Back to GetFilings.com

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Commission file number: 1-8145

Thoratec Corporation

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

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock

     Indicate by a 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 o

     Indicate by a 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. x

     Indicate by a check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12(b)-2) Yes x No o

     The aggregate market value of the voting stock held by non-affiliates $419,362,221 computed by reference to the last sale reported of such stock on June 29, 2002 as listed on The Nasdaq National Stock Market.(1)

     As of March 11, 2003, registrant had 55,051,485 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Designated portion of Thoratec’s definitive proxy statement for its 2003 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K.

Table of Contents

FORWARD-LOOKING STATEMENTS

     This Annual Report on Form 10-K, including the documents incorporated by reference in this Annual Report, includes forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. Our actual results could differ materially from those discussed in, or implied by, these forward-looking statements. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may”, “hope” and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Forward-looking statements include, but are not necessarily limited to, those relating to:

	•		our ability to obtain and maintain regulatory approval of our products in the United States and internationally;
	•		results and timing of our clinical trials;
	•		reimbursement policies and decisions by government agencies and third party payors;
	•		the other competing therapies that may currently, or in the future, be available to heart failure patients;
	•		our plans to develop and market new products; and
	•		our ability to improve our financial performance.

     Factors that could cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described in the “Risk Factors” section and in other documents we file with the Securities and Exchange Commission. We are not obligated to update or revise these forward-looking statements to reflect new events or circumstances.

     You should assume that the information appearing in this Annual Report on Form 10-K is accurate only as of the date on the front cover. Our business, financial condition, results of operations and prospects may have changed since that date.

     Thoratec, the Thoratec logo, Thoralon, TLC-II, HeartMate, HeartPak and Vectra are registered trademarks, and Aria is a trademark of Thoratec Corporation.

     HEMOCHRON, ProTime, Surgicutt, Tenderlett and tenderfoot are registered trademarks of International Technidyne Corporation, or ITC, our wholly-owned subsidiary.

2

Table of Contents

TABLE OF CONTENTS

3

Table of Contents

PART I

Item 1. Business

Overview

     We are a leading manufacturer of circulatory support products for use by patients with congestive heart failure, or CHF. According to the American Heart Association, 4.9 million patients in the United States suffer from CHF and an additional 550,000 patients are diagnosed with this disease annually. We were the first company to receive approval from the United States Food and Drug Administration, or FDA, to commercially market a ventricular assist device, or VAD, to treat patients with late-stage heart failure, which comprises approximately 5% to 10% of the CHF patient population. Our VADs are used primarily by these CHF patients to perform some or all of the pumping function of the heart and we currently offer the widest range of products to serve this market. We believe that our long-standing reputation for quality and innovation and our excellent relationships with leading cardiovascular surgeons worldwide position us to capture growth opportunities in the expanding congestive heart failure market.

     We develop and market products that are used by physicians and hospitals for cardiac assist, vascular and diagnostic applications. Our three types of products are:

	•		Circulatory Support Products. Our circulatory support products include VADs for the short-term and long-term treatment of congestive heart failure. Our products address more indications than the products of any other cardiac assist device company.
	•		Vascular Graft Products. We have developed small diameter grafts to address the vascular access and coronary bypass surgery markets. These grafts use our proprietary materials that are designed to improve performance. Our grafts are sold in the United States and internationally for use in hemodialysis patients and are currently in clinical trials for coronary artery bypass applications.
	•		Blood Coagulation Testing and Skin Incision Devices. We have a leading market position for devices that monitor blood coagulation and perform blood-screening analysis for patients undergoing various surgical procedures. We also offer a family of single-use skin incision devices used to create a blood sample.

     Our VADs are regarded as the most versatile and widely used circulatory support systems for patients with late-stage CHF. We currently market devices that may be implanted or worn outside the body and that are suitable for treatments of different durations for patients of varying sizes and ages. We estimate that our VADs have treated almost 5,700 patients. Our devices are currently used primarily for patients awaiting a heart transplant or recovering from open heart surgery. On November 6, 2002, the FDA granted us approval to market our HeartMate SNAP-VE VAD an alternative to optimal medical management or maximum drug therapy, which we call destination therapy, for CHF patients who are not eligible for a heart transplant. We are also pursuing approval to use our VADs for therapeutic recovery to partially reverse the complications of late-stage heart failure in certain patients. Although it is difficult to estimate the size of this market, we believe that the patient population that could benefit from this use could be substantial. We submitted a Pre-Market Approval, or PMA, Supplement for the therapeutic recovery indication and expect to receive FDA approval in 2003.

     On February 14, 2001, we completed our merger with Thermo Cardiosystems, Inc, which we refer to as Thermo Cardiosystems or TCA, a Massachusetts-based manufacturer of cardiac assist, blood coagulation testing and skin incision devices, which we refer to as the Merger. As a result of the Merger, we substantially increased the size of our company and became a leading provider of circulatory support products worldwide. We now sell VADs to virtually every leading heart transplant center worldwide and we market three out of the four VADs approved by the FDA as a bridge to heart transplant. At the time of the Merger, we changed our name from Thoratec Laboratories Corporation to Thoratec Corporation. Immediately after the Merger the parent company of TCA, Thermo Electron Corporation, or Thermo Electron, owned approximately 35% of our outstanding stock. As of the date of this report, Thermo Electron owns approximately 14% of our total outstanding common stock.

Destination Therapy

     On November 6, 2002, the FDA granted us approval to market our HeartMate SNAP-VE VAD for destination therapy for CHF patients who are not eligible for a heart transplant. This approval marks the first time a VAD has been approved as a long-term, permanent treatment for end-stage congestive heart failure patients who do not qualify for heart transplantation due to age or extenuating health circumstances and who have a life expectancy of less than two years. While our HeartMate VAD has been used

4

Table of Contents

since 1998 as a bridge to heart transplantation, this new approval gives regulatory authority for the medical community’s expanded use of VADs.

     The FDA’s decision to approve the HeartMate SNAP-VE VAD for destination therapy was based on data from a clinical trial called REMATCH, or Randomized Evaluation of Mechanical Assistance for the Treatment of Congestive Heart Failure, which showed our HeartMate device nearly doubled and tripled survival over the drug therapy group at one and two years, respectively. The results of the trial were presented at the American Heart Association Scientific Sessions in November 2001 and the results were published in The New England Journal of Medicine.

     The REMATCH trial involved 129 late-stage CHF patients who, because of their ages or other diseases, were not eligible to receive one of the very limited supply of donor organs for heart transplantation. The study was independently coordinated by Columbia University at 21 prestigious transplant centers in the United States. The overall purpose of the study was to evaluate the efficacy, safety and cost effectiveness of our HeartMate VAD versus maximum drug therapy. The REMATCH publication provided a detailed evaluation of survivability, device safety and impact on patient quality of life.

     The Centers for Medicare & Medicaid Services, or CMS, created a new diagnosis-related group, which increased payment to hospitals for Medicare patients receiving a VAD by approximately 40 percent effective October 1, 2002. While VADs for destination therapy are not yet covered by Medicare, a request has been filed with CMS to expand Medicare coverage to include VADs that are used for destination therapy.

     Late in 2002, the Technology Evaluation Center, or TEC, of the Blue Cross and Blue Shield Association, or BCBSA, completed an assessment for use of VADs as destination therapy and determined that the use of VADs for patients with end-stage heart failure who are not eligible for heart transplantation meets its five criteria, including that the technology improves net health outcomes. The TEC provides rigorous evidence-based technology assessments to many health care insurance decision makers regarding diagnostics and therapeutic medical procedures and we believe it is another external validation of the use of VADs for destination therapy from a fully independent, third party reviewer. The TEC assessment criteria include the following:

	•		The technology must have final approval from the appropriate governmental bodies;
	•		The scientific evidence must permit conclusions concerning the effect of the technology on health outcomes;
	•		The technology must improve the net health outcome;
	•		The technology must be as beneficial as any established alternatives; and
	•		The improvement must be attainable outside the investigational settings.

     The BCBSA TEC assessment is not binding on individual Blue Cross and Blue Shield plans, but in the first months of 2003 we have seen several plans update and expand their policies to recognize coverage for destination therapy.

     We filed a PMA Supplement with the FDA in November 2002 seeking approval to use our HeartMate XVE VAD for destination therapy. The HeartMate XVE, which is currently approved for use as a bridge to heart transplantation, is an enhancement to the HeartMate SNAP-VE, based in great part on the REMATCH trial, and was designed to reduce infection, improve durability and extend device life. We hope to have this approval in the first half of 2003.

     We believe that the destination therapy application for our HeartMate device represents a long-term market opportunity of up to 100,000 additional patients annually in the United States. For these patients, maximum drug therapy is currently the only treatment available and, even with drug therapy, the 12-month mortality rate for these patients is 75%. We believe that the HeartMate will provide a significant survival benefit for this patient population.

Other Recent Developments

     On March 12, 2003, a Medicare Coverage Advisory Committee (MCAC) voted favorably on two questions regarding Medicare coverage for the use of Left Ventricular Assist Devices (LVADs) for destination therapy. The two questions addressed by MCAC were:

	•		Is the quality of the evidence adequate to draw conclusions about the net health outcomes in Medicare beneficiaries comparable to patients enrolled in the REMATCH trial who undergo LVAD implantation?
	•		If the quality of the evidence is adequate, does it demonstrate any positive net health outcomes of LVADs compared to optimal medical management for these patients?

5

Table of Contents

     MCACs are expert advisory panels often used by CMS to review new, leading-edge technology treatment options. The panel members voted that “the quality of the evidence was adequate to draw conclusions about the net health outcomes in Medicare beneficiaries comparable to patients enrolled in the REMATCH trial.” Furthermore having found the evidence was adequate, a majority of panel members voted that LVADs provide a “substantially more effective” net outcome for these patients, a ranking second only to “breakthrough technology” on of a list of eight possible rankings.

     The MCAC input will be considered by CMS and we believe that CMS will issue a national coverage decision in 2003. MCACs are advisory panels and final decisions regarding national coverage policies are made by CMS.

Our Strategy

     We are a leading developer and manufacturer of medical devices for the CHF, cardiac surgery and vascular graft markets. Our key strategies to maintain and expand this leadership position are to:

     Develop the Destination Therapy Market. We recently received approval from the FDA to market the HeartMate SNAP-VE VAD for destination therapy in the treatment of late-stage CHF patients who are not candidates for heart transplants. We estimate the market size for this indication could be up to 100,000 patients annually in the United States alone.

     Increase Cost Effectiveness of Our Products. While a recent study indicates that the cost of implanting a VAD is comparable with that of a heart, liver and other major organ transplant, cost remains a significant concern of our customers. In July 2002, four REMATCH investigators filed a formal request with CMS to expand Medicare coverage to include VADs that are used for destination therapy and in March 2003 the MCAC voted that the quality of the evidence presented to them was adequate to draw conclusions that LVADs provide a substantially more effective net outcome in Medicare beneficiaries comparable to patients enrolled in the REMATCH trial. We continue to support third party payors in assessing the technology of our products. Additionally, we are expanding our market education and training programs and we continue to implement improvements that enhance the performance of our products.

     Obtain Approval for New Indications or Uses for Our Products. We believe that there are currently 4.9 million patients in the United States with CHF and that some of these patients who are currently not using VADs can benefit from our products. We are in the process of obtaining FDA approvals to market our products for the following new indications:

	•		Use of the HeartMate XVE for Destination Therapy. In November 2002, the FDA granted us approval to market our HeartMate SNAP-VE for destination therapy patients. Later that same month, we filed a PMA Supplement with the FDA seeking approval to use our HeartMate XVE for destination therapy. The HeartMate XVE is an enhancement to the HeartMate SNAP and was designed to reduce infection, improve durability and extend device life. We hope to have approval of this filing in the first half of 2003
	•		Therapeutic recovery. We believe that the use of VADs may lead to recovery of the natural heart in certain patients. We have submitted a PMA Supplement for our Thoratec VAD for this indication and hope to receive approval in 2003. Although it is difficult to estimate the size of this market, we believe that the patient population that could benefit from this use could be substantial.
	•		Home discharge for our TLC-II portable driver. We have submitted a PMA Supplement seeking home discharge approval for our TLC-II portable VAD driver. This small, lightweight device used to power the Thoratec VAD was approved in 2001 for use by patients in the hospital or short excursions away from the hospital. We believe that being able to offer patients increased mobility through home discharge will be a catalyst for increased use of the Thoratec VAD System by surgeons. We hope to have this approval in the first half of 2003.

     Increase Penetration of Existing Markets. We plan to treat a greater number and variety of patients within our current customer base. To accomplish this, we are leveraging our existing relationships with leading cardiac surgeons and hospitals and utilizing our existing sales channels to gain acceptance and adoption of our products.

     Offer a Broad Range of Products. We believe that our broad and diverse product offering is an important competitive advantage because it allows us to address the various preferences of surgeons and the clinical needs of a wide variety of patients, as well as the economic needs and concerns of third party payors. An important part of our growth strategy is to further broaden our product line to

6

Table of Contents

meet customer needs by developing new products internally or acquiring or licensing new products. We intend to further develop a number of new or improved products including next generation versions of both our HeartMate and Thoratec VADs.

     Focus On and Partner With Leading Heart Centers. We have developed extremely strong, long-standing relationships with leading cardiovascular surgeons and heart centers worldwide. We believe that no other cardiac assist company enjoys the same depth of relationship and access to these customers. Maintaining and expanding these relationships is an important part of our growth strategy, particularly for the development and introduction of new products and the pursuit of additional indications for our existing products.

     Increase Our Presence in the Heart Failure and Cardiovascular Disease Markets. In addition to increasing our presence in the heart failure and cardiovascular disease markets through internal growth, we will also be evaluating strategic alliances, joint ventures and related business development opportunities to achieve this objective.

Our Markets

     The primary markets for our VAD products are those patients suffering from heart failure, and in particular, from CHF. CHF is a chronic disease that occurs when degeneration of the heart muscle reduces the pumping power of the heart, causing the heart to become too weak to pump blood at a level sufficient to meet the body’s demands. CHF can be caused by artery or valve diseases or a general weakening of the heart muscle itself. In addition, other conditions, such as high blood pressure or diabetes, can also lead to CHF.

     According to the American Heart Association, or the AHA, there are 4.9 million CHF patients in the United States and approximately 550,000 new cases are diagnosed each year. The AHA also estimates that approximately 70% of CHF patients under age 65 will die within eight years. We believe that the number of patients suffering from CHF who could benefit from some form of cardiac assist could be over 200,000 annually. While the number of treatment options for CHF has increased in recent years, the use of medication remains the most widely used approach for treatment of the disease. These drug therapies include ACE inhibitors, anti-coagulants and beta-blockers, which facilitate blood flow, thin the blood or help the heart work in a more efficient manner. Other procedures used to treat CHF include angioplasty, biventricular pacing, valve replacement, bypass and left ventricular reduction surgery.

     Despite attempts to manage CHF through drug therapy, there is currently only one curative treatment for the disease — a heart transplant. Unfortunately, the number of hearts available for transplant each year can meet the needs of only a small number of the patients who need a heart transplant. The United Network for Organ Sharing reported that there were only 2,275 hearts available for transplant in the United States in 2001. At any given time, there are approximately 4,000 patients on the U.S. national transplant waiting list and we believe a comparable number of patients are waiting in Europe. The median wait for a donor heart by patients on a heart transplant waiting list is approximately nine months, and many patients have to wait as long as one to two years before receiving one of the few donor hearts available. In 2001, approximately 15% of such patients died while waiting for a donor heart.

     In the United States, there are currently two FDA-approved indications for the use of VADs in patients with CHF — as a bridge to heart transplant and as destination therapy. We are currently pursuing one additional indication for our VAD products — for therapeutic recovery of the heart. If approved, this additional indication will represent larger market opportunities than the current indications. Beyond the CHF markets, VADs are also approved for use during recovery following cardiac surgery. All four indications are summarized below.

Bridge to Transplant

     Ventricular assist devices provide additional cardiac support for patients who are in late-stage heart failure waiting for a donor heart. Of the approximately 4,000 patients on the waiting list for a heart transplant in the United States, we estimate that approximately 25% will receive a VAD.

     We believe that the percentage of patients bridged to transplant continues to increase with surgeons’ level of comfort with the technology, particularly for longer-term support cases. There are currently four devices approved in the United States as a bridge to transplant, three of which are manufactured by us. We estimate that the bridge to transplant indication represents a worldwide market opportunity of up to 8,000 patients annually.

7

Table of Contents

Destination Therapy

     On November 6, 2002, we received approval to market the HeartMate SNAP-VE VAD for destination therapy for patients with late-stage CHF who are not candidates for heart transplantation due to other degenerative illnesses or advanced age. We believe that the success in transitioning this market from maximum drug therapy to VADs is dependent on the development of VADs, like our HeartMate, with substantial longevities and proof of clinical efficacy.

     This is the first VAD approved for destination therapy for patients suffering from late-stage CHF and we believe that the destination therapy application for our HeartMate device represents a market opportunity of up to 100,000 additional patients annually in the United States alone, which would represent a significant increase over our existing customer base.

Therapeutic Recovery

     We believe that, for most patients, recovery of their own heart is a better alternative than either heart transplantation or permanent implantation of a blood pumping device. Based on recently reported cases of recovery in heart failure patients, we believe that our Thoratec VAD system is a potential therapy that can reverse the complications of late-stage heart failure in certain patients.

     While this therapeutic recovery indication is not yet approved for our devices, we are actively investigating the worldwide experience with our VAD systems as a means of therapeutic recovery and the requirements for pursuing regulatory approval for this indication. Although it is not certain how many patients with CHF could benefit from this indication, based upon the percentage of patients with late-stage CHF, we believe that the patient population could be substantial. We submitted a PMA Supplement to the FDA in December 2000 and submitted additional information in a PMA amendment in January 2003. We hope to receive approval to market our product for this indication in the United States in 2003. We are also formulating a regulatory and clinical strategy for non-U.S. markets.

Recovery Following Cardiac Surgery

     In addition to CHF, our devices are also used for patients who suffer from acute cardiac failure and undergo cardiac surgery. Following cardiac surgery, some patients have difficulty being weaned off heart/lung machines — a complication that arises in approximately one percent of the more than 900,000 open-heart procedures performed each year. Many of these patients ultimately die from heart failure when the heart, weakened by disease and the additional trauma of surgery, fails to maintain adequate blood circulation. We believe that only a small portion of this market is currently being treated with VADs and this patient population could benefit substantially from further awareness and use of our VADs in this market.

Other Markets

     In addition to the circulatory support market, we sell other devices including those that address the vascular access graft market. Our vascular grafts program has developed the Aria graft for patients undergoing Coronary Artery Bypass Graft, or CABG, surgery who have too few and/or poor quality vessels of their own to use for the procedure. The Aria is currently in clinical trials. We have also developed and are marketing the Vectra Vascular Access Graft, or Vectra, for patients undergoing renal hemodialysis.

     We believe that the market opportunity for the Aria could be significant given the patient trauma and costs associated with the harvesting of native vessels in those patients who undergo CABG surgery. Industry sources estimate that this market could be approximately 180,000 patients each year. Our Vectra product targets the estimated over $120 million hemodialysis graft market.

     Finally, our diagnostic products for blood coagulation testing and our single-use skin incision devices, which we sell through ITC, address the market for those patients who must monitor their blood chemistry. We estimate this market is smaller than our other markets but that we hold a leading position for these devices. We currently estimate that the market for these products is over $250 million per year.

8

Table of Contents

Our Products

     We offer two complementary circulatory support product lines:

	•		the Thoratec Ventricular Assist Device system, which we call the Thoratec VAD system, an external device for short to mid-term cardiac support; and
	•		the HeartMate Left Ventricular Assist system, which we call the HeartMate, an internal device for longer term cardiac support.

     In addition to our cardiac assist products, we offer vascular access grafts, used in hemodialysis for patients with end stage renal disease. We are also developing a small diameter access graft for use in CABG surgery. Additionally, we sell whole-blood coagulation testing equipment used in bedside anticoagulation management, coagulation screening and skin incision devices for the drawing of blood from adult, children and infant patients.

Circulatory Support Products

     Ventricular assist devices perform some or most of the pumping function of the heart in patients with severe heart failure. A cannula connects the left ventricle of the heart to a blood pump that is driven by a power source, which can be either electric or pneumatic. Blood flows from the left ventricle to the pump chamber, via the cannula. An electric or air driven mechanism compresses the pump chamber and forces the blood through another cannula into the aorta. From the aorta, the blood then circulates throughout the body. Valves, which can be mechanical or tissue, enable unidirectional flow.

     Certain VADs are implanted internally, while others are placed outside the body. Some external devices are placed immediately adjacent to the body (paracorporeal), while other external VADs are positioned at a distance from the body (extracorporeal). Between 15% and 20% of assist patients require biventricular support and therefore require a second pump for the right ventricle. Currently the power source remains outside the body for all FDA-approved VADs.

The Thoratec VAD

     The Thoratec VAD has been FDA-approved since 1995 and has treated over 2,100 patients worldwide. The Thoratec VAD is a paracorporeal device that remains outside of the body. The product is less invasive than implantable VADs since only the cannulae must be implanted. The paracorporeal nature of the Thoratec VAD has several positive consequences including relatively shorter and less invasive implantation times (approximately two hours) and the ability to use the device in smaller patients.

     A pneumatic power source drives our VAD. It is designed for intermediate duration use of a few weeks to several months, though this device has supported numerous patients for six to eighteen months. Offering left, right or biventricular support, the Thoratec VAD is the only biventricular support system approved for use as a bridge to transplant. This characteristic is significant since 15% to 20% of bridge to transplant patients require right-sided ventricular assist. The Thoratec VAD is also the only device approved for both bridge to transplant and recovery following cardiac surgery. We submitted a PMA Supplement in December 2000 for a therapeutic recovery indication, which we expect to receive by the end of 2003. The Thoratec VAD is made with our proprietary biomaterial, Thoralon, which may reduce clotting.

     Ambulation with most paracorporeal VADs is possible, but very limited because of the large size of the typical drive console. In order to improve patient mobility, we developed the TLC-II, a small portable driver, which increases portability and ambulation options. The portable driver was approved in the United States in June 2001 for use in off-site excursions and is in clinical trials for a home discharge indication. The TLC-II has been approved for use in Europe since 1998.

The HeartMate

     The HeartMate has been used to treat almost 3,600 patients worldwide. There are currently two versions of the HeartMate available on the market with different sources of power. The pneumatic-powered version of the HeartMate, called the HeartMate IP, was approved in the United States in 1994 and was the first FDA-approved cardiac assist device for bridge to transplantation. The electric HeartMate, called the HeartMate VE, received FDA approval in September 1998. Currently, the electric version accounts for over 90% of our total HeartMate sales and we recently introduced a number of enhancements to the HeartMate, which have been approved by the FDA. Compared with the Thoratec VAD, the HeartMate is designed for longer duration use of several months to up

9

Table of Contents

to two or three years. The HeartMate offers only left ventricular support. This device is currently approved for the bridge to transplant indication and for home discharge and, most recently, for destination therapy for patients who are not eligible for a heart transplant.

     Patients with a HeartMate do not require anti-coagulation, since the device utilizes proprietary textured surfaces and tissue valves rather than mechanical valves. As a result, we believe that this device has the lowest rate of stroke for patients using ventricular support. The implantable nature of this device enables patient ambulation and home discharge.

Implantable VAD

     We are developing and expect to commercialize the IVAD, which is an implantable version of the Thoratec VAD. The IVAD maintains the same blood flow path, valves and blood pump as the paracorporeal device and is better suited for longer-term support compared to the Thoratec VAD. The outer covering of the IVAD is made of a titanium alloy, which facilitates implantation. The device is approximately half the size of other implantable VADs and weighs less than one pound. The device can be implanted in patients ranging in weight from 40 kg to over 100 kg. The small blood pump is implanted in the body and is connected to a small, briefcase size, battery-powered, external control unit. The device can provide left, right, or biventricular support. The IVAD is being designed as a bridge to transplant and possibly for therapeutic recovery, but not as an alternative to transplant.

     In February 2001, we received a conditional IDE approval to commence an IVAD clinical trial in the United States. The study will evaluate approximately 30 patients in up to 10 centers. We plan to submit a PMA Supplement to the FDA by the end of 2003, and expect approval in the first half of 2004.

     An IVAD clinical trial was also conducted in Europe in 2002. This trial has concluded and the results have been submitted to European authorities. We hope to receive authorization to CE Mark the IVAD in the first half of 2003, thus allowing us to market and distribute the IVAD in the European Union.

HeartMate II and HeartMate III

     HeartMate II, the next-generation HeartMate device, is being designed for use in many types of patients and indications, including for destination therapy. HeartMate II is a small implantable electrically powered device that weighs only 12 ounces and is approximately 1.5 inches wide and 3 inches long. The small size of the device is made possible by a continuous axial flow mechanism, as compared with the pulsatile flow of other currently marketed products. The device is also designed to be quieter than currently marketed products. The pump speed can be controlled manually or by a proprietary automatic mode, which regulates pumping activity based on the demands of the body. We believe this will be a competitive advantage since most competitive axial pumps currently in development must be manually adjusted. The anticipated longevity of the device is expected to be five to seven years.

     The first HeartMate II was implanted in Israel in 2000 and the first European implant occurred in April 2001. We filed for a U.S. IDE in August 2001. Early clinical results led to several design and software enhancements. We are preparing to restart clinical trials in the United States and Europe in the first half of 2003.

     In addition, we are developing our third generation device, the HeartMate III. The HeartMate III is a centrifugal flow pump that employs a magnetically levitated rotor that eliminates wear from touching parts. No bearings are present and the device is completely encased in titanium. The anticipated longevity of the device is 10 to 20 years. Final designs to system components are being finalized and preclinical studies are being performed to ready the device for clinical evaluation.

Vascular Graft Products

     We are developing small diameter vascular graft products intended initially to address the vascular access and CABG markets. Both products utilize our proprietary Thoralon biomaterial, and are protected by several U.S. and foreign patents covering the material and the structure of the graft products, as well as several foreign patents covering aspects of the manufacturing processes used to make the products. We believe that our vascular grafts are highly compliant, have excellent handling and suturing properties and have the “feel” of a natural blood vessel. Our manufacturing process creates a structure in which the three different layers in the graft wall have different properties, which make the graft closely resemble natural blood vessels. The inner textured layer is designed for contact with blood and provides improved resistance to blood clots. The solid middle layer gives the graft its strength and self-sealing properties. The outer textured layer is designed to promote tissue ingrowth and to contain the reinforcing fibers for kink resistance.

10

Table of Contents

Aria Coronary Artery Bypass Graft

     We are developing a small diameter graft for use in coronary artery bypass surgery patients who have too few or no suitable vessels of their own. The most unique aspect of the Aria is that it offers an off-the-shelf alternative to current natural vessel harvesting, which may prove to reduce the need for additional surgery and thus reduce the complications associated with such additional surgery. We believe that to date no other company has developed and clinically tested a suitable small diameter graft which has remained patent over long periods of time when used in this critical application.

     We received FDA approval for a Phase I IDE study of the Aria graft in May 2000. This study was designed to evaluate the Aria graft in patients with inadequate autologous vessels to complete revascularization. The Phase I results, based on 19 patients enrolled across the six centers, were submitted to the FDA in September 2001 and we requested approval to begin the pivotal Phase II. In June 2002, the FDA granted approval for conducting the Phase II clinical trial at 20 centers for up to 162 patients. However, implementation of the clinical trial is pending the receipt of results from a separate pilot study being conducted in Europe. In this study, a new anastomotic technique is being tested, which is designed to improve surgical efficiencies and yield acceptable patency outcomes. Early patency results are expected to be available for analysis by the end of 2003.

Vectra Vascular Access Graft

     The Vectra vascular access graft was approved for sale in the United States in December 2000 and in Europe in January 1998. It is designed for use as a shunt between an artery and a vein, primarily to provide access to the bloodstream for renal hemodialysis patients requiring frequent needle punctures during treatment. Other currently available vascular access grafts are commonly made out of ePTFE, which can lose integrity after repeated punctures and require a three to six week healing period between implantation and the initiation of dialysis treatment. We believe that the Vectra may provide significant advantages over existing synthetic vascular access grafts that may encourage its use by surgeons who are currently using natural vessels for vascular access. We currently sell Vectra through the Bard Peripheral Vascular division of C.R. Bard Corporation, which we refer to as Bard, in the United States, Europe and selected countries in Scandinavia, the Middle East and Northern Africa and through Goodman Co. Ltd. in Japan.

Blood Coagulation Testing and Skin Incision Devices

     Through ITC, we manufacture and supply whole blood coagulation testing equipment and related disposables, as well as premium-quality, single-use skin incision devices.

     Our whole-blood coagulation testing equipment product lines offer systems for bedside anticoagulation management, coagulation screening and transfusion management. Each analyzes small blood samples, then processes and quickly displays comprehensive patient homeostasis information. Blood management of this type is essential for cardiopulmonary bypass surgery and angioplasty. HEMOCHRON models are designed for use in a clinical setting at the patient’s bedside. They are lightweight, battery-operated, portable and some provide data-management features.

     The ProTime Microcoagulation System is designed to allow testing for patients who take the blood-thinning drug Warfarin (or Coumadin, the trade name). The system consists of a hand-held instrument, a five-channel cuvette and a finger incision device. These tests are performed in a doctor’s office, clinic or by the patients at home.

     We also manufacture a family of single-use skin incision devices for drawing blood from adults, children and infants. Each employs a patented skin incision technology to provide a standardized surgical incision.

Sales and Marketing

     We operate in the following business segments: Cardiovascular Products and ITC. Cardiovascular Products include our circulatory support products and vascular graft products. ITC includes our blood coagulation testing and skin incision devices.

Circulatory Support Products

     The potential customers for our circulatory support products are hospitals that perform open heart surgery procedures and heart transplants. We estimate that 130 of the approximately 900 hospitals in the United States that perform open-heart surgery also perform heart transplants. We actively are marketing to these 130 heart transplant hospitals and large cardiac surgery centers in addition to the approximately 100 heart transplant hospitals in Europe.

11

Table of Contents

     We have recruited and trained a direct sales force that, as of December 28, 2002, was comprised of 20 experienced cardiovascular sales specialists to sell our circulatory support systems in the United States, Canada, France, Germany, Spain, United Kingdom, Austria, Switzerland, Netherlands, Portugal and South Africa.

     The sales effort is complemented by 12 direct clinical specialists that conduct clinical educational seminars, assist with a new open-heart center’s first VAD implant and resolve clinical questions or issues. We also partner with universities, experienced clinicians and opinion leaders to assist with expanding clinical educational needs. The sales team focuses on cardiac surgeons that perform heart transplantation, perfusionists and the transplant nursing staff. In addition to our direct selling effort, we have established a network of international distributors who cover those markets that represent the majority of VAD potential. We employ sales and marketing tactics commonly found within the cardiovascular device market such as direct mail, clinical education seminars, symposia, equipment purchase and lease programs and journal advertisement. We have also assembled a Medical Advisory Board consisting of opinion leaders who provide clinical input and direction on product development, marketing and market issues.

     Hospitals or other medical institutions that acquire a VAD system generally purchase VAD pumps, related disposables and training and purchase or rent two of the associated pump drivers (to ensure that a backup driver is available). The time from the initial contact with the cardiac surgeon until purchase is generally between nine and eighteen months, due to the expense of the product and common hospital capital equipment acquisition procedures. Upon receipt of a purchase order, we will usually ship the products within thirty days.

     The introduction of a VAD system in a new hospital or other medical institution requires that the surgical and clinical support personnel possess certain expertise to use our products. For our customers that do not already have this expertise, we provide initial training for the surgical and clinical support teams generally after delivery of one of our VAD products. As many of our customers already possess sufficient experience and expertise to use our products, training is provided as a best practice to optimize the use and success of our products. In addition, a variety of training materials accompany the initial delivery of our VAD products including instructions for use, patient management manuals and assorted videos. As a follow-up to the initial training, we provide clinical support at the first implant whenever possible. We also provide 24-hour access to clinically trained personnel. Our sales force also helps customers understand and manage reimbursement from third-party payors.

Vascular Graft Products

     We market the Vectra through Bard in the United States, Europe and selected countries in Scandinavia, the Middle East and Northern Africa and through Goodman Co. Ltd. in Japan. We intend to market the Aria CABG device through our direct sales force in the United States and Europe and potentially through distributors in other international markets.

     The Aria is being developed as a preferable clinical option for patients who lack suitable native vessels. We believe that more clinician education will be required for the Aria graft in terms of patient indications, product use, and product capabilities. We may accomplish this education by sponsoring educational programs, video educational tools and scientific lecture programs. We also anticipate that we may need a larger domestic sales force structure to effectively market the Aria graft.

Blood Coagulation Testing and Skin Incision Devices

     ITC maintains a direct sales staff of 32 in the United States who sell to hospitals as well as to third party dealers and distributors including Cardinal Healthcare. Outside of the United States, ITC has two salespeople selling principally to third-party dealers.

Manufacturing

     We manufacture our products at the following facilities:

•

The Thoratec VAD systems are manufactured at our facility in Pleasanton, California. This facility has been inspected, approved and licensed by the FDA and the State of California Department of Health Services, Food and Drug Section for the manufacture of medical devices and has received the International Standards Organization (ISO) 9001 certification. Our manufacturing processes for the Thoratec VAD system consist of the assembly of standard and custom component parts, including blood-contacting components fabricated from our proprietary biomaterials and the testing of completed products. We rely on single sources of supply for several components of the Thoratec VAD system. We are aware of alternative suppliers for all single-sourced items.

12

Table of Contents

	•		HeartMate devices are manufactured in Woburn, Massachusetts. We have recently completed moving portions of this facility, including all manufacturing, to our facility in Pleasanton, California. We hope to receive approval from the FDA to begin manufacturing HeartMate devices in Pleasanton in the first half of 2003. We will continue performing some marketing, research and development, clinical affairs and administrative functions at the Woburn facility.
	•		All blood coagulation testing and skin incision devices are manufactured in Edison, New Jersey, with the exception of the ProTime instrument, which is manufactured in Asia through a third party contract manufacturer. The New Jersey facilities have been inspected, approved and licensed by the FDA and the State of New Jersey and have received the ISO 9001 certification. Our manufacturing processes for the blood coagulation instruments and reagents and disposable skin incision devices consist of the manufacture and assembly of standard and custom component parts and the testing of completed products. We rely on single sources of supply for some components and we manufacture some components of the skin incision devices ourselves. We are aware of alternative suppliers for all single-sourced items. In addition, these facilities maintain ISO9001, EN ISO 13485 and Canadian (CMDCAS) ISO certifications.

Patents and Proprietary Rights

     We seek to patent certain aspects of our technology. We hold, or have exclusive rights to, several U.S. and foreign patents. Except for the patents mentioned below, the Thoratec VAD system is not protected by any patents other than one patent pertaining to the TLC-II. We do not believe that this lack of patent protection will have a material adverse effect on our ability to sell the Thoratec VAD system because of the lengthy regulatory period required to obtain approval of a VAD. We are not aware of any VADs that are based on our product design currently approved by the FDA or undergoing clinical trials. Several patents cover aspects of our HeartMate line of products.

     Our patents relating to blood coagulation and skin incision devices are assigned to ITC. We own or hold rights in the remainder of the U.S. patents by virtue of the Merger between Thoratec and Thermo Cardiosystems, which resulted in the transfer of the ownership of the TCA patents to Thoratec.

     Several patents cover aspects of our proprietary biomaterials technology, some of which were sold to TH Goldschmidt AG, a German chemical manufacturer, in 1989, but we have retained worldwide, royalty-free, exclusive rights to these patents for most medical applications. The patent license from Goldschmidt will remain in effect for the duration of the patents sold to Goldschmidt and includes medical uses that we expect are necessary for our business as now conducted or as proposed to be conducted in the future. For example, the medical applications include blood pumps, artificial hearts and cardiac assist devices of all kinds, cardiovascular products, including heart valves and prosthetic blood vessels and cannulae and blood tubing of all kinds. Aspects of our vascular graft products are covered by patents covering materials, graft structure, and, in some foreign countries, manufacturing processes used to make the graft products. Aspects of our blood coagulation and skin incision device products are covered by patents directed to blood coagulation testing equipment and methods, and to skin incision devices and methods of manufacturing such devices. The duration of some of our patents on our HeartMate products range from 13 to 14 years, on our biomaterials from 1 to 7 years, on our grafts from 2 months to 2 years and on our blood coagulation and skin incision device products from 2 to 16 years. During the term of our patents, we have the right to prevent third parties from manufacturing, marketing or distributing products that infringe upon our patents.

     In addition, we hold several patents on the HeartMate II axial blood flow pump and transcutaneous energy transmission technology, the duration of which range from 9 to 17 years. In August 1998, we obtained a license to incorporate technology developed by Sulzer Electronics Ltd. into the HeartMate III. HeartMate III is a miniature centrifugal pump featuring a magnetically levitated rotor with a bearingless motor that has been developed by Levitronix GmbH. The license from Sulzer gives us the exclusive right to use in our HeartMate products technology protected by several U.S. and foreign patents covering implantable bearingless motors for the duration of those patents, subject to our payment of royalties. In December 2000, we were informed by Sulzer Electronics that Sulzer had sold all of their business in the bearingless motor and magnetic bearing fields to Levitronix and had assigned the agreements between Sulzer and us to Levitronix. The license remains in full force and effect.

     The validity of any of our patents may be challenged by others, and we could encounter legal and financial difficulties in enforcing our patent rights against alleged infringements. In addition, others could develop technologies that avoid infringement of our patents or obtain patents, which would render our patents obsolete. Although we do not believe patents are the sole determinant in the commercial success of our products, the loss of a significant percentage of our patents or the patents relating to our products could seriously harm our business.

13

Table of Contents

     We hold, or have exclusive rights to, several international patents, including several biomaterial patents licensed from Goldschmidt referred to above.

     We have developed technical knowledge, which although non-patentable, we consider to be significant in enabling us to compete. However, the proprietary nature of such knowledge may be difficult to protect. It is our policy to enter into confidentiality agreements with each of our employees prohibiting such employee from disclosing any confidential information or trade secrets. In addition, these agreements provide that any inventions or discoveries relating to our business by these individuals will be assigned to us and become our sole property. However, we cannot guarantee that every person who gets access to our confidential information or trade secrets will have signed such an agreement, or that every person who has signed such an agreement will abide by it. If they do not, or if our confidential information or trade secrets are otherwise disclosed, there is no guarantee that any legal remedies will prevent the harmful disclosure or use of our confidential information or trade secrets.

     Claims by competitors and other third parties that our products allegedly infringe the patent rights of others could seriously harm our business. The medical device industry is characterized by frequent and substantial intellectual property litigation. The cardiovascular device market is characterized by extensive patent and other intellectual property claims. Intellectual property litigation is complex and expensive and the outcome of this litigation is difficult to predict. Any future litigation, regardless of outcome, could result in substantial expense and significant diversion of the efforts of our technical and management personnel. An adverse determination in any such proceeding could subject us to significant liabilities or require us to seek licenses from third parties or pay royalties that may be substantial. Furthermore, we cannot assure you that necessary licenses would be available on satisfactory terms, or at all. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing or selling certain of our products, any of which could seriously harm our business.

     We have received correspondence from a third party alleging that the textured surface of our HeartMate housing infringes certain patent rights of such third party. In general, an owner of intellectual property can prevent others from using such property without a license and is entitled to damages for unauthorized usage. We have investigated the basis of the allegation and, based upon an evaluation of all of the facts and circumstances, we believe that we have meritorious defenses. However, we cannot be sure that our defenses would prevail, and given the inherent uncertainties in dispute resolution, if we were sued and the outcome was unfavorable, our results of operations or financial condition could be seriously harmed.

Competition

     Principal competitors of our VAD systems include:

	•		World Heart Corporation, which manufactures and markets an implantable left ventricular assist device approved only for bridge to heart transplant in the United States;
	•		ABIOMED, Inc., which manufactures and markets a biventricular assist device approved only for temporary circulatory support of patients in post-heart surgery shock and other recovery indications in the United States; and
	•		MicroMed Technology, Inc., which manufactures and markets an axial-flow implantable left ventricular assist device in Europe and has begun a phase III pivotal clinical trial in the United States.

     We believe that the principal competitive factors in the circulatory support market are patient outcomes, product performance, size and portability, quality, cost-effectiveness and customer service. We believe that our principal competitive advantages are:

	•		our ability to provide left, right or biventricular support;
	•		our ability to provide short-term or long-term circulatory support;
	•		the lowest known rate of stroke for patients using ventricular support;
	•		our ability to provide implantable or paracorporeal VAD placement;
	•		our ability to provide support in the hospital or in the home;

14

Table of Contents

	•		our ability to provide support to a greater range of patients as a result of the smaller size and placement of the paracorporeal system outside the body;
	•		the greater range of cannulation options available;
	•		the quality of our biomaterials;
	•		a wider range of indications served by our products;
	•		the availability and quality of service and field support; and
	•		our ability to offer numerous products from one company.

     Although we believe that these attributes of our VAD systems offer certain advantages over existing ventricular assist devices, we expect our current competitors to defend their market positions vigorously.

     Our principal competitors in the vascular access graft market are W.L. Gore, Inc., C.R. Bard and Boston Scientific Corporation, who manufacture and market ePTFE grafts worldwide. Smaller competitors include Atrium Medical Inc. who manufactures and markets an ePTFE vascular graft.

     ITC’s principal competitor for the HEMOCHRON coagulation monitoring instruments, used in the operating room and in cardiac catheterization, is the Cardiac Surgery Division of Metronic, Inc., which markets the HemoTec product line. Roche Holding AG competes with the ProTime product with a blood coagulation monitor that is marketed to clinics and also is used for patient self-testing. There are also several new competitors that have recently entered the blood coagulation monitoring market. ITC’s products compete primarily on the basis of reputation, utility, and price.

     ITC’s skin incision devices compete with products offered by a number of companies, including Organon Teknika B.V.; Becton, Dickinson and Company; and Owen-Mumford Ltd. The skin incision devices compete primarily on the basis of safety, quality and reputation.

Government Regulations

     Regulation by governmental authorities in the United States and foreign countries is a significant factor in the manufacture and marketing of our current and future products and in our ongoing product research and development activities. All of our proposed products will require regulatory approval prior to commercialization. In particular, medical devices are subject to rigorous preclinical testing as a condition of approval by the FDA and by similar authorities in foreign countries.

U.S. Regulations

     In the United States, the FDA regulates the design, manufacture, distribution and promotion of medical devices pursuant to the Federal Food, Drug, and Cosmetic Act and the regulations promulgated thereunder, or the FDA Act and Regulations. Our VAD systems, blood coagulation testing devices, skin incision devices, and Aria and Vectra graft products are regulated as medical devices. To obtain FDA approval to market VADs similar to those under development, the FDA requires proof of safety and efficacy in human clinical trials performed under an IDE. An IDE application must contain preclinical test data supporting the safety of the product for human investigational use, information on manufacturing processes and procedures, proposed clinical protocols and other information. If the IDE application is accepted, human clinical trials may begin. The trials must be conducted in compliance with FDA regulations and with the approval of one or more institutional review boards. The results obtained from these trials, if satisfactory, are accumulated and submitted to the FDA in support of either a PMA application or a 510(k) premarket notification. Premarket approval from the FDA is required before commercial distribution of devices similar to those under development by us is permitted in the United States.

     The PMA Supplement must be supported by extensive data, including preclinical and human clinical data, to prove the safety and efficacy of the device with respect to the modifications disclosed in the supplement. By regulation, the FDA has 180 days to review a PMA application and during that time an advisory committee may evaluate the application and provide recommendations to the FDA. While the FDA has approved PMA applications within the allotted time period, reviews more often occur over a significantly

15

Table of Contents

protracted period, usually 18 to 36 months, and a number of devices have never been cleared for marketing. This is a lengthy and expensive process and there can be no assurance that such FDA approval will be obtained.

     Under the FDA’s requirements, if a manufacturer can establish that a newly developed device is “substantially equivalent” to a legally marketed predicate device, the manufacturer may seek marketing clearance from the FDA to market the device by filing a 510(k) premarket notification with the FDA. This is the process that is used to gain FDA market clearance for most of the ITC products including HEMOCHRON and ProTime. The 510(k) premarket notification must be supported by data establishing the claim of substantial equivalence to the satisfaction of the FDA. The process of obtaining a 510(k) clearance typically can take several months to a year or longer. If substantial equivalence cannot be established, or if the FDA determines that the device requires a more rigorous review, the FDA will require that the manufacturer submit a PMA application that must be approved by the FDA prior to marketing the device in the United States.

     Both a 510(k) and a PMA, if approved, may include significant limitations on the indicated uses for which a product may be marketed. FDA enforcement policy prohibits the promotion of approved medical devices for unapproved uses. In addition, product approvals can be withdrawn for failure to comply with regulatory requirements or the occurrence of unforeseen problems following initial marketing.

     The approval process for each of our products is expensive and time consuming and we cannot assure you that any regulatory agency will grant its approval. Our inability to obtain, or delays in obtaining, such approval would adversely affect our ability to commence marketing our products. We cannot assure you that we will have sufficient resources to complete the required testing and regulatory review processes. Furthermore, we are unable to predict the extent of adverse governmental regulation which might arise from future U.S. or foreign legislative or administrative action. On October 26, 2002, the FDA signed into law the The Medical Device User Fee and Modernization Act of 2002 (MDUFMA). This law amends the FDA Act and Regulations to provide, among other things, the ability for the FDA to impose user fees for medical device reviews. Our activities require that we make many filings with the FDA that will now be subject to this new fee structure. Although the precise amount of fees that we will incur each year will be dependent upon the specific quantity and nature of our filings, such fees could amount to hundreds of thousands of dollars per year.

     In addition, any products distributed pursuant to the above authorizations are subject to pervasive and continuing regulation by the FDA. Products must be manufactured in registered establishments and must be manufactured in accordance with Quality System Regulations and adverse events must be reported to the FDA. Labeling and promotional activities are subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. The failure to comply with the FDA’s regulations can result in enforcement action, including seizure, injunction, prosecution, civil penalties, recall and suspension of FDA approval. The export of devices is also subject to regulation in certain instances.

     We are also subject to regulation by the California Department of Health Services, Food and Drug Section and the New Jersey Department of Health, which may inspect us and enforce regulations. Failure to comply with applicable state regulations may result in seizures, injunctions or other types of enforcement actions.

International Regulations

     We are also subject to regulation in each of the foreign countries in which we sell products with regard to product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. Many of the regulations applicable to our products in such countries are similar to those of the FDA. The national health or social security organizations of certain countries require our products to be qualified before they can be marketed in those countries.

     In order to be positioned for access to European and other international markets, we sought and obtained certification under the ISO 9000 Series of Standards. ISO 9000 is a set of integrated requirements, which when implemented, form the foundation and framework for an effective quality management system. These standards were developed and published by the ISO, a worldwide federation of national bodies, founded in Geneva, Switzerland in 1947. ISO has over 90 member countries. ISO certification is widely regarded as essential to enter Western European markets. We obtained certification and were registered as an ISO 9002 compliant company in January 1995. Commencing in mid-1998, all companies are required to obtain CE Marks for medical devices sold or distributed in the European Union. The CE Mark is an international symbol of quality. With it, medical devices can be distributed within the European Union, which is comprised of 15 European countries representing a population of over 377 million people. A prerequisite for obtaining authority to CE Mark products is to achieve full quality system certification in accordance with ISO 9001 and EN 46001. These are quality standards that cover design, production, installation and servicing of medical devices. We have our ISO 9001 and EN 46001 certification and authority to CE Mark all VAD systems, including the HeartMate, blood coagulation testing

16

Table of Contents

and skin incision devices and the Vectra graft. We are also certified to be in compliance with the requirements of the European Medical Device Directive, another prerequisite for applying the CE Mark. In early 2003, we expect to receive additional certification under the Canadian Medical Device Regulations (CMDRs) for our Pleasanton manufacturing facility, which is required effective January 1, 2003 to sell medical devices in Canada. We also maintain certification of our implantable devices such as the HeartMate under the Active Implantable Medical Device Directive (AIMDD) and anticipate receiving AIMDD certification for the Thoratec IVAD in the first half of 2003. AIMDD certification is required to sell these products in Europe. Effective the end of 2003, our diagnostic equipment manufactured by ITC will be subject to In Vitro Diagnostic Directives (IVDD). Certification to the IVDD is required to sell these products in Europe and we anticipate receiving IVDD certification in 2003. Finally, as international standards evolve, we will be subject to the certification requirements of ISO 13485. This is not only a requirement by Canadian law, it is also the direction the international standards are moving in as the 2003 version of ISO 13485 will satisfy the requirements for medical devices in place of both ISO 9001 and EN 46001.

Other Regulations

     We are also subject to various federal, state and local laws and regulations relating to such matters as safe working conditions, laboratory and manufacturing practices and the use, handling and disposal of hazardous or potentially hazardous substances used in connection with our research and development work. Specifically, the manufacture of our biomaterials is subject to compliance with federal environmental regulations and by various state and local agencies. Although we believe we are in compliance with these laws and regulations in all material respects, we cannot assure you that we will not be required to incur significant costs to comply with environmental laws or regulations in the future.

Third Party Reimbursement and Cost Containment

     Our products are purchased primarily by hospitals and other users, which then bill various third party payors for the services provided to the patients. These payors, which include CMS, private health insurance companies and managed care organizations, reimburse part or all of the reasonable costs and fees associated with these devices and the procedures performed with these devices.

     Third party payors are increasingly challenging the prices charged for medical products and services and may deny reimbursement if they determine that a device was not used in accordance with cost-effective treatment methods as determined by the payor, was experimental or was used for an unapproved application. To date, some private insurers and CMS have determined to reimburse some or all of the costs associated with our VAD systems. Changes in reimbursement, policies and practices of third party payors could seriously harm sales of our products.

     CMS created a new diagnosis-related group, which increased payment to hospitals for Medicare patients receiving a VAD by approximately 40 percent effective October 1, 2002. While VADs for destination therapy are not yet covered by Medicare, a formal request has been filed with CMS to expand Medicare coverage to include VADs that are used as long-term destination therapy.

     Late in 2002, the TEC of the BCBSA completed an assessment for use of VADs as destination therapy and determined that the use of VADs for patients with end-stage heart failure who are not eligible for heart transplantation meets its five criteria, including that the technology improves net health outcomes. The TEC provides rigorous evidence-based technology assessments to many health care insurance decision makers regarding diagnostics and therapeutic medical procedures. We believe it is another external validation of the use of VADs for destination therapy from a fully independent, third party reviewer. The TEC assessment criteria include the following:

	•		The technology must have final approval from the appropriate governmental bodies;
	•		The scientific evidence must permit conclusions concerning the effect of the technology on health outcomes;
	•		The technology must improve the net health outcome;
	•		The technology must be as beneficial as any established alternatives; and
	•		The improvement must be attainable outside the investigational settings.

     The BCBSA TEC assessment is not binding on individual Blue Cross and Blue Shield plans, but in the first months of 2003 we have seen several plans update and expand their policies to recognize coverage for destination therapy.

     In March 2003, an MCAC voted favorably on two questions regarding Medicare coverage for the use of LVADs for destination therapy. The two questions addressed by MCAC were:

17

Table of Contents

	•		Is the quality of the evidence adequate to draw conclusions about the net health outcomes in Medicare beneficiaries comparable to patients enrolled in the REMATCH trial who undergo LVAD implantation?
	•		If the quality of the evidence is adequate, does it demonstrate any positive net health outcomes of LVADs compared to optimal medical management for these patients?

     MCACs are expert advisory panels often used by CMS to review new, leading-edge technology treatment options. The panel members voted that “the quality of the evidence was adequate to draw conclusions about the net health outcomes in Medicare beneficiaries comparable to patients enrolled in the REMATCH trial.” Furthermore having found the evidence was adequate, a majority of panel members voted that LVADs provide a “substantially more effective” net outcome for these patients, a ranking second only to “breakthrough technology” on a list of eight possible rankings.

     The MCAC input will be considered by CMS and we believe that CMS will issue a national coverage decision in 2003. MCACs are advisory panels and final decisions regarding national coverage policies are made by CMS.

Employees

     As of December 28, 2002, we had 699 full-time employees, 301 of whom worked in manufacturing, 100 in engineering, 86 in quality control and regulatory affairs, 109 in marketing and sales support, 46 in administration and finance and 57 in other support functions, including human resources, management information systems, purchasing and facilities. Out of our total full-time employees, 684 are employed in the United States and 15 are employed in the United Kingdom and other European countries. None of our employees are covered by a collective bargaining agreement. We consider relations with our employees to be good.

Research and Development

     Thoratec’s research and development expenses in 2002, 2001 and 2000 were $25.3 million, $22.1 million and $16.2 million, respectively.

Additional Information

     You can find additional information about Thoratec on our website at http://www.thoratec.com. We make filings of our periodic reports to the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as amendments to those reports, available free of charge on our website as soon as reasonably practicable following electronic filing of those reports with the SEC.

18

Table of Contents

RISK FACTORS

     We make statements in this Annual Report on Form 10-K and other statements from time to time that relate to future plans, events or performance that are forward-looking statements which involve risks and uncertainties. Actual results, events or performance may differ materially from those anticipated in any forward-looking statements as a result of a variety of factors, including those set forth below and elsewhere in this Annual Report on Form 10-K. You should consider each of the risks and uncertainties described in this section and all of the other information in this Annual Report on Form 10-K in evaluating our company and our business before deciding to invest in our common stock.

We have a history of net losses, and we may not maintain profitability.

     We were founded in 1976 and we have a history of incurring losses from operations. As of December 28, 2002, our accumulated deficit was approximately $32.4 million. We anticipate that our expenses will increase as a result of increased preclinical and clinical testing, research and development and selling, general and administrative expenses. We could also incur significant additional costs in connection with our business development activities and the development and marketing of new products and indicated uses for our existing products. Such costs could prevent us from achieving or maintaining profitability in future periods.

Since our physician and hospital customers depend on third party reimbursement, if third party payors fail to provide appropriate levels of reimbursement for our products, our operations will be harmed.

     Significant uncertainty exists as to the reimbursement status of newly-approved health care products such as VADs and vascular grafts. Government and other third party payors are increasingly attempting to contain health care costs. Payors are attempting to contain costs by, for example, limiting coverage and the level of reimbursement of new therapeutic products. Payors are also attempting to contain costs by refusing, in some cases, to provide any coverage of uses of approved products for disease indications other than those for which the FDA has granted marketing approval.

     To date, a majority of private insurers that we have dealt with and CMS have determined to reimburse some portion of the costs of our VADs and our diagnostic and vascular graft products. Although HeartMate SNAP-VE recently received FDA approval for destination therapy and an MCAC has voted that the quality of the evidence presented to them was adequate to draw conclusions that LVADs provide a substantially more effective net outcome in Medicare beneficiaries comparable to patients enrolled in the REMATCH trial, CMS may decide to not cover this indication. Also, although the TEC has determined that the HeartMate SNAP-VE for destination therapy meets its five criteria, some or all of the individual Blue Cross and Blue Shield plans may decide to not cover this indication or not pay at adequate levels. We cannot, however, estimate what portion of such costs will be reimbursed and our products may not continue to be approved for reimbursement. In addition, changes in the health care system may affect the reimbursability of future products. If coverage is not expanded or if the reimbursement levels are not increased or are partially or completely reduced, our revenues would be reduced.

If we fail to obtain approval from the FDA and from foreign regulatory authorities, we cannot market and sell our products under development in the United States and in other countries.

     Before we can market new products in the United States, we must obtain clearance from the FDA. This process is lengthy and uncertain. In the United States, one must obtain clearance from the FDA of a 510(k) premarket notification or approval of a more extensive submission known as a PMA application. If the FDA concludes that any of our products does not meet the requirements to obtain clearance under Section 510(k) of the Federal Food, Drug, and Cosmetic Act, then we would be required to file a PMA application. The process for a PMA application is lengthy, expensive and typically requires extensive preclinical and clinical trial data. Preclinical data may need to be obtained in accordance with FDA good laboratory practices.

     We may not obtain clearance of a 510(k) notification or approval of a PMA application with respect to any of our products on a timely basis, if at all. If we fail to obtain timely clearance or approval for our products, we will not be able to market and sell our products, harming our ability to generate revenue. The FDA may also limit the claims that we can make about our products. We may also be required to obtain clearance of a 510(k) notification or PMA Supplement from the FDA before we can market products that have been cleared that we have now modified or for which we wish to use for new indications.

     The FDA also requires us to adhere to Quality System Regulations, which include production design controls, testing, quality control, storage and documentation procedures. The FDA may at any time inspect our facilities to determine whether we have

19

Table of Contents

adequate compliance. Compliance with Quality System Regulations for medical devices is difficult and costly. In addition, we may not be found to be compliant as a result of future changes in, or interpretations of, regulations by the FDA or other regulatory agencies. If we do not achieve compliance, the FDA may withdraw marketing clearance, require product recall or take other enforcement action, which in each case would harm our business. Any change or modification in a device is required to be made in compliance with Quality System Regulations, which may cause interruptions or delays in the marketing and sale of our products. The FDA also requires device manufacturers to submit reports regarding deaths, serious injuries and certain malfunctions.

     Sales of our products outside the United States are subject to foreign regulatory requirements that vary from country to country. The time required to obtain approvals from foreign countries may be longer or shorter than that required for FDA approval, and requirements for foreign licensing may differ from FDA requirements.

     The federal, state and foreign laws and regulations regarding the manufacture and sale of our products are subject to future changes, as are administrative interpretations and policies of regulatory agencies. If we fail to comply with applicable federal, state or foreign laws or regulations, we could be subject to enforcement actions. Enforcement actions could include product seizures, recalls, withdrawal of clearances or approvals, and civil and criminal penalties, which in each case would harm our business.

Physicians may not accept or continue to accept our products and products under development.

     The success of our current and future products will require acceptance or continued acceptance by cardiovascular and vascular surgeons and other medical professionals. Such acceptance will depend on clinical results and the conclusion by these professionals that our products are safe, cost-effective and acceptable methods of treatment. Even if the safety and efficacy of our future products are established, physicians may elect not to use them for a number of reasons. These reasons could include the high cost of our VAD systems, restrictions on coverage or unfavorable reimbursement from health care payors. Also, economic, psychological, ethical and other concerns may limit general acceptance of our ventricular assist, graft and other products.

We have experienced rapid growth and changes in our business, and our failure to manage this and any future growth could harm our business.

     As a result of the Merger in February 2001, the number of our employees has increased significantly, from 183 on December 30, 2000 to 699 on December 28, 2002. We expect to continue to grow and we may suffer if we do not train our new employees quickly and effectively. Our revenues may not continue to grow at a rate sufficient to support the costs associated with an increasing number of employees. Any future periods of rapid growth may place significant strains on our managerial, financial and other resources. The rate of any future expansion, in combination with our complex technologies and products, may demand an unusually high level of managerial effectiveness in anticipating, planning, coordinating and meeting our operational needs as well as the needs of our customers.

If we fail to successfully introduce new products, our future growth may suffer.

     As part of our growth strategy, we intend to develop and introduce a number of new products and product improvements. We also intend to develop new indications for our existing products. If we do not introduce these new products, product improvements and new indications on a timely basis, or if they are not well accepted by the market, our future growth may suffer.

Amortization of our intangible assets, which represents a significant portion of our total assets, will adversely impact our net income and we may never realize the full value of our intangible assets.

     As of December 28, 2002, we had $280.8 million of net intangible assets, representing 60% of our total assets and 75% of our shareholders’ equity. These intangible assets consist primarily of goodwill and other intangible assets arising from our Merger and our trademarks and patented technology. Amortization expense relating to these intangible assets for 2002 was $12.4 million. No amortization of goodwill was recorded in 2002 after we adopted Statement of Financial Accounting Standards No. 142 at the beginning of 2002. Ongoing amortization of purchased intangibles will reduce our future earnings or increase our future losses.

     We may not receive the recorded value for our intangible assets if we sell or liquidate our business or assets. The material concentration of intangible assets increases the risk of a large charge to earnings in the event that the recoverability of these intangible assets is impaired, and in the event of such a charge to earnings, the market price of our common stock could be adversely affected.

20

Table of Contents

We rely on specialized suppliers and alternative suppliers may not be available.

     We depend on a number of custom-designed components and materials supplied by other companies including, in some cases, single source suppliers for components and materials used in our VAD products and blood testing products. We do not have long-term written agreements with most of our vendors and receive components on a purchase order basis. If we need alternative sources for key raw materials or component parts for any reason, such alternative sources may not be available and our inventory may not be sufficient to fill orders before we find alternative suppliers or begin manufacturing such components or materials ourselves. Cessation or interruption of sales of circulatory support products would seriously harm our business, financial condition and results of operations.

     Alternative suppliers, if available, may not agree to supply us. In addition, we may need to obtain FDA approval before using new suppliers or manufacturing our own components or materials. Existing suppliers could also be subject to an FDA enforcement action, which could also disrupt our supplies. If alternative suppliers are not available, we may not have the expertise or resources necessary to produce such materials or component parts internally. Any interruption in supply of materials or component parts could seriously harm our ability to manufacture products until we locate a new supply source.

If we fail to compete successfully against our existing or potential competitors, our revenues or operating results may be harmed.

     Competition from medical device companies and medical device subsidiaries of health care and pharmaceutical companies is intense and is expected to increase. Competitors for the VAD system include, for example, World Heart Corporation and ABIOMED, Inc. Principal competitors in the vascular graft market include W.L. Gore, Inc., C.R. Bard and Boston Scientific Corporation. The principal competitors in the coagulation monitoring equipment market are the Cardiac Surgery Division of Metronic, Inc., which markets the HemoTec product line and Roche Holding AG. The primary competitors in the skin incision device market are Organon Teknika B.V.; Becton, Dickson and Company; and Owen-Mumford Ltd.

     Many of our competitors have substantially greater financial, technical, distribution, marketing and manufacturing resources than we do. Accordingly, our competitors may be able to develop, manufacture and market products more efficiently and at a lower cost than we can. We expect that the key competitive factors will include the relative speeds with which we can:

	•		develop products;
	•		complete clinical testing;
	•		receive regulatory approvals; and
	•		manufacture and sell commercial quantities of products.

     Additionally, our competitors may succeed in developing and marketing technologies and products that are more effective than ours. Any such products may render our technology and products obsolete or noncompetitive. In addition, new surgical procedures and medications could be developed that replace or reduce the importance of current procedures that use our products.

We may encounter problems manufacturing our products.

     We may encounter difficulties manufacturing our products. We do not have experience in manufacturing our products in the commercial quantities that might be required if we receive FDA approval of several or all of the products and indications currently under development. We have also recently transferred the manufacturing operations for the HeartMate to Pleasanton and we expect to receive clearance from the FDA to begin manufacturing the HeartMate in this location in the first half of 2003. If we have difficulties manufacturing our products, our business will be harmed.

Since we depend upon distributors, if we lose a distributor or a distributor fails to perform, our operations will be harmed.

     With the exception of Canada and the larger countries in Europe, we sell our VAD and HeartMate systems in foreign markets through distributors. In addition, we sell our vascular access graft products through the Bard Peripheral Vascular division of C.R. Bard Corporation, which we refer to as Bard, in the United States, Europe and selected countries in Scandinavia, the Middle East and Northern Africa and through Goodman Co. Ltd. in Japan. In 2002, 11% of our total product sales were through Cardinal Healthcare, a distributor of our blood coagulation testing equipment and skin incision devices.

21

Table of Contents

     To the extent we rely on distributors, our success will depend upon the efforts of others, over which we may have little control. If we lose a distributor or a distributor fails to perform, our revenues will be harmed.

Our inability to protect our proprietary technologies or an infringement of others’ patents could harm our competitive position.

     We rely on patents, trade secrets, copyrights, know-how, trademarks, license agreements and contractual provisions to establish our intellectual property rights and protect our products. These legal means, however, afford only limited protection and may not adequately protect our rights. In addition, we cannot assure you that any of our pending patent applications will issue. The PTO may deny or significantly narrow claims made under patent applications and the issued patents, if any, may not provide us with commercial protection. We could incur substantial costs in proceedings before the PTO or in any future litigation to enforce our patents in court. These proceedings could result in adverse decisions as to the validity and/or enforceability of our patents. In addition, the laws of some of the countries in which our products are or may be sold may not protect our products and intellectual property to the same extent as U.S. laws, if at all. We may be unable to protect our rights in trade secrets and unpatented proprietary technology in these countries.

     Aside from the biomaterials patents, which are utilized in the Thoratec VAD blood pump and cannulae, and one patent covering aspects of our TLC-II, the Thoratec VAD system is not protected by any patents. We rely principally on trade secret protection and, to a lesser extent, patents to protect our rights to the HeartMate. We rely principally on patents to protect our coagulation testing equipment and skin incision devices.

     We seek to protect our trade secrets and unpatented proprietary technology, in part, with confidentiality agreements with our employees and consultants. Although it is our policy to require that all employees and consultants sign such agreements, we cannot assure you that every person who gains access to such information has done so. Moreover, these agreements may be breached and we may not have an adequate remedy.

     Our products may be found to infringe prior or future patents owned by others. We may need to acquire licenses under patents belonging to others for technology potentially useful or necessary, and such licenses may not be available to us. We could incur substantial costs in defending suits brought against us on such patents or in bringing suits to protect our patents or patents licensed by us against infringement.

     We have received correspondence from a third party alleging that the textured surface of our HeartMate housing infringes certain patent rights of such third party. In general, an owner of intellectual property can prevent others from using such property without a license and is entitled to damages for unauthorized usage. We have investigated the basis of the allegation and, based upon an evaluation of all of the facts and circumstances, we believe that we have meritorious defenses. However, we cannot be sure that our defenses would prevail, and given the inherent uncertainties in dispute resolution, if we were sued and the outcome was unfavorable, our results of operations or financial condition could be seriously harmed.

Product liability claims could damage our reputation and hurt our financial results.

     Our business exposes us to an inherent risk of potential product liability claims related to the manufacturing, marketing and sale of human medical devices. We maintain only a limited amount of product liability insurance. Our insurance policies generally must be renewed on an annual basis. We may not be able to maintain or increase such insurance on acceptable terms or at reasonable costs, and such insurance may not provide us with adequate coverage against potential liabilities. A successful claim brought against us in excess of, or outside of, our insurance coverage could seriously harm our financial condition and results of operations. Claims against us, regardless of their merit or potential outcome, may also reduce our ability to obtain physician endorsement of our products or expand our business.

If we make acquisitions or divestitures, we could encounter difficulties that harm our business.

     We may acquire companies, products or technologies that we believe to be complementary to our business. If we do so, we may have difficulty integrating the acquired personnel, operations, products or technologies. Acquisitions may dilute our earnings per share, disrupt our ongoing business, distract our management and employees and increase our expenses, which could harm our

22

Table of Contents

business. We may also sell businesses or assets as part of our strategy or if we receive offers from third parties. If we do so, we may sell an asset or business for less than its full value.

The long and variable sales and deployment cycles for our VAD systems may cause our revenue and operating results to vary significantly, which increases the risk of an operating loss for any given fiscal quarter.

     Our VAD systems have lengthy sales cycles and we may incur substantial sales and marketing expenses and expend significant effort without making a sale. Even after making the decision to purchase our VAD systems, our customers often deploy our products slowly. For example, the length of time between initial contact with cardiac surgeons and the purchase of our VAD systems is generally between nine and eighteen months. As a result, it is difficult for us to predict the quarter in which our customers may purchase our VAD systems and our revenue and operating results may vary significantly from quarter to quarter, which increases the risk of an operating loss for us for any given quarter.

Our non-U.S. sales present special risks.

     During 2002, sales originating outside the United States and U.S. export sales accounted for approximately 18% of our total revenues. For 2001, sales originating outside the United States and U.S. export sales accounted for approximately 20% of our total revenues. We anticipate that sales outside the United States and U.S. export sales will continue to account for a significant percentage of our revenues and we intend to continue to expand our presence in international markets. Non-U.S. sales are subject to a number of special risks. For example:

	•		we generally sell many of our products at a lower price outside the United States;
	•		agreements may be difficult to enforce;
	•		receivables may be difficult to collect through a foreign country’s legal system;
	•		foreign customers may have longer payment cycles;
	•		foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade;
	•		U.S. export licenses may be difficult to obtain;
	•		intellectual property may be more difficult to enforce in foreign countries;
	•		terrorist activity may interrupt distribution channels or impact our customers or employees; and
	•		fluctuations in exchange rates may affect product demand and adversely affect the profitability, in U.S. dollars, of products sold in foreign markets where payments are made in local currencies.

     Any of these events could harm our operations.

Any claims relating to improper handling, storage or disposal of hazardous chemicals and biomaterials could be time consuming and costly.

     Producing our products requires the use of hazardous materials, including chemicals and biomaterials. We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials.

     We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our total assets. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development or production efforts.

23

Table of Contents

Our stock price has been volatile and is likely to continue to be volatile.

     The price of our common stock has been, and is likely to continue to be, highly volatile, which means that it could decline substantially. The price of our common stock could fluctuate significantly for the following reasons:

	•		future announcements concerning us or our competitors;
	•		timing and reaction to the publication of clinical trial results;
	•		quarterly variations in operating results;
	•		charges, amortization and other financial effects relating to our Merger;
	•		introduction of new products or changes in product pricing policies by us or our competitors;
	•		acquisition or loss of significant customers, distributors or suppliers;
	•		business acquisitions or divestitures;
	•		changes in earnings estimates by analysts;
	•		changes in third party reimbursement practices;
	•		regulatory developments, enforcement actions bearing on advertising, marketing or sales, and disclosure regarding completed ongoing or future clinical trials; or
	•		fluctuations in the economy, world political events or general market conditions.

     In addition, stock markets in general, and the market for shares of health care stocks in particular, have experienced extreme price and volume fluctuations in recent years which have frequently been unrelated to the operating performance of the affected companies. These broad market fluctuations may adversely affect the market price of our common stock. The market price of our common stock could decline below its current price and the market price of our stock may fluctuate significantly in the future. These fluctuations may be unrelated to our performance.

     In the past, shareholders have often instituted securities class action litigation after periods of volatility in the market price of a company’s securities. If a shareholder files a securities class action suit against us, we would incur substantial legal fees and our management’s attention and resources would be diverted from operating our business in order to respond to the litigation.

Future issuances and sales of our stock could dilute shareholder ownership and cause our stock price to decline.

     Future sales of substantial amounts of our stock in the public market, or the perception that such sales could occur, could adversely affect the market price of our stock. Sale of our shares and the potential for such sales, could cause our stock price to decline.

The occurrence of a catastrophic disaster or other similar events could cause damage to our facilities and equipment, which would require us to cease or curtail operations.

     We are vulnerable to damage from various types of disasters, including earthquake, fire, terrorist acts, flood, power loss, communications failures and similar events. For example, in October 1989, a major earthquake that caused significant property damage and a number of fatalities struck near the area in which our Pleasanton facility is located. If any disaster were to occur, we may not be able to operate our business at our facilities, which could seriously harm our business and operations. The insurance we maintain may not be adequate to cover our losses resulting from disasters or other business interruptions.

Fluctuations in foreign currency exchange rates could result in declines in our reported sales and earnings.

     Since our international sales are denominated in local currencies and not in U.S. dollars, our reported sales and earnings are subject to fluctuations in foreign exchange rates. At present, we do not engage in hedging transactions to protect against uncertainty in future exchange rates between particular foreign currencies and the U.S. dollar.

24

Table of Contents

The competition for qualified personnel is particularly intense in our industry. If we are unable to retain or hire key personnel, we may not be able to sustain or grow our business.

     Our ability to operate successfully and manage our potential future growth depends significantly upon retaining key research, technical, sales, marketing, managerial and financial personnel, and attracting and retaining additional highly qualified personnel in these areas. We face intense competition for such personnel, and we may not be able to attract and retain these individuals. We compete with numerous companies, as well as universities and nonprofit research organizations throughout all our locations. The loss of key personnel for any reason or our inability to hire and retain additional qualified personnel in the future could prevent us from sustaining or growing our business. Our success will depend in large part on the continued services of our research, managerial and manufacturing personnel. We cannot assure you that we will continue to be able to attract and retain sufficient qualified personnel.

Arthur Andersen LLP audited certain financial information included or incorporated in this report. In the event such financial information is later determined to contain false statements, you may be unable to recover damages from Arthur Andersen LLP.

     Our consolidated statements of income, comprehensive income, shareholders’ equity and cash flows and associated information contained in the footnotes to these financial statements for the 2000 fiscal year were audited by Arthur Andersen LLP. In 2002, Arthur Andersen ceased operations and we are unable to obtain their consent to the incorporation by reference of its report on such financial statements, dated February 5, 2001, into this Form 10-K. As a result, you may be limited in your ability to recover damages from Arthur Andersen under Section 11 of the Securities Act of 1933 if it is later determined that there are false statements contained in or incorporated by reference into any portions of this report that have been prepared in reliance on financial statements audited by Arthur Andersen.

Item 2. Properties

     We are headquartered in Pleasanton, California, where we lease approximately 73,000 square feet of commercial space and 5,000 square feet of warehouse space. Our leases for these facilities expire through 2012. Additionally, we lease the following facilities:

	•		Approximately 11,000 square feet of office and research facilities in Rancho Cordova, California expiring in 2002,
	•		Approximately 47,000 square feet of office, manufacturing and research facilities in Edison, New Jersey expiring through 2017,
	•		Approximately 3,800 square feet of office facilities in the United Kingdom expiring in 2008, and
	•		Approximately 34,000 square feet of space in Woburn, Massachusetts under a sublease expiring in 2004.

     We also own approximately 66,000 square feet of office, manufacturing and research facilities in Edison, New Jersey.

     Each of our manufacturing areas have been inspected, approved and licensed for the manufacture of medical devices by the FDA. Additionally, the Pleasanton facility is subject to inspections, approvals and licensing by the State of California Department of Health Services (Food and Drug Section). The Edison facility is subject to inspections, approvals and licensing by State of New Jersey Department of Health.

     We believe our facilities will be sufficient for the next two years and that additional space will be available at a reasonable price to satisfy space needs thereafter.

Item 3. Litigation

     We are not a party to any material legal proceedings.

Item 4. Submission of Matters to a Vote of Security Holders

     No matters were submitted to a vote of security holders during the quarter ended December 28, 2002.

25

Table of Contents

Our Officers

     D.     Keith Grossman,* President, Chief Executive Officer and Director, joined our company as President and Chief Executive Officer in January 1996. He was elected to the Board of Directors in February 1996. Prior to joining us, Mr. Grossman was a Division President of Major Pharmaceuticals, Inc., from June 1992 to September 1995, at which time it was sold. From July 1988 to June 1992, Mr. Grossman served as the Vice President of Sales and Marketing for Calcitek, Inc., a manufacturer of implantable medical devices, and division of SulzerMedica formerly Intermedics, Inc. Prior to 1988, Mr. Grossman held various other sales and marketing management positions within the McGaw Laboratories Division of American Hospital Supply Corporation.

     M.     Wayne Boylston,* Senior Vice President, Chief Financial Officer and Secretary, became our Senior Vice President, Chief Financial Officer and Secretary in August 2001. Prior to joining us, Mr. Boylston was Chief Financial Officer at Flashcom, Inc., a provider of broadband communications services. Flashcom filed for bankruptcy protection in December 2000. From July 1998 until March 2000, Mr. Boylston served as Executive Vice President, Chief Financial Officer, Treasurer and Assistant Secretary of iXL Enterprises, Inc., an Internet consulting service provider. From 1995 until 1998, Mr. Boylston served as Vice President — Finance, Chief Financial Officer and Treasurer of Healthdyne Technologies, Inc., a medical device manufacturer. Prior to 1995, Mr. Boylston held a variety of financial management positions with Healthdyne, Inc., a diversified health care products and services company. Mr. Boylston is a Certified Public Accountant.

     Lawrence Cohen,* President of ITC, joined our company in May 2001 as President of ITC. Prior to joining ITC, Mr. Cohen served as CEO of HemoSense, Inc., a developer of medical diagnostic products, from August 1998 to April 2000. From October 1989 to March 1998, Mr. Cohen held the positions of Vice President Marketing and Sales, Vice President International and Worldwide Executive Vice President at Ortho-Clinical Diagnostics, a Johnson & Johnson company. From 1980 to 1989, Mr. Cohen has also held executive management positions at Instrumentation Laboratory and Beckman Coulter Corporation. He is a past president of the Biomedical Marketing Association and is currently on the Board of Trustees of the National Blood Foundation.

     Jeffrey W. Nelson,* President – Cardiovascular Division, joined our company as President — Cardiovascular Division in August 2002. Prior to joining us, Mr. Nelson was at Philips Medical Systems (formerly ADAC Laboratories) where he spent the past eight years, most recently as general manager of the company’s nuclear medicine division. He also served as a senior vice president of North American sales and general manager of ADAC Radiology Solutions and held business unit and regional sales and marketing positions at the company. Before that, he was a marketing manager for Syncor International Corporation, an associate at Cerulean Venture Fund and was in sales with Baxter Healthcare International.

     David J. Farrar, Ph.D., Vice President — Research and Development, joined our company as Program Manager of our circulatory support products in January 1980 and became Vice President — Circulatory Support Products in 1988, and Vice President — Research & Development in 1996. In addition, Dr. Farrar has a research appointment in the Department of Cardiac Surgery at the California Pacific Medical Center of San Francisco. Dr. Farrar has over 20 years of research experience in the cardiovascular and medical device industry.

     Bradley D. Goskowicz, Vice President — Sales and Marketing, joined our company as Vice President, Sales and Marketing in January 2001. Prior to joining our company, Mr. Goskowicz was Director of Marketing in the Cardiac Surgery Division of Medtronic, Inc. where he was responsible for directing, developing and implementing marketing strategies for a broad line of cardiovascular surgery products worldwide. He joined Medtronic in March 1999, as part of Medtronic’s acquisition of Avecor Cardiovascular, and was one of the original Directors when Avecor Cardiovascular was formed in 1991. Before assuming the role of Director of Marketing, he held the position of Director of Sales. Prior to 1991 Mr. Goskowicz held various sales and marketing positions with Bio-Medicus, Inc., Medtronic, Inc. and Johnson & Johnson.

     Jeffrey C. Mack, Vice President — Finance, joined our company as Controller in 1996. He became Director of Finance and Corporate Controller in September 1999 and Vice President of Finance in September 2000. Prior to joining our company, he served as Director of Finance and Corporate Controller for The North Face, a designer and manufacturer of outdoor apparel and equipment. He also held various other financial and operational positions with Kenetech Corporation, a manufacturer and operator of utility grade wind turbines, and Deloitte & Touche, LLP. Mr. Mack is a Certified Public Accountant.

26

Table of Contents

     Donald A. Middlebrook, Vice President — Regulatory Affairs/Quality Assurance, joined our company as Vice President — Regulatory Affairs/Quality Assurance in September 1996. Before joining our company, he held the position of Senior Director, Global Regulatory Affairs and Assurance for Chiron Vision Corporation, a manufacturer of implantable ophthalmic devices and surgical equipment. Prior to that, Mr. Middlebrook spent fifteen years with Baxter International in a number of positions, including Vice President of Regulatory Affairs and Quality Assurance for the CardioVascular Group, a producer of a wide range of cardiopulmonary, critical care, vascular and cardiovascular products.

     Victor Poirier, Chief Technology Advisor, joined our company in February 2001. Prior to joining us, Mr. Poirier was President and Director of Thermo Cardiosystems from 1998 to 2001, and Chief Executive Officer, President and Director of Thermo Cardiosystems from 1990 to 1998. Prior to that, Mr. Poirier was Executive Vice President of Thermo Cardiosystems and Sr. Vice President of Thermedics from 1984 to 2000. Mr. Poirier has more than 40 years of research experience in the cardiovascular industry.

     Joseph G. Sharpe, Vice President — Operations, joined our company as Vice President — Operations in September 1997. Prior to joining us, Mr. Sharpe was Director of Operations for the IV Systems Division of Baxter International, Inc. from 1992 to September 1997. Prior to that, Mr. Sharpe held a number of other positions at Baxter International, Inc. including Director of Engineering of the Pharmaseal Division, and Honeywell Information Systems.

     Jon R. Shear, Vice President — Business Development, joined our company as Vice President – Business Development in August 2002. Prior to joining us, Mr. Shear spent the past 13 years with St. Jude Medical Inc. where he was a senior member of the corporate business and technology development function from July 2001 to August 2002 and, prior to that, Director of Healthcare Services Contracting and Business Development Manager for the Cardiac Surgery Division. In addition, Mr. Shear also held a variety of marketing and finance management positions at St. Jude Medical Inc., American Express Financial Advisors and Stirtz Bernards & Company.

     Beth A. Taylor, Vice President — Human Resources, joined our company as Director of Human Resources in November 1999 and became Vice President of Human Resources in February 2001. Prior to joining our company, Ms. Taylor served as Director of Human Resources for CCI/Triad. She has also held various other human resource positions such as Corporate Employee Development Manager with Valent U.S.A. Corporation, and as Director of Human Resources with Automatic Data Processing, Inc.

27

Table of Contents

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

     Our common stock is traded on the NASDAQ National Market under the symbol “THOR”. The following table sets forth, for the periods indicated, the high and low closing sales price per share of our common stock, as reported by the NASDAQ National Market. As of March 11, 2002 there 55,051,485 shares of our common stock outstanding with approximately 900 holders of record, including multiple beneficial holders at depositories, banks, and brokerages listed as a single holder in the “street” name of each respective depository, bank, or broker.

     We have not declared or paid any dividends on our common stock and we anticipate that for the foreseeable future we will continue to retain our earnings for use in our business.

28

Table of Contents

Item 6. Selected Consolidated Financial Data

     The selected consolidated financial data presented below for the five fiscal years ended December 28, 2002 is derived from audited financial statements. The data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes thereto appearing elsewhere in this Annual Report, the consolidated financial statements of TCA filed with the SEC on Form 8-K/A on March 30, 2001 and on Form 10-K on March 17, 2000 and March 12, 1999. Certain reclassifications have been made to the financial statements previously filed with the SEC to conform to current practice.

     The Merger of Thoratec with TCA was completed on February 14, 2001. We issued new shares of our common stock to the shareholders of TCA in exchange for all the outstanding common stock of TCA at an exchange ratio of 0.835 shares of Thoratec stock for each share of TCA. The Merger was accounted for as a reverse acquisition because former shareholders of TCA owned a majority of our outstanding stock subsequent to the Merger. For accounting purposes, TCA is deemed to have acquired Thoratec and therefore for fiscal years 1998, 1999 and 2000 all financial information presented herein represents the results of operations of TCA. Our 2001 consolidated financial information presented herein includes the financial results of TCA for the full fiscal year and Thoratec’s financial results for the post-merger period from February 14, 2001 through December 29, 2001. The weighted average number of common shares previously reported by TCA has been adjusted for all periods presented to reflect the exchange ratio of 0.835 to 1.

     Our fiscal year ends on the Saturday closest to December 31. Accordingly, our fiscal year will periodically contain more or less than 365 days. For example, 1998 ended on January 1, 1999, 1999 ended on December 31, 1999, 2000 ended on December 30, 2000, 2001 ended on December 29, 2001 and 2002 ended December 28, 2002.

29

Table of Contents

     The statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that relate to future plans, events or performance are forward-looking statements which involve risks and uncertainties. These factors, and others, are discussed more fully in Item 1 above and our other filings with the SEC. Actual results, events or performance may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth in “Risk Factors” presented in Item 1 above in this Annual Report on Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be needed to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Overview

     We are a leading manufacturer of circulatory support products for use by patients with congestive heart failure, or CHF. According to the American Heart Association, 4.9 million patients in the United States suffer from CHF and an additional 550,000 patients are diagnosed with this disease annually. We were the first company to receive FDA approval to commercially market a ventricular assist device, or VAD, to treat patients with late-stage heart failure, which comprises approximately 5% to 10% of the CHF patient population. Our VADs are used primarily by these CHF patients to perform some or all of the pumping function of the heart and we currently offer the widest range of products to serve this market. We believe that our long-standing reputation for quality and innovation and our excellent relationships with leading cardiovascular surgeons worldwide position us to capture growth opportunities in the expanding congestive heart failure market. We also develop and sell products that are used by physicians and hospitals for vascular and diagnostic applications that include vascular grafts, blood coagulation testing and skin incision devices. We conduct business both domestically and internationally.

The Merger with Thermo Cardiosystems

     The Merger of Thoratec with TCA was completed on February 14, 2001. We issued new shares of our common stock to the shareholders of TCA in exchange for all the outstanding common stock of TCA at an exchange ratio of 0.835 shares of Thoratec stock for each share of TCA stock. The Merger was accounted for as a reverse acquisition because former shareholders of TCA owned a majority of our outstanding stock subsequent to the Merger. For accounting purposes, TCA is deemed to have acquired Thoratec and, therefore, for fiscal year 2000 all financial information presented herein represents the results of operations of TCA.

     Our 2001 consolidated financial information presented herein includes the financial results of TCA for the full fiscal year and Thoratec’s financial results for the post-merger period from February 14, 2001 through December 29, 2001.

Restructuring Plan

     In June 2001, we approved a plan to consolidate all of our VAD manufacturing operations to our manufacturing facilities and headquarters in Pleasanton, California, which we called the Restructuring Plan. This Restructuring Plan specifically provided for the reduction of approximately 90 of our manufacturing and related workforce at our Woburn and Chelmsford, Massachusetts facilities, both of which were acquired in the Merger in February 2001. We notified the affected employees during the second quarter of 2001 both through direct personal contact and written notification. The Chelmsford facility was closed in February 2002. Our HeartMate family of products, which were manufactured at the Woburn facility, were transitioned to the Pleasanton facility. We completed the Restructuring Plan in the first quarter of 2003. Through December 28, 2002, we have recorded $1.6 million of restructuring charges, in accordance with Emerging Issues Task Force (EITF) 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity,” and Staff Accounting Bulletin (SAB) 100, “Restructuring and Impairment Charges.” These charges represent estimated severance costs and stock option acceleration charges. As of December 28, 2002, we have paid approximately $0.7 million in severance payments to 47 employees related to the restructuring. We expect to pay out the remaining accrued restructuring charges of $0.7 million in the first half of 2003.

30

Table of Contents

Results of Operations

     The following table sets forth selected consolidated statements of operations data for the years indicated as a percentage of total product sales:

Fiscal Years 2002 and 2001

Product Sales

     Product sales in 2002 were $130.8 million compared to $113.4 million in 2001, an increase of $17.4 million or 15%. This increase was primarily attributable to an increase in VAD product sales of $10.5 million resulting from higher unit sales and average selling prices, an increase in vascular graft product sales of $2.1 million due to higher unit sales, and an increase in ITC sales of $4.8 million. Product sales in 2001 included Thoratec sales for the post-merger period from February 14, 2001 through December 29, 2001 whereas product sales in 2002 included Thoratec sales for the full 12 months of 2002.

     The increase in ITC sales $4.8 million was primarily due to increases in sales of our blood coagulation testing products of $4.4 million and our skin incision products of $0.4 million.

Gross Profit

     Gross profit in 2002 was $75.7 million, representing approximately 58% of product sales, compared to $60.5 million, representing approximately 53% of product sales in 2001. This increase in gross profit as a percentage of sales was primarily due to higher average selling prices for our VAD products and lower manufacturing and product service costs as a percentage of sales in 2002 compared to 2001.

Selling, General and Administrative

     Selling, general, and administrative expenses in 2002 were $37.4 million, or 29% of product sales, compared to $32.3 million, or 29% of revenues, in 2001. While selling, general and administrative expenses were consistent as a percentage of revenues from period to period, they increased as a result of promotional activities, new product introductions and costs to expand markets for our blood coagulation testing equipment and VADs as well as higher insurance costs, costs associated with computer systems installed in 2002 and business development activities.

31

Table of Contents

Research and Development

     Research and development expenses in 2002 were $25.3 million, or 19% of product sales, compared to $22.1 million, or 19% of product sales, in 2001. This increase resulted from an increase in spending for certain VAD product development programs partially offset by lower spending related to the REMATCH trials.

Amortization of Purchased Intangible Assets

     Amortization of purchased intangible assets in 2002 was $12.4 million compared to $11.3 million in 2001. As of December 28, 2002, intangible assets of $207.0 million have been recorded as a result of our Merger and are being amortized over their estimated useful lives of eight to twenty years. In accordance with SFAS No. 142, at the beginning of 2002 we reclassified our purchased intangible asset related to acquired workforce in the net amount of $1.3 million to goodwill and ceased amortization of that asset. The increase in the amortization of purchased intangible assets from 2001 is due to the inclusion of a full year of amortization in 2002 compared to only ten months of amortization in 2001.

Amortization of Goodwill

     Amortization of goodwill in 2001 was $4.4 million. Beginning in 2002, we have stopped amortizing goodwill in accordance with SFAS No. 142.

In-process Research and Development Costs

     In-process research and development, or IPR&D, expense in 2001 was $76.9 million and represents the one-time write-off of nonrecurring charges associated with our Merger in February 2001 for projects that had not reached technological feasibility, had no alternative future use and for which successful development was uncertain.

     One of the projects was completed in 2001. There have been no significant developments subsequent to the Merger related to the current status of any of the remaining IPR&D projects that would result in material changes to the assumptions or resulting valuation performed at the time of the Merger. Development of the IPR&D products continues and while the timing of completion of these projects may vary due to the highly regulated and technical nature of our products, current estimates remain materially consistent with our initial estimates.

     There can be no assurances that we will be able to complete the development of these products on a timely basis. Failure to complete these projects could have an adverse impact on our financial condition or results of operations.

Merger, Restructuring and Other Costs

     Merger, restructuring and other charges in 2002 were $1.4 million compared to $7.1 million in 2001. The 2002 amount included costs consisting mainly of executive waiver agreement costs of $0.4 million, restructuring costs of $0.5 million representing estimated severance costs related to the consolidation of our VAD manufacturing operations, and other costs of $0.5 million related to the termination of a European distribution agreement. The 2001 amount included employee severance of $2.8 million, executive waiver agreement costs of $0.7 million, consulting, accounting and legal expenses of $1.8 million, restructuring costs of $1.1 million, representing estimated severance costs related to the consolidation of our VAD manufacturing operations, and costs of $0.7 million related to the events of September 11, 2001.

Interest and Other Income — Net

     Interest and other income — net in 2002 was $2.1 million compared to $2.4 million in 2001. This decrease was primarily due to a decrease of $3.2 million in interest income caused by both lower cash balances and a reduction in interest rates during 2002. The decrease in interest income was partially offset by a reduction of interest expense due to the redemption of our subordinated convertible debentures in the first quarter of 2002 and an increase in other income primarily related to foreign currency translation gains.

32

Table of Contents

Income Taxes

     Our effective tax provision rate was 42% in 2002 compared to an effective tax benefit rate of 4% in 2001. For 2002, the effective tax provision rate exceeded the federal statutory income tax rate primarily due to the impact of state income taxes. Our effective tax benefit rate for 2001 differed from the statutory federal income tax rate primarily due to the impact on the reported net loss of nondeductible expenses related to our Merger with TCA, including the write-off of IPR&D costs, the amortization of goodwill and other nondeductible merger transaction costs.

Extraordinary Item

     In 2002, we recorded an extraordinary loss of $0.3 million, net of a tax benefit of $0.2 million, as a result of the redemption of our 4.75% subordinated convertible debentures. The extraordinary loss related to the write-off of the capitalized debt issuance costs associated with the debentures. There was no extraordinary item in 2001.

Fiscal Years 2001 and 2000

Product Sales

     Product sales in 2001 were $113.4 million compared to $83.4 million in 2000, an increase of $30.0 million or 36%. This increase was primarily attributable to the addition of Thoratec product sales of $34.7 million as a result of our Merger and an increase in ITC sales of $1.2 million, partially offset by a $5.9 million reduction in sales of HeartMate products due primarily to significant distractions and uncertainties among TCA’s sales force during the first and second quarters of 2001 while the Merger was being closed and the companies were being integrated.

     The impact of the reduction in HeartMate sales was principally in the VAD domestic market because we use employees to sell these products domestically compared to the international markets where distributors are primarily used. Domestic sales of the HeartMate in 2001 were $7.4 million lower than the previous year, partially offset by a $1.5 million increase in sales of the HeartMate internationally. The decrease in domestic HeartMate sales in 2001 was also attributable, in part, to fluctuations in the VAD market as customers used existing inventories to address their implantation needs.

     The increase in ITC sales of $1.2 million was primarily due to increases in sales of our blood coagulation testing products of $1.9 million partially offset by a decrease in sales of our skin incision products of $0.7 million.

Gross Profit

     Gross profit in 2001 was $60.5 million, representing approximately 53% of product sales, compared to $48.6 million, representing approximately 58% of product sales in 2000. This decrease in gross profit as a percentage of sales was primarily due to a lower proportion of domestic sales to total product sales as our products that are sold in the United States generally have a higher gross profit than those sold in the rest of the world. In addition, production costs for the HeartMate product line were higher in 2001 due to $1.4 million of employee retention and plant relocation costs and $0.4 million of write-offs of product inventory related to the HeartMate pneumatic driver, which was discontinued in the second half of 2001.

     In addition, approximately 1% of our decrease in gross profit as a percentage of sales was attributable to a lower gross profit on ITC’s products. This decrease was primarily due to lower average selling prices of our skin incision products because of increased market competition.

Selling, General and Administrative

     Selling, general, and administrative expenses in 2001 were $32.3 million, or 29% of product sales, compared to $23.6 million, or 28% of revenues, in 2000. This increase resulted from the addition of Thoratec’s selling, general and administrative expenses of $12.0 million as a result of our Merger, offset by lower employee related expenses due to personnel reductions primarily in the sales and marketing areas since the Merger.

33

Table of Contents

Research and Development

     Research and development expenses in 2001 were $22.1 million, or 19% of product sales, compared to $16.2 million, or 19% of product sales, in 2000. This increase resulted from the addition of Thoratec’s research and development expenses of $8.0 million as a result of our Merger, offset by a decrease in clinical trial and other costs related to the TLC-II, Aria graft and REMATCH trials and various other research and development projects.

Amortization of Purchased Intangible Assets

     Amortization of purchased intangible assets in 2001 was $11.3 million. All recorded purchased intangible assets relate to the Merger of Thoratec and TCA in February 2001.

Amortization of Goodwill

     Amortization of goodwill assets in 2001 was $4.4 million. All recorded goodwill relates to the Merger of Thoratec and TCA in February 2001.

In-process Research and Development Costs

     In-process research and development expense in 2001 was $76.9 million and represents the one-time write-off of nonrecurring charges associated with our Merger in February 2001 for technology that had not reached technological feasibility, had no alternative future use and for which successful development was uncertain.

Merger, Restructuring and Other Costs

     Merger, restructuring and other charges in 2001 were $7.1 million compared to $1.8 million in 2000. The 2001 charges included costs consisting mainly of employee severance of $2.8 million, executive waiver agreement costs of $0.7 million, consulting, accounting and legal expenses of $1.8 million, restructuring costs of $1.1 million, representing estimated severance costs related to the consolidation of our VAD manufacturing operations, and costs of $0.7 million related to the events of September 11, 2001. The 2000 charges consisted of pre-merger retention costs for TCA employees of $1.8 million.

Interest and Other Income — Net

     Interest and other income — net in 2001 was $2.4 million compared to $5.0 million in 2000. This decrease was due to a $2.5 million reduction in interest income caused by both lower cash balances and a reduction in interest rates.

Income Taxes

     Our effective tax benefit rate was 4% in 2001 compared to an effective tax provision rate of 39% in 2000. Our effective tax benefit rate for 2001 differed from the statutory federal income tax rate primarily due to the impact on the reported net loss of nondeductible expenses related to our Merger with TCA, including the write-off of IPR&D costs, the amortization of goodwill and other nondeductible merger transaction costs. For 2000, the effective tax provision rate exceeded the federal statutory income tax rate primarily due to the impact of state income taxes.

Extraordinary Item

     We recorded an extraordinary gain of $0.2 million in 2000 as a result of our purchase of a portion of our 4.75% subordinated convertible debentures. There was no extraordinary item in 2001.

34

Table of Contents

Liquidity and Capital Resources

     At the end of 2002, we had working capital of $108.0 million compared with $135.9 million at the end of 2001. Cash and cash equivalents at the end of 2002 were $42.0 million compared to $91.7 million at the end of 2001, a decrease of $49.7 million. This decrease in cash and cash equivalents was due principally to purchases of long-term investments of $34.0 million, use of $9.8 million for the redemption of our outstanding subordinated debentures, and $18.3 million used to repurchase our common stock. These decreases were partially offset by $15.3 million of net proceeds received from the issuance of our common stock and higher accounts receivable collections.

     Cash provided by operating activities was $2.2 million in 2002 resulting from our net income of $0.5 million adding back $18.4 million for items not affecting 2002 cash flows, primarily depreciation and amortization expenses, less changes in working capital of $16.7 million. The change in working capital in 2002 was due principally to inventory increasing by $12.6 million due primarily to VAD product inventory being built in preparation for the relocation of the HeartMate manufacturing operations to our Pleasanton facilities. Net cash used by operating activities during 2001 was $3.1 million resulting from our net loss of $87.9 million adding back $94.7 million for items not affecting 2001 cash flows, primarily depreciation and amortization expenses and write-off of IPR&D costs, less changes in working capital of $10.0 million. Net cash provided by operating activities during 2000 was $8.7 million resulting from our net income of $7.5 million adding back $2.9 million for items not affecting cash flows, primarily depreciation and amortization expenses, less changes in working capital of $1.7 million.

     Cash provided by investing activities was $5.0 million in 2002, $55.3 million in 2001 and $23.4 million in 2000. Cash provided in 2002 was due to the reclassification of $45.9 million of restricted cash and cash equivalents to retire our subordinated debentures partially offset by $34.1 million used to purchase long-term available-for-sale investments and $7.5 million used for capital expenditures. Cash provided in 2001 was due to $98.6 million, net, provided from available-for-sale investments and $16.2 million cash acquired in the Merger partially offset by $45.8 million reclassified to restricted cash and cash equivalents, transaction costs of $5.8 capitalized in conjunction with the Merger and capital expenditures of $7.9 million. Cash provided in 2000 was due to $21.0 million, net, provided from available-for-sale investments partially offset by $2.4 million used for capital expenditures.

     Cash used in financing activities was $57.0 million in 2002, compared to $9.4 million provided by financing activities in 2001 and cash used of $2.3 million in 2000. Cash used in 2002 was due to $54.8 million to retire our subordinated debentures and $18.3 million to repurchase our common stock partially offset by $15.3 million, net, proceeds received in a public stock offering and $0.8 million provided from exercises of common stock options. Cash provided in 2001 was due to $11.1 million from exercises of common stock options partially offset by $1.7 million used to repurchase our common stock. Cash used in 2000 was due to $2.8 million to retire our subordinated debentures partially offset by $0.6 million provided from exercises of common stock options.

     During 2002, we made cash payments of $2.9 million for merger, restructuring and other costs. These payments consisted mainly of employee retention and executive waiver agreement costs related to the Merger and severance costs related to the Restructuring Plan.

     In April 2001, we announced a stock repurchase program under which up to $20 million in market value of our common stock could be acquired in the open market or in privately negotiated transactions. The number of shares to be purchased and the timing of purchases were based on several conditions, including the price of our stock, general market conditions and other factors. The program was completed in the fourth quarter of 2002. During 2002, $18.3 million in common stock was repurchased, representing 2.3 million shares. All repurchased shares were subsequently retired.

     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. This registration statement became effective on February 12, 2002 and all shares registered were sold on February 15, 2002. We received $15.3 million, net of underwriting fees and discounts and other expenses of the offering, from the sale of the newly issued shares.

     In January 2002, we announced a plan to redeem at par value all outstanding 4.75% convertible subordinated debentures due 2004, which were originally issued by TCA. We completed the redemption in March 2002 using our restricted cash and cash equivalents of $45.9 million and cash of $9.8 million. We recorded an extraordinary loss in the amount of $0.3 million, net of a tax benefit of $0.2 million, in the first quarter of 2002 related to the write-off of capitalized debt issuance costs associated with the initial issuance of the debentures, which were being amortized over the life of the debentures.

35

Table of Contents

     We believe that cash and investments on-hand and expected cash flows from operations will be sufficient to fund our operations and capital requirements for the foreseeable future. We expect that our operating expenses will increase in future periods as we spend more on product manufacturing, marketing, and research and development of new product lines.

     The impact of inflation on our financial position and the results of operations was not significant during any of the years presented.

Critical Accounting Policies

     We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed below. For a more detailed discussion on the application of these and other accounting policies, see the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. There can be no assurance that actual results will not differ from those estimates.

Merger Accounting

     On February 14, 2001, Thoratec completed its Merger with TCA. Pursuant to the Merger agreement between Thoratec and TCA, Thoratec issued new shares of its common stock to the shareholders of TCA in exchange for all the outstanding common stock of TCA. The merger was treated as a reverse acquisition because the shareholders of TCA owned the majority of Thoratec common stock after the Merger. TCA was considered the acquiror for accounting and financial reporting purposes. The Merger was accounted for under the purchase method of accounting. Due to the reverse acquisition, Thoratec’s assets and liabilities were recorded based upon their estimated fair values at the date of acquisition. The purchase price is also allocated to intangible assets, including goodwill. As of December 28, 2002, approximately $309.0 million of the total purchase price of $346.2 million has been allocated to goodwill and other purchased intangibles. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements. The amounts allocated to goodwill and other intangible assets will affect the amount of amortization expense we recognize in future periods and could result in a possible impairment expense if at some future date such assets were determined to be impaired.

     As a result of the Merger, $76.9 million relating to IPR&D was expensed in the first quarter of 2001. The write-off of IPR&D was related to projects that were in development, had not reached technological feasibility, had no alternative future use and for which successful development was uncertain. There have been no significant developments subsequent to the Merger related to the current status of any of the IPR&D projects that would result in material changes to the assumptions or resulting valuation performed at the time of the Merger. Development of IPR&D projects continues and while the timing of completion of these projects may vary due to the highly regulated and technical nature of the Company’s products, current estimates remain materially consistent with the Company’s initial estimates.

Revenue Recognition

     We recognize revenue from product sales when evidence of an arrangement exists, title has passed (generally upon shipment) or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured. Sales to distributors are recorded when title transfers upon shipment. One distributor has certain limited product return rights. A limited number of other distributors have certain rights of return upon termination of their distribution agreement. A reserve for sales returns is recorded for these customers applying reasonable estimates of product returns based upon significant historical experience in accordance with SFAS No. 48, “Revenue Recognition when Right of Return Exists.” No other direct sales customers or distributors have return rights or price protection.

     Sales of certain Cardiovascular segment products to first-time customers are recognized when it has been determined that the customer has the ability to use such products. These sales frequently include the sale of products and training services under multiple element arrangements. For most customers, training is not essential to the functionality of the products as the customers already possess sufficient expertise and experience to use the products. In these situations, training is provided as a best practice to optimize the use and success of the products. The amount of revenues under these arrangements allocated to training is based upon fair market value of the training, performed principally by third party providers. The amount of revenues allocated to the Cardiovascular segment products is done on a residual method basis. Under this method, the total value of the arrangement is allocated first to the undelivered training element based on the fair market value, with the remainder being allocated to the Cardiovascular segment products. The amount of revenues allocated to training is recorded as deferred revenue and is recognized when the training is completed. As of the

36

Table of Contents

end of 2002, $1.4 million of products have been delivered and recorded as product sales for customers that were determined to be able to use those products, but for which training had not yet been completed. The amount of revenue deferred related to this training not yet completed was $0.1 million at the end of 2002 and $38,000 at the end of 2001. As of the end of 2000 all training related to product sales had been completed.

     We also rent certain medical devices to customers on a month-to-month or as-used basis. Rental income is based on utilization and is included in product sales as earned. Included in product sales for 2002, 2001 and 2000 are $3.8 million, $3.5 million and $2.7 million, respectively, of income earned from the rental of these medical devices.

     The majority of our products are covered by a one-year limited manufacturer’s warranty from the date of installation. Estimated contractual warranty obligations are recorded when related sales are recognized and any additional amounts are recorded when such costs are probable and can be reasonably estimated. The change in accrued warranty expense in 2002 and 2001 is summarized in the following table (in thousands):

Reserves

     We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make payments owed to us for product sales. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

     In June 2001, we approved a Restructuring Plan to consolidate all of our VAD manufacturing operations to our manufacturing facilities and headquarters in Pleasanton, California. Through December 28, 2002, we have recorded $1.6 million of restructuring charges in accordance with Emerging Issues Task Force 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity” and Staff Accounting Bulletin 100, “Restructuring and Impairment Charges.” These charges represent estimated employee severance costs and stock option acceleration charges. We completed the relocation of the Woburn, Massachusetts manufacturing operations to our Pleasanton facility in the first quarter of 2003 and in February 2003 the FDA inspected the Pleasanton facility related to this transfer. We expect to receive FDA approval in the half quarter of 2003. We do not believe there are likely to be any developments until FDA approval which would have a significant impact on our original restructuring cost estimates.

Commitments

     As of December 28, 2002, we have the following outstanding commitments:

     Leases — The Company leases manufacturing, office, research facilities, and equipment under various operating lease agreements. Future minimum lease payments as of the end of 2002 are noted below:

     Rent expense for all operating leases was $1.8 million in 2002, $1.8 million in 2001 and $0.6 million in 2000.

     Purchase Commitments — We had various firm purchase commitments totaling approximately $11 million at December 28, 2002.

37

Table of Contents

Recent Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standard, or 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 plan to adopt SFAS No. 143 at the beginning of fiscal 2003 and do not expect this statement to materially impact our financial position, results of operations or cash flows.

     In April 2002, the FASB issued SFAS 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”, is to be included in operating earnings and not presented separately as an extraordinary item. We plan to adopt SFAS No. 145 at the beginning of fiscal year 2003 and therefore, we will reclassify in the first quarter of 2003 the extraordinary loss incurred in 2002 of $0.5 million to interest and other income-net.

     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 Recognition for Certain Employee Termination Benefits and Other Costs to Exit on Activity (including Certain Costs Incurred in a Restructuring).” This standard is applicable for restructuring activities that are initiated after December 31, 2002 and may affect the timing of recognizing future restructuring costs as well as the amounts recognized when and if we engage in such activities.

     In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires a liability to be recognized at the time a company issues a guarantee for the fair value of the obligations assumed under certain guarantee agreements. Additional disclosures about guarantee agreements are also required in the interim and annual financial statements, including a roll forward of the entity’s product warranty liabilities. The disclosure provisions of FIN 45 are effective for us as of fiscal year end 2002. The provisions for initial recognition and measurement of guarantee agreements are effective on a prospective basis for guarantees that are issued or modified after December 28, 2002. We do not expect that the recognition provisions of FIN 45 will have a material impact upon our consolidated financial statements.

     In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” which amends FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements of the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years beginning after December 15, 2002. We plan to adopt the disclosure provisions of SFAS No. 148 at the beginning of fiscal 2003. We do not expect to change to use the fair value based method of accounting for stock-based financial position, results of operations or cash flows.

38

Table of Contents

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Short-Term and Long-Term Investments

     We do not use derivative financial instruments for speculative or trading purposes. However, we are exposed to market risk related to changes in interest rates. Our investment portfolio at the end of 2002 consisted of short-term and long-term corporate bonds that are classified as available-for-sale and have maturities of two years or less. The fair market value of these investments will fall if market interest rates increase. If market interest rates were to increase by 10% from levels at December 28, 2002, the fair market value of our investment portfolio would decline by an immaterial amount.

Foreign Currency Rate Fluctuations

     We conduct business in foreign countries. Our international operations consist primarily of sales and service personnel for our ventricular assist products. The employees report into our U.S. sales and marketing group and are internally reported as part of that group. All assets and liabilities of our non-U.S. operations are translated into U.S. dollars at the period-end exchange rates. The resulting translation adjustments are included in comprehensive income. The period-end translation of the non-functional currency balances (the result of foreign sales, foreign expenses, and intercompany transactions) in our wholly-owned subsidiary in the United Kingdom at the period-end exchange rate into the functional currency of our subsidiary results in foreign currency exchange gains and losses. These foreign currency exchange gains and losses are included in interest and other income-net. Net foreign currency exchange gain was approximately $0.5 million for 2002. Net foreign currency exchange loss was approximately $0.1 million in 2001. There were no such gains or losses in 2000 as Thoratec’s United Kingdom subsidiary did not become part of our operations until completion of our Merger on February 14, 2001. Currently, we do not expect to be subject to material foreign currency risk with respect to future costs or cash flows from our foreign operations. To date, we have not entered into any significant foreign currency hedging contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange, however, we are currently evaluating possible future use of such contracts and instruments.

39

Table of Contents

Item 8. Financial Statements and Supplementary Data

THORATEC CORPORATION AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

40

Table of Contents

INDEPENDENT AUDITORS’ REPORT

To the Shareholders and Board of Directors of Thoratec Corporation:

     We have audited the accompanying consolidated balance sheets of Thoratec Corporation and subsidiaries (the “Company”) as of December 28, 2002 and December 29, 2001 and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for the years then ended. The financial statements of the Company as of December 30, 2000, and for the year then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated February 5, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

     We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, such 2002 and 2001 consolidated financial statements present fairly, in all material respects, the financial position of Thoratec Corporation and subsidiaries as of December 28, 2002 and December 29, 2001 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

     As discussed in Note 1 to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

/s/ DELOITTE & TOUCHE LLP

San Francisco, California
March 7, 2003

41

Table of Contents

THE FOLLOWING REPORT IS A COPY OF THE PREVIOUSLY ISSUED REPORT FROM ARTHUR ANDERSEN LLP (ANDERSEN). ANDERSEN DID NOT PERFORM ANY PROCEDURES IN CONNECTION WITH THIS ANNUAL REPORT ON FORM 10-K. ACCORDINGLY, THIS REPORT HAS NOT BEEN REISSUED BY ANDERSEN.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors of Thoratec Corporation:

     We have audited the accompanying consolidated balance sheet of Thoratec Corporation (formerly Thermo Cardiosystems Inc., a Massachusetts corporation and 60%-owned subsidiary of Thermo Electron Corporation) and subsidiaries as of December 30, 2000, and the related consolidated statements of income, cash flows, and comprehensive income and shareholders’ investment for each of the two years in the period ended December 30, 2000. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated 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 financial position of Thoratec Corporation (formerly Thermo Cardiosystems Inc.) and subsidiaries as of December 30, 2000, and the results of their operations and their cash flows for each of the two years in the period ended December 30, 2000, in conformity with accounting principles generally accepted in the United States.

/s/ ARTHUR ANDERSEN LLP

Boston, Massachusetts
February 5, 2001

42

Table of Contents

THORATEC CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

43

Table of Contents

THORATEC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to consolidated financial statements.

44

Table of Contents

THORATEC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

See notes to consolidated financial statements.

45

Table of Contents

THORATEC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY