.9 million and cash of approximately $9.8 million. An extraordinary loss in the amount of $0.3 million net of a tax benefit of $0.2 million was recorded on the date of the redemption related to the write-off of the capitalized debt issuance costs. Upon the closing of the Merger with TCA in February 2001, $45.0 million in cash and cash equivalents was pledged as collateral for a letter of credit guarantee to Thermo Electron related to Thermo Electron’s guarantee of our subordinated debentures. As a result of the redemption, the letter of credit guarantee to Thermo Electron was extinguished.

8. Common and Preferred Stock

     We filed a registration statement on Form S-3 with the SEC to register 1,055,000 newly issued shares of our common stock and to register for resale 5,945,000 shares of our common stock held by selling shareholders, of which 5,825,000 shares were held by Thermo Electron Corporation or Thermo Electron. This registration statement became effective on February 12, 2002 and all shares registered were sold on February 15, 2002. We received $15.4 million, net of underwriting fees and discounts and other issuance costs, from the sale of the 1,055,000 newly issued shares. In addition, the underwriters exercised a 30-day option to purchase from Thermo Electron 1,050,000 additional shares of our common stock to cover any over-allotments. We received no proceeds from the sale of shares by selling shareholders or from the sale of the over-allotment shares. As of June 29, 2002. Thermo Electron owned approximately 14% of our total outstanding common stock.

     We recently filed another registration statement on Form S-3 with the SEC to register for resale up to 7.6 million shares of our common stock held by Thermo Electron. This registration statement is expected to become effective on or about August 14, 2002. We will not receive any proceeds from the sale of any of these shares.

     On April 12, 2001 we announced that our Board of Directors authorized a stock repurchase program under which our common stock with a market value up to $20 million may be acquired in the open market or in privately negotiated transactions. The number of shares to be purchased and the timing of purchases will be based on several conditions, including the price of our common stock, general market conditions and other factors. During the six months ended June 29, 2002, we repurchased 653,000 shares of our common stock on the open market for $6.0 million. From the inception of the program through June 29, 2002, we have repurchased 845,700 million shares of our common stock for $7.7 million. All repurchased common stock has been retired.

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     On May 2, 2002, we adopted a shareholder rights plan, which we call the Rights Plan. Under the Rights Plan, we distributed one purchase right for each share of common stock outstanding at the close of business on May 17, 2002. If a person or group acquires 15% or more of our common stock in a transaction not pre-approved by our Board of Directors, each right will entitle its holder, other than the acquirer, to buy our common stock at 50% of its market value for the right’s then current exercise price (initially $70.00). In addition, if an unapproved party acquires more than 15% of our common stock, and our Company or our business is later acquired by the unapproved party or in a transaction in which all shareholders are not treated alike, shareholders with unexercised rights, other than the unapproved party, will be entitled to purchase common stock of the merger party or asset buyer with a value of twice the exercise price of the rights. Each right also becomes exercisable for one one-thousandth of a share of our Series RP preferred stock at the right’s then current exercise price ten days after an unapproved third party makes, or announces an intention to make, a tender offer or exchange offer that, if completed, would result in the unapproved party acquiring 15% or more of our common stock. Our Board of Directors may redeem the rights for a nominal amount before an event that causes the rights to become exercisable. The rights will expire on May 2, 2012.

     In connection with the Rights Plan, we designated 100,000 no par shares of Series RP preferred stock. These shares, if issued, will be entitled to receive quarterly dividends and a liquidation preference. There are no shares of Series RP preferred stock issued and outstanding and we do not anticipate issuing any shares of Series RP preferred stock except as may be required under the Rights Plan.

     On May 31, 2002, our shareholders approved an Employee Stock Purchase Plan, or the ESPP. The ESPP authorizes the issuance of up to 500,000 shares of common stock to participating employees. In addition, the ESPP provides for an annual increase of up to 250,000 shares in the total number of shares available for issuance under the ESPP on March 1 of each year. As of June 29, 2002, 679 of our employees would have been eligible to participate in the ESPP.

     The ESPP will be implemented through a series of six-month offering periods, the first of which will commence no sooner than the first trading day of November 2002. A participating employee may have up to 15% of their compensation withheld during an offering period. At the end of each offering period, the accumulated payroll deductions of each employee will be used to purchase shares at the purchase price for that offering period. The purchase price of the shares will be 85 percent of the lower of the fair market value of the shares on the first or the last day of that offering period.

     Because participation by employees in the ESPP will be voluntary, and is subject to certain eligibility requirements, we cannot determine the number of shares of common stock that will be purchased in the future by our employees as a group.

9. Merger and Restructuring Costs

     Merger and restructuring costs were recorded in the condensed consolidated statements of operations as follows (in thousands):

     Merger Costs

     Early in 2000, Thermo Electron announced its intent to sell TCA. In conjunction with this announcement, TCA put in place an employee retention plan, which offered a bonus to certain key employees to continue employment with TCA through the completion of the sale of the company. Upon closure of the Merger between TCA and Thoratec, certain Thoratec executives’ stock options accelerated per the original terms of the stock option agreements. In exchange for a waiver of their rights to immediately exercise these options and to sell the related stock, we compensated these executives for that waiver. Merger costs recorded during the three months ended June 29, 2002 consisted of executive waiver agreement expenses. Merger costs recorded during the three and six-month periods ended June 30, 2001 consisted principally of employee severance, employee retention costs and outside consulting, accounting and legal expenses associated with the Merger.

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     The following table reflects the activity in accrued merger costs for the three and six-month periods ended June 29, 2002 and June 30, 2001 (in thousands):

     In accordance with the executive waiver agreements, payments to the executives occurred at the one-year anniversary of the Merger, although the executives continue to be restricted from exercising some of their options and selling the related stock for an additional six months following the one-year anniversary date. The total expense related to the waiver agreements of $810,000 is being amortized over the 18-month waiver period. As of June 29, 2002, the ending balance of accrued merger costs has been reclassified to prepaid expenses and other in the accompanying condensed consolidated balance sheet.

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     Restructuring Costs

     In June 2001, we approved a plan to consolidate all of our Cardiovascular product manufacturing operations to our manufacturing facilities and headquarters in Pleasanton, California, which we refer to as the Restructuring Plan. The restructuring initiatives, which commenced in 2001, are expected to achieve operating efficiencies and result in substantial cost savings. Substantially all of the milestones related to the relocation that are under our control have been completed. Because our products are regulated by the U.S. Food and Drug Administration, or the FDA, it is estimated it will take an additional six months to complete the FDA review and certification process before all of the products being transferred can be manufactured in Pleasanton. The timing of these events is consistent with estimates made at the inception of the Restructuring Plan. From the inception of the Restructuring Plan through June 29, 2002, we have recorded $1.6 million of restructuring charges in accordance with EITF No. 94-3, and Staff Accounting Bulletin No. 100, “Restructuring and Impairment Charges.” These charges represent estimated employee severance costs and stock option acceleration charges. Since the announcement of the Restructuring Plan in the second quarter of 2001, we have paid approximately $0.5 million in severance payments to 31 employees. The following is a summary of our accrued restructuring costs activity for the three-month and six-month periods ended June 29, 2002 and June 30, 2001 (in thousands):

     In addition to the employee severance, estimated restructuring costs for each of the three and six-month periods ended June 29, 2002 and June 30, 2001 includes $112,000, $152,000, nil, and nil, respectively, of expense related to the estimated fair value of options granted to the employees to be severed in the Restructuring Plan, which will accelerate upon the employees’ termination.

10. Income Taxes

     Our effective tax benefit rate was 40% for both the three and six-month periods ended June 29, 2002. For the three and six-month periods ended June 30, 2001, our effective tax benefit rate was 34% and 2%, respectively. The effective tax benefit rate for 2002 differed from the statutory federal income tax rate primarily due to the impact of state income taxes. The effective tax benefit rate for the six-month period of 2001 differed from the statutory federal income tax rate primarily due to the nondeductible nature of expenses related to our merger with TCA, including the write-off of in-process research and development costs, the amortization of goodwill and other nondeductible merger transaction expenses.

     At June 29, 2002 and December 29, 2001, we reported a net deferred tax liability of approximately $56.3 million and $58.6 million, respectively, comprised principally of temporary differences between the financial statement and income tax bases of intangible assets.

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11. Net Loss Per Share

     Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. As a result of our net losses for all periods presented, there is no difference between basic and diluted net loss per share. Options to purchase 389,910 and 1,062,849 shares of common stock for the three and six-month periods ended June 29, 2002 respectively, were not included in the computations of diluted net loss per share because the loss position in both periods would have rendered the additional shares antidilutive. Options to purchase 6,283,714 shares of common stock for both of the three and six-month periods ended June 30, 2001 were not included in the computations of diluted loss per share because the loss position in both periods would have rendered the additional shares antidilutive. In addition, the effect of assuming the conversion of our 4.75% subordinated convertible debentures, convertible at $37.62 per share, was excluded from the calculation of diluted net loss per share for the three and six-month periods ended June 30, 2001 and June 29, 2002 because the effects would be antidilutive.

12. Business Segment and Geographical Data

     We organize and manage our business by functional operating entities. Our functional entities operate in two segments: (1) Cardiovascular and (2) Other Medical Equipment. The 2001 condensed consolidated financial information presented herein includes the financial results of TCA’s Cardiovascular segment and Other Medical Equipment segment for the entire three and six-month periods ended June 30, 2001 and the financial results of Thoratec’s Cardiovascular segment for only the post-merger period from February 14, 2001 through June 30, 2001.

     Business Segments (in thousands):

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Geographic Areas (in thousands):