U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended April 4, 2009

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

For the transition period from                      to                     

THORATEC CORPORATION

California		94-2340464
(State or other jurisdiction of incorporation		(I.R.S. Employer Identification No.)
or organization)
6035 Stoneridge Drive, Pleasanton, California		94588
(Address of principal executive offices)		(Zip Code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes o No þ

As of May 2, 2009, the registrant had 56,463,601 shares of common stock outstanding.

 

 

THORATEC CORPORATION

TABLE OF CONTENTS

Part I. Financial Information			3
Item 1. Condensed Consolidated Financial Statements (unaudited)			3
Condensed Consolidated Balance Sheets as of April 4, 2009 and January 3, 2009			3
Condensed Consolidated Statements of Operations for the Three Months Ended April 4, 2009 and March 29, 2008			4
Condensed Consolidated Statements of Shareholders’ Equity for the Three Months Ended April 4, 2009 and March 29, 2008			5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 4, 2009 and March 29, 2008			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3. Quantitative and Qualitative Disclosure of Market Risk			40
Item 4. Controls and Procedures			41
Part II. Other Information			42
Item 1A. Risk Factors			42
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds			42
Item 6. Exhibits			43
Signatures			44
Exhibits
EX-10.34
EX-10.35
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Thoratec, the Thoratec logo, Thoralon, HeartMate, and HeartMate II are registered trademarks of Thoratec Corporation, and IVAD is a trademark of Thoratec Corporation.

CentriMag is a registered trademark of Levitronix LLC.

ITC, A-VOX Systems, AVOXimeter, HEMOCHRON, ProTime, Surgicutt, Tenderlett, Tenderfoot, and IRMA are registered trademarks of International Technidyne Corporation, Thoratec Corporation’s wholly-owned subsidiary.

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THORATEC CORPORATION

(unaudited)
(in thousands)

		April 4, 2009				January 3, 2009
						As adjusted (1)
ASSETS
Current assets:
Cash and cash equivalents		$	115,374			$	107,053
Restricted cash and cash equivalents			20,000				—
Short-term available-for-sale investments			109,505				141,598
Receivables, net of allowances of $1,054 and $947, respectively			59,476				55,065
Inventories			65,644				61,373
Deferred tax assets			8,397				8,397
Prepaid expenses and other assets			8,051				6,917
Total current assets			386,447				380,403
Property, plant and equipment, net			51,244				50,138
Goodwill			99,287				99,287
Purchased intangible assets, net			105,652				108,584
Long-term available-for-sale investments			29,928				29,959
Other long-term assets			16,045				15,716
Total Assets		$	688,603			$	684,087
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	14,580			$	10,563
Accrued compensation			12,639				25,550
Other accrued liabilities			15,982				12,410
Total current liabilities			43,201				48,523
Senior subordinated convertible notes			126,025				124,115
Long-term deferred tax liability			37,127				38,842
Other			7,092				6,328
Total Liabilities			213,445				217,808
Shareholders’ equity:
Common shares: no par, authorized 100,000; issued and outstanding 56,367 and 56,395 as of April 4, 2009 and January 3, 2009, respectively			—				—
Additional paid-in capital			533,832				528,657
Accumulated deficit			(52,881	)			(56,634	)
Accumulated other comprehensive income (loss):
Unrealized gain (loss) on investments			(3,433	)			(3,337	)
Cumulative translation adjustments			(2,360	)			(2,407	)
Total accumulated other comprehensive income (loss)			(5,793	)			(5,744	)
Total Shareholders’ Equity			475,158				466,279
Total Liabilities and Shareholders’ Equity		$	688,603			$	684,087

See notes to condensed consolidated financial statements.

THORATEC CORPORATION

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

		Three Months Ended
		April 4,				March 29,
		2009				2008
						As adjusted(1)
Product sales		$	89,466			$	64,427
Cost of product sales			35,439				28,590
Gross profit			54,027				35,837
Operating expenses:
Selling, general and administrative			27,455				20,636
Research and development			14,086				12,519
Amortization of purchased intangible assets			2,931				3,296
Total operating expenses			44,472				36,451
Income (loss) from operations			9,555				(614	)
Other income and (expense):
Interest expense and other			(2,866	)			(2,587	)
Interest income and other			988				2,178
Income (loss) before income taxes			7,677				(1,023	)
Income tax (expense) benefit			(2,050	)			345
Net income (loss)		$	5,627			$	(678	)
Net income (loss) per share:
Basic		$	0.10			$	(0.01	)
Diluted		$	0.10			$	(0.01	)
Shares used to compute net income (loss) per share:
Basic			56,384				54,222
Diluted			57,738				54,222

See notes to condensed consolidated financial statements.

THORATEC CORPORATION

														Accumulated
														Other				Total				Total
		Common				Additional				Accumulated				Comprehensive				Shareholders’				Comprehensive
		Shares				Paid-in Capital				Deficit				Income (Loss)				Equity				Income (loss)
		(in thousands)
BALANCE, DECEMBER 29, 2007, as previously reported			54,108			$	458,383			$	(61,577	)		$	1,223			$	398,029
Retrospective application of FSP APB 14-1, net of taxes							28,462				(12,682	)							15,780
BALANCE, DECEMBER 29, 2007, as adjusted (1)			54,108				486,845				(74,259	)			1,223				413,809
Exercise of common stock options for cash			15				147												147
Excess income tax deficiency on stock option exercises			(18	)			(180	)											(180	)
Repurchase and retirement of common shares, net			358				(534	)			(434	)							(968	)
Share-based compensation							2,760												2,760
Comprehensive income (loss):
Unrealized loss on available-for-sale investments (net of taxes of $1,835)															(2,752	)			(2,752	)			(2,752	)
Foreign currency translation adjustment															168				168				168
Net loss (1)											(678	)							(678	)			(678	)
Total comprehensive income (loss)																						$	(3,262	)
BALANCE, MARCH 29, 2008 (1)			54,463			$	489,038			$	(75,371	)		$	(1,361	)		$	412,306
BALANCE, JANUARY 3, 2009, as previously reported			56,395			$	500,195			$	(39,751	)		$	(5,744	)		$	454,700
Retrospective application of FSP APB 14-1, net of taxes							28,462				(16,883	)							11,579
BALANCE, JANUARY 3, 2009, as adjusted (1)			56,395				528,657				(56,634	)			(5,744	)			466,279
Exercise of common stock options for cash			73				1,033												1,033
Tax deduction related to employees’ and directors’ stock plans							1,119												1,119
Repurchase and retirement of common shares, net			(101	)			(1,020	)			(1,874	)							(2,894	)
Share-based compensation							4,043												4,043
Comprehensive income (loss):
Unrealized loss on available-for-sale investments (net of taxes of $64)															(96	)			(96	)			(96	)
Foreign currency translation adjustment															47				47				47
Net income											5,627								5,627				5,627
Total comprehensive income																						$	5,578
BALANCE, APRIL 4, 2009			56,367			$	533,832			$	(52,881	)		$	(5,793	)		$	475,158

See notes to condensed consolidated financial statements.

THORATEC CORPORATION

(unaudited)
(in thousands)

		Three Months Ended
		April 4,				March 29,
		2009				2008
						As adjusted (1)
Cash flows from operating activities:
Net income (loss)		$	5,627			$	(678	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			5,537				5,715
Investment premium amortization, net			691				290
Non-cash expenses, net			(47	)			289
Non-cash interest on convertible subordinated debt			2,763				2,603
Tax benefit related to stock options			1,119				—
Share-based compensation expense			4,036				2,657
Excess tax benefits from share-based compensation			(1,041	)			(28	)
Change in net deferred tax liability			(2,801	)			(1,844	)
Changes in assets and liabilities:
Receivables			(4,552	)			2,607
Inventories			(4,264	)			993
Prepaid expenses and other assets			(110	)			(806	)
Accounts payable and other liabilities			(7,103	)			(1,829	)
Accrued income taxes, net			1,501				(253	)
Net cash provided by operating activities			1,356				9,716
Cash flows from investing activities:
Purchases of available-for-sale investments			—				(42,120	)
Sales of available-for-sale investments			20,808				69,820
Maturities of available-for-sale investments			10,460				24,536
Restricted cash and equivalents			(20,000	)			—
Purchases of property, plant and equipment			(3,646	)			(1,583	)
Net cash provided by investing activities			7,622				50,653
Cash flows from financing activities:
Excess income tax deficiency on stock option exercises			—				(180	)
Excess tax benefits from share-based compensation			1,041				28
Proceeds from stock option exercises			1,033				147
Repurchase and retirement of common shares			(2,894	)			(966	)
Net cash (used in) financing activities			(820	)			(971	)
Effect of exchange rate changes on cash and cash equivalents			163				47
Net increase in cash and cash equivalents			8,321				59,445
Cash and cash equivalents at beginning of period			107,053				20,689
Cash and cash equivalents at end of period		$	115,374			$	80,134
Supplemental disclosure of cash flow information:
Cash paid for taxes		$	2,180			$	1,933
Supplemental disclosure of non-cash investing and financing activities:
Transfers of equipment from inventory		$	41			$	763

See notes to condensed consolidated financial statements.

THORATEC CORPORATION

(unaudited)

1. Operations and Significant Accounting Policies

Basis of Presentation

     The interim condensed consolidated financial statements of Thoratec Corporation (“Thoratec” or “the Company”) have been prepared and presented in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission (“SEC”), without audit, and reflect all adjustments necessary (consisting only of normal recurring adjustments) to present fairly the Company’s financial position, results of operations and cash flows. Certain information and footnote disclosures normally included in the Company’s annual financial statements, prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted. The accompanying financial statements should be read in conjunction with the Company’s fiscal 2008 consolidated financial statements, and the accompanying notes thereto, filed with the SEC in the Company’s Annual Report on Form 10-K (the “2008 Annual Report”). The operating results for any interim period are not necessarily indicative of the results that may be expected for any future period. The financial statements of the prior periods presented in this Quarterly Report on Form 10-Q have been adjusted for the retrospective adoption of FSP APB 14-1 on January 4, 2009. See Note 13, “Long-Term Debt” to these condensed consolidated financial statements for further discussion.

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

Revenue Recognition and Product Warranty

     The Company recognizes revenue from product sales of its Cardiovascular and ITC segments 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. 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.

     Cardiovascular segment sales of certain 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. Training is not essential to the functionality of the products. Revenue under these arrangements is allocated to training at fair value, which is typically performed on behalf of the Company by third party providers. The balance of the revenue from the multiple arrangement is recorded to product sales.

     The majority of the Company’s products are covered by up to a two-year limited manufacturer’s warranty. 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 and are included in “Cost of product sales.” The change in accrued warranty expense is summarized in the following table:

		Balance				Cost of				Accruals of				Balance
		Beginning				Warranty				Product				End
		of Period				Claims				Warranties				of Period
		(in thousands)
Three months ended April 4, 2009		$	1,071			$	(882	)		$	1,072			$	1,261
Three months ended March 29, 2008		$	1,006			$	(589	)		$	549			$	966

2. Business Combination

     On February 12, 2009, the Company entered into a definitive merger agreement with HeartWare International Inc., a company listed on the NASDAQ Global Market and the Australian stock exchange under which the Company will acquire HeartWare. Under the merger agreement, at the effective time of the merger, each share of HeartWare common stock, including shares of common stock represented by HeartWare Chess Depositary Interests (“HeartWare CDIs”), will be converted into the right to receive $14.30 in cash, without interest, and 0.6054 of a share of Thoratec common stock, subject to certain adjustments provided for in the merger agreement. Based on the number of shares of HeartWare common stock and shares issuable upon exercise of stock options and other stock-based awards outstanding as of February 12, 2009, and a price of $26.25 per Thoratec common share (the volume weighted average closing price of Thoratec common shares on The NASDAQ Stock Market for the four trading days preceding the execution of the merger agreement), HeartWare stockholders would receive Thoratec common shares having a market value of approximately $141.0 million in the merger and an aggregate of approximately $141.0 million in cash, reflecting a price of $30.19 per share of HeartWare common stock or $0.86 for each HeartWare CDI (based upon the assumed US/AUS exchange rate of 1.5265) provided in the merger agreement.

     The HeartWare board of directors and the Thoratec board of directors have approved the merger agreement. The completion of the merger depends on a number of conditions being satisfied or, where legally permissible, waived. These conditions include, among others, receipt of the requisite approval of HeartWare stockholders, the expiration or termination of the required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”) and the absence of legal impediments to the consummation of the merger. HeartWare and Thoratec have completed the initial filing of applications and notifications to obtain the expiration or termination of the waiting period under the HSR Act. On March 26, 2009, each of HeartWare and Thoratec received a request for additional information, or a second request, from the Federal Trade Commission, and each of HeartWare and Thoratec are in the process of responding to the information request. The Company cannot be certain when, or if, the conditions to the mergers will be satisfied or waived, or that the mergers will be completed.

3. Accounting Standards

Recently Issued Accounting Standards

     In April 2009, the FASB issued FSP FAS 115-2 and FSP FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairment, which is intended to provide greater clarity to investors about the credit and non-credit component of an other-than-temporary impairment event and to more effectively communicate when an other-than-temporary impairment event has occurred. FSP FAS 115-2 and FSP FAS 124-2 applies to fixed maturity securities only and requires separate display of losses related to credit deterioration and losses related to other market factors. When an entity does not intend to sell the security and it is more-likely-than-not that an entity will not have to sell the security before recovery of its cost basis, if there is an impairment, it must recognize the credit loss component of the impairment in earnings and the remaining portion in other comprehensive income. In addition, upon adoption of FSP FAS 115-2 and FSP FAS 124-2, an entity will be required to record a cumulative-effect adjustment as of the beginning of the period of adoption to reclassify the noncredit component of a previously recognized other-than-temporary impairment from retained earnings to accumulated other comprehensive income. FSP FAS 115-2 and FSP FAS 124-2 will be effective for the Company in the second quarter ending July 4, 2009. The Company is currently evaluating the impact of adopting FSP FAS 115-2 and FSP FAS 124-2.

     In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which provides additional authoritative guidance to assist both issuers and users of financial statements in determining whether a market is active or inactive, and whether a transaction is distressed. FSP FAS 157-4 will be effective for the Company for the second quarter ending July 4, 2009. The Company is currently evaluating the impact of adopting FSP FAS 157-4.

     In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Bulletin (“APB”) No. 28-1, Interim Disclosures about Fair Value of Financial Instruments, which requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. FSP FAS 107-1 and APB No. 28-1 will be effective for the Company for the second quarter ending July 4, 2009. The Company is currently evaluating the disclosure requirements of adopting FSP FAS 107-1 and APB No. 28-1.

     In May 2008, the FASB issued FSP ABP 14-1 that alters the accounting treatment for convertible debt instruments that allow for either mandatory or optional cash settlements upon conversion. FSP APB 14-1 will impact the accounting associated with the Company’s senior subordinated convertible notes recorded at a book value of $143.8 million. FSP APB 14-1 requires the issuer to recognize additional (non-cash) interest expense based on the market rate for similar debt instruments without the conversion feature. On January 4, 2009 the Company adopted FSP APB 14-1. See Note 13 “Long-Term Debt” for the accounting treatment associated with the adoption of this standard.

     In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, which is intended to help investors better understand how derivative instruments and hedging activities affect an entity’s financial position, financial performance and cash flows through enhanced disclosure requirements. The main requirement is to disclose the objectives and strategies for using derivative instruments by their underlying risk as well as a tabular format of the fair values of the derivative instruments and their gains and losses. On January 4, 2009, the Company adopted SFAS No. 161. See Note 8, “Foreign Exchange Instruments” for the disclosure associated with the adoption of this standard.

       In February 2008, the FASB issued SFAS No. 157-2, Effective Date of FASB Statement No. 157. With the issuance of SFAS No. 157-2, the FASB agreed to: (a) defer the effective date of SFAS No. 157, Fair Value Measurements, for one year for certain nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), and (b) remove certain leasing transactions from the scope of SFAS No. 157. The deferral is intended to provide the FASB time to consider the effect of certain implementation issues that have arisen from the application of SFAS No. 157 to the assets and liabilities. On January 4, 2009 the Company adopted SFAS No. 157-2 related to fair value of nonfinancial assets and this standard did not have a material impact on the Company’s condensed consolidated financial statements. See Note 7 “Fair Value Measurements” for further details.

     In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, which requires the acquiring entity in a business combination to record all assets acquired and liabilities assumed at their respective acquisition-date fair values, changes the recognition of assets acquired and liabilities assumed arising from contingencies, changes the recognition and measurement of contingent consideration, and requires the expensing of acquisition-related costs as incurred. In April 2009, the FASB issued FSP SFAS No. 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, which amends the guidance in SFAS No. 141(R) to require contingent assets acquired and liabilities assumed in a business combination to be recognized at fair value on the acquisition date if fair value can be reasonably estimated during the measurement period.  If fair value cannot be reasonably estimated during the measurement period, the contingent asset or liability would be recognized in accordance with SFAS No. 5, Accounting for Contingencies, and FASB Interpretation (FIN) No. 14, Reasonable Estimation of the Amount of a Loss. The Company adopted the provisions of SFAS No. 141(R) and SFAS No. 141(R)-1 for business combinations commencing in 2009, such as the proposed acquisition of HeartWare, which is expected to close in the second half of 2009. See Note 2, “Business Combination” for further details.

4. Cash and cash equivalents

     Cash and cash equivalents are defined as short-term, highly liquid investments with original maturities of 90 days or less at the date of purchase.

5. Restricted cash and cash equivalents

     On February 12, 2009, the Company entered into a definitive merger agreement with HeartWare, a company listed on the NASDAQ Global Market and the Australian stock exchange under which the Company will acquire HeartWare. See Note 2 “Business Combination” for further details.

     Pursuant to the loan agreement entered into concurrently with the execution and delivery of the merger agreement, the Company deposited $20.0 million into an escrow account on February 13, 2009. Beginning on May 1, 2009, HeartWare may borrow up to an aggregate of $12.0 million and beginning on July 31, 2009, HeartWare may borrow up to an aggregate of $20.0 million, under certain conditions provided in the loan agreement. In the event that all of the conditions to closing the merger have been satisfied (other than those conditions that, by their terms, are not capable of being satisfied until the closing, and the condition that relates to the expiration or termination of the applicable waiting period under the HSR Act) and the Company exercises an option under the merger agreement to extend the outside date for the completion of the merger until January 31, 2010, HeartWare may borrow up to an additional $8.0 million, which the Company must deposit into the escrow account at the time it exercises its extension option. The maximum aggregate amount that HeartWare may borrow under the loan agreement shall not exceed $28.0 million. The loan to HeartWare will bear interest at a rate per annum equal to 10%.

6. Investments in Available-for-Sale Securities

     The Company’s investment portfolio is comprised of short-term and long-term investments. Investments classified as short-term available-for-sale consist primarily of municipal bonds, and U.S. government obligations with callable bond features. Investments classified as long-term available-for-sale consist of auction rate securities, whose underlying assets are student loans.

     The Company’s investments in available-for-sale securities are recorded at estimated fair value on its financial statements, and the temporary differences between cost and estimated fair value are presented as a separate component of accumulated other comprehensive income.

     As of April 4, 2009, the Company had unrealized gains from the Company’s investment in municipal bonds of $1.4 million and unrealized losses from its auction rate securities of $7.2 million.

     The aggregate market value, cost basis and gross unrealized gains and losses of available-for-sale investments as of April 4, 2009 and as of January 3, 2009 by major security type are as follows:

						Gross
		Amortized				unrealized				Fair
		cost				gains (losses)				value
		(in thousands)
April 4, 2009:
Short-term investments:
Municipal bonds		$	108,072			$	1,433			$	109,505
Long-term investments:
Auction rate securities		$	37,100			$	(7,172	)		$	29,928
January 3, 2009:
Short-term investments:
Municipal bonds		$	139,931			$	1,667			$	141,598
Long-term investments:
Auction rate securities		$	37,200			$	(7,241	)		$	29,959

     As of April 4, 2009 the Company owned approximately $37.1 million of auction rate securities. The assets underlying these investments are student loans which are rated Aaa/A or better, and backed by the U.S. government under the Federal Family Education Loan Program or private insurers. Historically, these securities have provided liquidity through a Dutch auction process that resets the applicable interest rate periodically every seven to 365 days. Beginning in February of 2008, these auctions began to fail. The principal amount of these auction rate securities will not be accessible until future auctions for these securities are successful, a secondary market is established, or these securities are called for redemption. Therefore, the Company’s auction rate securities are classified as long-term and are valued at $29.9 million using significant unobservable inputs.

     As a result of these auction failures, these auction rate securities do not have a readily determinable market value. To estimate their fair values at April 4, 2009, the Company’s management used a discounted cash flow model based on estimated interest rates, the present value of future principal and interest payments are discounted at rates considered to reflect current market conditions, and the credit quality of the underlying securities. Specifically, the Company’s management estimated the future cash flows over a five year period, and applied a credit default rate to reflect the risk in the marketplace for these investments that has arisen due to the lack of an active market. As a result of feedback from outside consultants, and government activities including recent settlement agreements, management’s assumption on the expected recovery was modified to five years beginning at January 3, 2009 and this assumption continues to be applicable at April 4, 2009. Because of the inherent subjectivity in valuing these securities, the Company’s management also considered independent valuations obtained for each of the Company’s auction rate securities in estimating fair values.

     The Company’s management reviewed impairments associated with its marketable securities to determine the classification of the impairment as “temporary” or “other-than-temporary” in accordance with FSP FAS 115-1 and FSP FAS 124-1, The Meaning of Other-Than-Temporary-Impairment and Its Application to Certain Investments. A temporary impairment charge results in an unrealized loss being recorded in other comprehensive income, a component of shareholders’ equity. Such an unrealized loss does not reduce net income for the applicable accounting period because the loss is not viewed as other-than-temporary. As of April 4, 2009, the Company’s management believed that all impairments related to auction rate securities investments are temporary. The factors evaluated to differentiate between temporary and other-than-temporary include the Company’s projected future cash flows, credit ratings, and assessment of the credit quality of the underlying collateral. The recent auction failures may limit the Company’s future ability to liquidate these investments. The Company intends and has the ability to hold these auction rate securities until the market recovers to par or until maturity. If the issuers of the auction rate securities are unable to successfully complete future auctions and their credit ratings deteriorate, the Company may in the future be required to record an impairment charge on these investments. It could conceivably take until the final maturity of the underlying notes (up to 30 years) to realize the investments’ recorded value.

7. Fair Value Measurements

     The Company adopted SFAS No. 157 on December 30, 2007 which requires the measurement of fair value for certain of the Company’s financial assets and financial liabilities on a recurring basis. Additionally, on January 4, 2009, in accordance with the provisions SFAS No. 157-2, the Company now applies SFAS No. 157 to financial and nonfinancial assets and liabilities. SFAS No. 157-2 delayed the effective date of SFAS No. 157 for nonfinancial assets and liabilities, except for certain items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company valued its financial and nonfinancial assets and liabilities based on the observability inputs used in the valuation of such assets and liabilities, using the following fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial and nonfinancial assets and liabilities carried or disclosed at fair value were classified and disclosed in one of the following three categories:

Level 1:		Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2:		Directly or indirectly observable market based inputs used in models or other valuation methodologies.

Level 3:		Unobservable inputs that are not corroborated by market data which require significant management judgment or estimation.

     The following table represents the fair value hierarchy for the Company’s financial assets and financial liabilities measured at fair value on a recurring basis:

		April 4, 2009
		Assets and												Significant
		liabilities								Quoted prices in				other				Significant
		at carrying				Total				active markets for				observable				unobservable
		value				fair value				identical assets				inputs				inputs
										(Level 1)				(Level 2)				(Level 3)
		(in thousands)
Assets
Short-term investments — municipal bonds		$	109,505			$	109,505			$	—			$	109,505			$	—
Long-term investments — auction rate securities			29,928				29,928				—				—				29,928
Convertible debenture with Levitronix LLC			5,792				4,200				—				—				4,200
Liabilities
Mark to market on foreign exchange instruments (Note 8)			66				66				—				66				—
Make-whole provision (Note 13)			71				71				—				—				71
Senior subordinated convertible notes (fair value for purposes of disclosure in Note 13)			126,025				205,612				—				205,612				—

		January 3, 2009
		Assets and												Significant
		liabilities at								Quoted prices in				other				Significant
		carrying				Total				active markets for				observable				unobservable
		value				fair value				identical assets				inputs				inputs
										(Level 1)				(Level 2)				(Level 3)
		(in thousands)
Assets
Short term investments — municipal bonds		$	141,598			$	141,598			$	—			$	141,598			$	—
Long term investments — auction rate securities			29,959				29,959				—				—				29,959
Convertible debenture with Levitronix LLC			5,711				4,200				—				—				4,200
Liabilities
Mark to market on foreign exchange instruments (Note 8)			73				73				—				73				—
Make-whole provision (Note 13)			46				46				—				—				46
Senior subordinated convertible notes (fair value for purposes of disclosure in Note 13)			124,115				215,880				—				215,880				—

     Assets measured at fair value on a recurring basis using significant unobservable Level 3 inputs consist of securities with an auction reset feature (“auction rate securities”) whose underlying assets are student loans issued by various tax-exempt state agencies, most of which are supported by federal government guarantees and some of which are supported by private insurers. In addition, the Company is using significant unobservable Level 3 inputs for its disclosure of the fair value of its convertible debenture with Levitronix LLC (“Levitronix”) disclosed in Note 12 “Other Assets.”

     The following table provides a reconciliation of the beginning and ending balances for the assets and liabilities measured at fair value using significant unobservable inputs (Level 3):

		Fair Value Measurement Using Significant
		Unobservable Inputs (Level 3)
		Auction
		Rate				Other Long				Other Long
		Securities				Term Assets				Term Liabilities
		(in thousands)
Balance at January 3, 2009		$	29,959			$	4,200			$	46
Settlement at par			(100	)
Unrealized holding loss, included in interest income and other			—				—				25
Unrealized holding gain, included in other comprehensive income			69				—				—
Balance at April 4, 2009		$	29,928			$	4,200			$	71

     The Company’s management will continue to monitor the market for auction rate securities and consider its impact (if any) on the fair value of the Company’s investments. If the current market conditions deteriorate further, or the anticipated recovery in fair values does not occur, the Company may be required to record additional unrealized losses in other comprehensive income or other-than-temporary impairment charges to the condensed consolidated statements of operations in future periods.

8. Foreign Exchange Instruments

     The Company utilizes foreign currency forward exchange contracts and options to mitigate against future movements in foreign exchange rates that affect certain existing and forecasted foreign currency denominated sales and purchase transactions (primarily assets and liabilities on its U.K. subsidiary’s consolidated balance sheet that are not denominated in U.K. pounds). The Company does not use derivative financial instruments for speculative or trading purposes. The Company routinely hedges its exposures to certain foreign currencies with various financial institutions in an effort to minimize the impact of certain currency exchange rate fluctuations. If a financial counter-party to any of the Company’s hedging arrangement experiences financial difficulties or is otherwise unable to honor the terms of the foreign currency forward contract, the Company may experience material financial losses.

     On January 4, 2009, the Company adopted SFAS No. 161, which requires the disclosure about the Company’s objective of using derivative instruments for its forward foreign currency contracts, which qualify as derivatives under SFAS No. 133, Accounting for Derivative Instrument and Hedging Activities, and do not qualify for hedge accounting. The impacts of the outstanding foreign currency contracts, with a maximum maturity of three months were as follows:

		Notional Amount
		Three Months Ended
		April 4,				March 29,
		2009				2008
		(in thousands)
Purchase		$	9,231			$	6,510
Sales			11,342				12,587

     As of April 4, 2009, the Company had forward contracts to sell euros with a notional value of €8.6 million and to purchase U.K. pounds with a notional value of £6.4 million, and as of March 29, 2008, the Company had forward contracts to sell euros with a notional value of €8.2 million and to purchase U.K. pounds with a notional value of £3.3 million. As of April 4, 2009, the Company’s forward contracts had an average exchange rate of one U.S. dollar to 0.7539 euros and one U.S. dollar to 0.6933 U.K. pounds. The forward contracts are valued based on exchange rates derived from an independent source of market participant assumptions and compiled from the best information available. As of April 4, 2009, the estimated fair of value of these foreign currency contracts were $0.1 million, recorded in “Prepaid expenses and other assets.”

     The Company’s realized change in fair value of the forward currency contracts is included in “Interest income and other” and offsets the foreign currency exchange gains and losses in the condensed consolidated statements of operations as follows:

		Three Months Ended
		April 4,				March 29,
		2009				2008
		(in thousands)
Foreign currency exchange gain (loss) on foreign currency contracts		$	448			$	(1,040	)
Foreign currency exchange (loss) gain on foreign translation adjustments			(311	)			1,108

9. Inventories

     Inventories consisted of the following:

		April 4,				January 3,
		2009				2009
		(in thousands)
Finished goods		$	22,368			$	24,373
Work in process			11,022				9,174
Raw materials			32,254				27,826
Total		$	65,644			$	61,373

10. Property, Plant and Equipment, net

     Property, plant and equipment, net, consisted of the following:

		April 4,				January 3,
		2009				2009
		(in thousands)
Land, building and improvements		$	16,135			$	16,135
Equipment and capitalized software			69,126				68,029
Furniture and leasehold improvements			29,381				27,424
Total			114,642				111,588
Less accumulated depreciation			(63,398	)			(61,450	)
Total		$	51,244			$	50,138

     Depreciation expense for the three months ended April 4, 2009 was $2.6 million and for the three months ended March 29, 2008 was $2.4 million.

11. Goodwill and Purchased Intangible Assets

     The carrying amount of goodwill was $99.3 million as of April 4, 2009 and as of January 3, 2009. The components of goodwill at April 4, 2009 were $95.0 million attributable to the Cardiovascular division and $4.3 million to the ITC acquisition of the outstanding common shares of privately held A-VOX Systems, Inc. (“Avox”).

     The changes in the carrying amount of goodwill were as follows:

		April 4, 2009				January 3, 2009
		(in thousands)
Balance at the beginning of the fiscal period		$	99,287			$	98,368
Adjustment for the acquisition related to the Cardiovascular division			—				919
Balance as of the end of the fiscal period		$	99,287			$	99,287

     In February 2001, the Company merged with Thermo Cardiosystems, Inc. (“TCA”). Prior to the merger with TCA (the “Merger”), TCA was a subsidiary of Thermo Electron Corporation (“TCI”). The components of identifiable intangible assets related to the Merger include: patents and trademarks, core technology (Thoralon, the Company’s proprietary bio-material), and developed technology (patent technology, other than core technology, acquired in the Merger). The components of intangible assets related to the October 2006 Avox acquisition includes: patents and trademarks, developed technology and customer and distributor relationships and other. The combined components are included in purchased intangibles on the condensed consolidated balance sheets as follows:

		April 4, 2009
		Gross								Net
		Carrying				Accumulated				Carrying
		Amount				Amortization				Amount
		(in thousands)
Patents and trademarks		$	38,515			$	(29,369	)		$	9,146
Core technology			37,485				(14,258	)			23,227
Developed technology			125,742				(52,935	)			72,807
Customer and distributor relationships and other			897				(425	)			472
Total purchased intangible assets		$	202,639			$	(96,987	)		$	105,652

		January 3, 2009
		Gross								Net
		Carrying				Accumulated				Carrying
		Amount				Amortization				Amount
		(in thousands)
Patents and trademarks		$	38,515			$	(28,803	)		$	9,712
Core technology			37,485				(13,765	)			23,720
Developed technology			125,742				(51,098	)			74,644
Customer and distributor relationships and other			897				(389	)			508
Total purchased intangible assets		$	202,639			$	(94,055	)		$	108,584

     Amortization expense related to purchased intangible assets was $2.9 million and $3.3 million for the three months ended April 4, 2009 and March 29, 2008, respectively. The Company’s amortization expense is expected to be approximately $10.2 million in 2009, declining to $8.7 million by 2013. This decline in amortization expense is due to certain intangibles being fully amortized during 2009. Patents and trademarks have useful lives ranging from one to fifteen years, core and developed technology assets have useful lives ranging from two to thirteen years and customer and distributor relationships and other have useful lives ranging one to six years.

12. Other Assets

     On August 23, 2006, the Company purchased a $5.0 million convertible debenture from Levitronix, a company with which it has a distribution arrangement to sell Levitronix products. The convertible debenture is a long-term note receivable with an annual interest rate of 5.7%, to be accrued monthly and at the option of Levitronix, paid in cash or in-kind semi-annually on February 23 and August 23 until its maturity on August 23, 2013. The Company may convert the debenture at any time at its option into membership interests of Levitronix at a conversion price of $4.2857, which may be adjusted as a result of certain corporate events. This conversion feature is not an embedded derivative under SFAS No. 133 because the membership interests of the issuer are not readily convertible to cash. If the Company had converted the debenture as of April 4, 2009, its ownership in Levitronix would have been less than 5%.

     As of April 4, 2009, the convertible debenture of $5.0 million plus accrued interest of $0.8 million was included in “Other long-term assets” on the Company’s condensed consolidated balance sheets. The fair value of the convertible debenture, based on a discounted cash flows valuation approach, was $4.2 million.

13. Long-Term Debt

     In 2004, the Company completed the sale of $143.8 million initial principal amount of senior subordinated convertible notes due in 2034. The convertible notes were sold to Qualified Institutional Buyers pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended, provided by Rule 144A thereunder. A portion of the proceeds were used to repurchase 4.2 million shares of the Company’s outstanding common stock for $60 million. The balance of the proceeds has been and will be used for general corporate purposes, which may include additional stock repurchases, strategic investments or acquisitions. The principal amount of the convertible notes at maturity is $247.4 million offset by the original issue discount of $103.7 million and net debt issuance costs of $4.3 million, equaling net proceeds of $139.4 million.

     On January 4, 2009, the Company adopted FSP APB 14-1, which applies to certain convertible debt instruments that may be settled in cash or other assets, or partially in cash, upon conversion. The senior subordinated convertible notes fall within the scope of FSP APB 14-1 because their terms include partial cash settlement. Pursuant to FSP APB 14-1, the Company is required to account for the liability and equity components of the senior subordinated convertible notes separately in a manner that reflects the Company’s nonconvertible debt borrowing rate when interest expense is subsequently recognized. FSP APB 14-1 requires retrospective application as of May 16, 2004. Accordingly, the accompanying prior period condensed consolidated financial statements have been adjusted to reflect the adoption of FSP APB 14-1. The Company estimated the fair value of the senior subordinated convertible notes without the conversion feature as of the date of issuance (“liability component”). The estimated fair value of the liability component was approximately $95.1 million and was determined using a discounted cash flow approach. Key inputs used to estimate the fair value of the liability component included the following:

	•		The Company’s estimated non-convertible borrowing rate as of May 16, 2004 — the date the senior subordinated convertible notes were issued;
	•		The amount and timing of cash flows; and
	•		The expected life.

     The excess of the proceeds received over the estimated fair value of the liability component totaling $48.5 million was allocated to the conversion feature (“equity component”) and a corresponding offset was recognized as a discount to reduce the net carrying value of the senior subordinated convertible notes. The discount is being amortized to interest expense over a seven-year period ending May 16, 2011 (the expected life of the liability component) using the effective interest method. Additionally, FSP APB 14-1 requires transactions costs to be allocated on the same percentage as the liability and equity components. The adoption of FSP APB 14-1 will result in a portion of the deferred debt issuance costs allocated to the liability component to be amortized using the effective interest method until May 16, 2011, and the equity component to be included in additional paid-in capital. The deferred debt issuance costs are amortized using the effective interest method until May 16, 2011 at which point the Company may redeem the debt.

     The adoption of FSP APB 14-1 increased interest expense associated with the Company’s senior subordinated convertible notes by adding a non-cash component to amortize a debt discount calculated based on the difference between the cash coupon rate (2.375% per year) of the senior subordinated convertible notes and the effective interest rate on debt borrowing (9% per year). The impact of the adoption of FSP ABP 14-1 on the results of operations for the three months ended April 4, 2009 and March 29, 2008 consisted of the following:

		Three Months Ended April 4, 2009
						Incremental impact
		Excluding impact of				of adoption of
		FSP APB 14-1				FSP APB 14-1				As reported
		(in thousands, except per share amounts)
Net income (loss) before interest and amortization expense (net of tax)		$	7,361							$	7,361
Interest and amortization expense (net of tax):
Interest expense			(853	)		$	(1,910	)			(2,763	)
Amortization of debt issuance costs			(155	)			52				(103	)
Income tax benefit			398				734				1,132
Impact on net income			(610	)		$	(1,124	)			(1,734	)
Net income		$	6,751							$	5,627
Net income per share:
Basic and diluted		$	0.11							$	0.10

		Three Months Ended March 29, 2008
						Incremental impact
		Excluding impact				of adoption of
		of FSP APB 14-1				FSP APB 14-1				As adjusted
		(in thousands, except per share amounts)
Net income (loss) before interest and amortization expense (net of tax)		$	959							$	959
Interest and amortization expense (net of tax):
Interest expense			(853	)		$	(1,750	)			(2,603	)
Amortization of debt issuance costs			(155	)			52				(103	)
Income tax benefit			398				671				1,069
Impact on net income (loss)			(610	)		$	(1,027	)			(1,637	)
Net income (loss)		$	349							$	(678	)
Net income (loss) per share:
Basic and diluted		$	0.01							$	(0.01	)

     The impact of the adoption of FSP ABP 14-1 on the opening balance sheets consisted of the following:

		Net Increase (Decrease)
														Additional
		Long-term				Debt issuance				Deferred tax				paid-in
		debt				costs				liability				capital				Deficit
		(in thousands)
Allocation of long-term debt proceeds and issuance costs to equity component on issuance date		$	(48,508	)		$	(1,462	)		$	18,584			$	28,462			$	—
Cumulative retrospective impact from amortization of discount on liability component and debt issuance costs			21,718				754				(8,282	)			—				12,682
Cumulative retrospective impact as of December 29, 2007			(26,790	)			(708	)			10,302				28,462				12,682
Retrospective impact from amortization of discount on liability component and debt issuance costs during the period			7,155				209				(2,745	)			—				4,201
Cumulative retrospective impact as of January 3, 2009		$	(19,635	)		$	(499	)		$	7,557			$	28,462			$	16,883

														Additional
		Long-term				Debt issuance				Deferred tax				paid-in
		debt				costs				liability				capital				Deficit
		(in thousands)
January 3, 2009, balance as previously reported		$	143,750			$	1,475			$	31,285			$	500,195			$	39,751
Cumulative retrospective impact as of January 3, 2009			(19,635	)			(499	)			7,557				28,462				16,883
January 3, 2009, as adjusted		$	124,115			$	976			$	38,842			$	528,657			$	56,634

     As of April 4, 2009 and January 3, 2009, long-term debt and equity component (recorded in additional paid-in-capital, net of income tax benefit) associated with FSP APB 14-1 consisted of the following:

		April 4, 2009				January 3, 2009
		(in thousands)
Long-term debt
Principal amount		$	143,750			$	143,750
Unamortized discount			(17,725	)			(19,635	)
Net carrying amount		$	126,025			$	124,115
Equity component, net of income tax benefit		$	28,462			$	28,462

     The senior subordinated convertible notes were issued at an issue price of $580.98 per note, which is 58.098% of the principal amount at maturity of the notes. The senior subordinated convertible notes bear interest at a rate of 1.3798% per year on the principal amount at maturity, payable semi-annually in arrears in cash on May 16 and November 16 of each year, from November 16, 2004 until May 16, 2011. Beginning on May 16, 2011, the original issue discount will accrue daily at a rate of 2.375% per year on a semi-annual bond equivalent basis and, on the maturity date, a holder will receive $1,000 per note. As a result, the aggregate principal amount of the notes at maturity will be $247.4 million.

     Holders of the senior subordinated convertible notes may convert their convertible notes into shares of the Company’s common stock at a conversion rate of 29.4652 shares per $1,000 principal amount of senior subordinated convertible notes, which represents a conversion price of $19.72 per share, subject to adjustments upon the occurrence of certain events as set forth in the indenture. Holders have been and are able to convert their convertible notes at any point after the close of business on September 30, 2004 if, as of the last day of the preceding calendar quarter, the closing price of the Company’s common stock for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of such preceding calendar quarter is more than 120% of the accreted conversion price per share of its common stock. Commencing October 1, 2008, this market price conversion feature was satisfied, such that holders of the senior subordinated convertible notes may convert their notes through the final maturity date of the notes into shares of the Company’s common stock at a conversion rate of 29.462 shares per $1,000 principal amount of senior subordinated convertible notes, subject to adjustments as provided in the indenture. If holders elect conversion, the Company may, at its option, deliver shares of common stock, pay a holder in cash, or deliver a combination of shares and cash, as determined pursuant to the terms of the notes. As of April 4, 2009, no notes had been converted or called.

     Holders may require the Company to repurchase all or a portion of their senior subordinated convertible notes on each of May 16, 2011, 2014, 2019, 2024 and 2029 at a repurchase price equal to 100% of the issue price, plus accrued original issue discount, if any. In addition, if the Company experiences a change in control or a termination of trading of its common stock each holder may require the Company to purchase all or a portion of such holder’s notes at the same price, plus, in certain circumstances, to pay a make-whole premium. This premium is considered an embedded derivative under SFAS No. 133 and has been bifurcated from the senior subordinated convertible notes and recorded at its estimated fair value, $70,000 at April 4, 2009. There are significant variables and assumptions used in valuing the make-whole provision including, but not limited to, the Company’s stock price, volatility of the Company’s stock, the probability of the Company being acquired and the probability of the type of consideration used by a potential acquirer.

     The Company may redeem either in whole or in part, any of the senior subordinated convertible notes at any time beginning May 16, 2011, by giving the holders at least 30 days notice, at a redemption price equal to the sum of the issue price and the accrued original issue discount. If the holders converted the senior subordinated convertible notes into shares of the Company’s stock as of April 4, 2009, the if-converted value would be $199.5 million, based on the Company’s stock price of $27.15 per share on April 3, 2009, which amount is greater than the original value $143.8 million by $55.7 million. This if-converted value is $47.9 million less than the $247.4 million face amount at maturity in 2034.

     The senior subordinated convertible notes are subordinated to all of the Company’s senior indebtedness and structurally subordinated to all indebtedness of its subsidiaries. Therefore, in the event of a bankruptcy, liquidation or dissolution of the Company or one or more of its subsidiaries and acceleration of or payment default on its senior indebtedness, holders of the convertible notes will not receive any payment until holders of any senior indebtedness the Company may have outstanding have been paid in full.

     The aggregate fair value of the senior subordinated convertible notes at April 4, 2009 was $205.6 million.

14. Share-Based Compensation

     Share-based compensation expense is measured based on the grant-date fair value of the share-based awards. The Company recognizes share-based compensation expense for the portion of the award that will ultimately be expected to vest over the requisite service period for those awards with graded vesting and service conditions. The Company develops an estimate of the number of share-based awards which will ultimately vest, primarily based on historical experience. The estimated forfeiture rate is re-assessed periodically throughout the requisite service period. Such estimates are revised if they differ materially from actual forfeitures. As required, the forfeiture estimates will be adjusted to reflect actual forfeitures when an award vests.

     Share-based compensation included in the condensed consolidated statements of operations consists of the following:

		Three Months Ended
		April 4,				March 29,
		2009				2008
		(in thousands)
Cost of Goods Sold		$	511			$	442
Selling, general and administrative			2,406				1,674
Research and development			1,119				747
Total share based compensation expense before taxes			4,036				2,863
Tax benefit for share-based compensation expense			1,122				632
Total share-based compensation (net of taxes)		$	2,914			$	2,231

     For the three months ended April 4, 2009 and March 29, 2008, share-based compensation expense of $0.4 million and $0.6 million, respectively, was capitalized to inventory.

     The Company receives a tax deduction for certain stock option exercises during the period the options are exercised, generally for the excess of the fair market value of the options at the date of exercise over the exercise prices of the options. Prior to the adoption of SFAS No. 123(R) Share-Based Payment, the Company reported all tax benefits resulting from the exercise of stock options as operating cash flows in its condensed consolidated statements of cash flows. In accordance with SFAS No. 123(R), beginning in 2006, the Company’s condensed consolidated statements of cash flows presentation reports the excess tax benefits from the exercise of stock options as financing cash flows of $1.0 million and $28,000 for the three months ended April 4, 2009 and March 29, 2008, respectively.

     Cash proceeds from the exercise of stock options were $1.0 million and cash proceeds from the Company’s employee stock purchase plan were none for the three months ended April 4, 2009. Cash proceeds from the exercise of stock options were $0.1 million and cash proceeds from the Company’s employee stock purchase plan were none for the three months ended March 29, 2008. Additionally, for the three months ended April 4, 2009, the Company purchased $2.9 million of restricted stock for payment of income tax withholding due upon vesting. For the three months ended March 29, 2008, the Company purchased $1.0 million of restricted stock for payment of income tax withholding due upon vesting.

Equity Plan

     In April 2006, the Board of Directors approved the 2006 Incentive Stock Plan (“2006 Plan”), in May 2006 the 2006 Plan was amended by the Board of Directors and such amendment was approved by the Company’s shareholders and in May 2008 the 2006 Plan was amended by the Board of Directors and such amendment was approved by the Company’s shareholders. The 2006 Plan allows the Company to grant to employees and directors of, and consultants to, the Company up to a total of 5.4 million shares of stock awards. Each share issued from and after May 20, 2008 as restricted stock bonuses, restricted stock units, phantom stock units, performance share bonuses, or performance share units reduces the number of shares available for issuance under the 2006 Plan by one and seventy-four hundredths (1.74) shares, and each share issued as stock options, restricted stock purchases or stock appreciation rights reduces the shares available for issuance under the 2006 Plan on a share-for-share basis. During the three months ended April 4, 2009, approximately 326,000 options were granted under the 2006 Plan at an exercise price equal to the fair market value on the date of grant, and approximately 407,000 shares of restricted stock and restricted stock units were granted under the 2006 Plan. As of April 4, 2009, 2.5 million shares remained available for grant under the 2006 Plan.

Stock Options

     Upon approval in May 2006, the 2006 Plan replaced the Company’s previous common stock option plans and equity incentive plans. At April 4, 2009, the Company had options outstanding under the 2006 Plan and the replaced plans. Options under the 2006 Plan may be granted by the Board of Directors at the fair market value on the date of grant and generally become fully exercisable within four years after the grant date and expire between five and ten years from the date of grant. Vesting on options granted to officers will be accelerated in certain circumstances following a change in control of the Company.

     The fair value of each option is estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:

		Three Months Ended
		April 4, 2009				March 29, 2008
Risk-free interest rate			2.30	%			3.25	%
Expected volatility			53	%			40	%
Expected option life			4.91 to 6.02 years				5.09 to 6.07 years
Dividends		None				None

     The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of grant. The expected term of options represents the period of time that options are expected to be outstanding. The Company uses separate assumptions for groups of employees (for example, officers) that have similar historical exercise behavior. The range above reflects the expected option impact of these separate groups. The Company bases the expected volatility on historical trends, because it has determined that the historical volatility trends are reflective of market conditions.

     At April 4, 2009, there was $5.6 million of unrecognized compensation expense related to stock options, which expense the Company expects to recognize over a weighted average period of 1.57 years. The aggregate intrinsic value of in-the-money options outstanding, based on the closing price of the Company’s common stock on April 3, 2009, the last trading day in the three months ended April 4, 2009, of $27.15, was $46.0 million, and the aggregate intrinsic value of options exercisable was $36.1 million. The intrinsic value of options vested and expected to vest was $44.8 million, for the three months ended April 4, 2009. The intrinsic value of options exercised was $0.9 million for the three months ended April 4, 2009. The aggregate fair value of the options granted during the three months ended April 4, 2009 was $3.9 million.

     Stock option activity is summarized as follows:

		Number of				Weighted				Weighted Average
		Options				Average Exercise				Remaining Contract
		(in thousands)				Price Per Share				Life (years)
Outstanding options at January 3, 2009			4,259			$	16.37				5.98
Granted			326				23.92
Exercised			(73	)			14.12
Forfeited or expired			(16	)			31.63
Outstanding options at April 4, 2009			4,496			$	16.94				6.05
Outstanding options exercisable at April 4, 2009			3,203			$	15.92				5.14
Outstanding options vested at April 4, 2009 and expected to vest			4,323			$	16.83				5.94

     The weighted average grant-date fair value of options granted during the first quarter of 2009 was $11.99 per share.

Restricted Stock

     The 2006 Plan allows for the issuance of restricted stock awards and restricted stock units, which awards or units may not be sold or otherwise transferred until certain restrictions have lapsed. The unearned share-based compensation related to these awards is being amortized to compensation expense over the period of the restrictions, generally four years. The expense for these awards was determined based on the market price of the Company’s shares on the date of grant applied to the total number of shares that were granted.

     Share-based compensation expense related to these restricted stock grants was $1.6 million for the three months ended April 4, 2009, which expense the Company expects to recognize over a weighted average period of 2.33 years. As of April 4, 2009, the Company had $9.0 million of unrecognized compensation expense related to these restricted stock awards. There were no restricted stock awards granted during the first quarter of 2009.

     Restricted stock activity is summarized as follows:

		Number of				Weighted Average
		Shares				Grant Date Fair
		(in thousands)				Value
Outstanding unvested restricted stock at January 3, 2009			983			$	16.83
Granted			—				—
Vested			(258	)			17.05
Forfeited or expired			(11	)			16.69
Outstanding unvested restricted stock at April 4, 2009			714			$	16.76

Restricted Stock Units

     As of April 4, 2009, the Company had $7.4 million of unrecognized compensation expense related to these restricted stock units, which expense the Company expects to recognize over a weighted average period of 3.81 years. The aggregate intrinsic value of the units outstanding, based on the Company’s stock price on April 4, 2009, was $11.1 million. In the first of quarter of 2009, the Company issued restricted stock units to U.S and non-U.S. employees.

     Restricted stock unit activity is summarized as follows:

		Number of				Weighted Average				Weighted Average
		Units				Grant Date Fair				Remaining Contract
		(in thousands)				Value				Life (in years)
Outstanding units at January 3, 2009			28			$	16.66				2.46
Granted			408				24.01
Released			(25	)			22.65
Forfeited or expired			(3	)			23.93
Outstanding units at April 4, 2009			408			$	23.59				3.81

Employee Stock Purchase Plan

     In May 2002, the Company’s shareholders approved the Company’s Employee Stock Purchase Plan (“ESPP”) under which 500,000 shares of common stock were reserved for issuance. In addition, the ESPP provides for an annual, automatic increase of up to 250,000 shares in the total number of shares available for issuance thereunder on March 1st of each year, unless the Company’s Board of Directors specifies a smaller increase or no increase. Under this provision, an additional 250,000 shares were reserved for issuance under the ESPP on each of March 1, 2006, March 1, 2008 and March 1, 2009; the Company’s Board of Directors specified no increase as of March 1, 2007. Eligible employees may purchase a limited number of shares, over a six month period, of the Company’s common stock at 85% of the lower of the market value on the offering date or the market value on the purchase date. During the three months ended April 4, 2009, no shares of common stock were issued under the ESPP. As of April 4, 2009, approximately 432,000 shares remained available for issuance under this plan.

     The estimated subscription date fair value of the current offering under the ESPP is approximately $0.5 million using the Black-Scholes option pricing model and the following assumptions:

Risk-free interest rate			1.07	%
Expected volatility			60	%
Expected option life		0.50 years
Dividends		None

     As of April 4, 2009, there was approximately $0.1 million of unrecognized compensation expense related to ESPP subscriptions that began on November 1, 2008, which amount the Company expects to recognize during the second quarter of 2009.

15. Income Taxes

     The Company’s effective income tax rates were 26.7% and 33.7% for the three months ended April 4, 2009 and March 29, 2008, respectively. The comparative numbers have been adjusted for the retrospective application of FSP APB14-1, see Note 13, “Long-Term Debt.”

     For the three months ended April 4, 2009, the Company recorded a discrete benefit of approximately $0.9 million to reflect the effect of a change in California tax law which will permit the Company to make a beneficial apportionment election beginning in 2011. This election will impact the California state rate for certain of the Company’s existing long-term deferred tax assets and liabilities which are anticipated to reverse subsequent to 2011. As a result of the enactment of this tax law, the Company has included the effect of its re-measurement of certain deferred tax assets and liabilities in the first quarter of 2009.

     The tax years 2005 through 2008 remain subject to audit by certain jurisdictions in which the Company is subject to taxation with the exception of California and New Jersey, which remain subject to audit from tax years 2004 to 2008, and the U.K. which remains subject to audit from tax years 2007 through 2008. However, because the Company had net operating losses and credits carried forward in several jurisdictions including U.S. federal and California, certain items attributed to closed years remain subject to adjustment by the relevant tax authority through an adjustment to tax attributes carried forward to open years. The Company is currently under audit by the states of California and Massachusetts for its 2003 and 2004 tax years. Although the ultimate outcome and the timing of the conclusion of this examination is unknown, the Company believes that adequate amounts have been provided for any adjustments that may result from the current examination and that the final outcome will not have a material adverse effect on the Company’s condensed consolidated statements of operations.

     As of April 4, 2009 and January 3, 2009, the Company reported a net deferred tax liability of approximately $26.4 million and $29.1 million, respectively, comprised principally of temporary differences between the financial statement and income tax bases of intangible assets, and subordinated convertible notes.

     The Company adopted FIN 48 on December 31, 2006. Under FIN 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109, tax positions are evaluated for recognition using a more-likely-than-not recognition threshold, and those tax positions eligible for recognition are measured as the largest amount of tax benefit that is greater than fifty percent likely of being realized upon the effective settlement with a taxing authority that has full knowledge of all relevant information. Unrecognized tax benefits increased by approximately $0.2 million during the three months ended April 4, 2009 primarily as a result of positions taken in 2005 and 2006 and decreased by $4,000 due to changes in prior year unrecognized benefits primarily as a result of foreign exchange rate fluctuations. The Company believes it is reasonably possible that unrecognized tax benefits will increase by approximately $0.9 million within the next twelve months as a result of tax positions which may be taken on tax returns yet to be filed. Conversely, it is reasonably possible unrecognized tax benefits will decrease by approximately $1.5 million, primarily as a result of the settlement of outstanding audits.

16. Net Income (Loss) Per Share

     Basic and diluted net income (loss) per share was calculated as follows:

		Three Months Ended
		April 4,				March 29,
		2009				2008
						As adjusted (1)
		(in thousands, except per share data)
Net income (loss)		$	5,627			$	(678	)
Weighted average number of common shares-basic			56,384				54,222
Dilutive effect of stock-based compensation plans			1,354				——
Weighted average number of common shares-diluted			57,738				54,222
Net income (loss) per common share
Basic		$	0.10			$	(0.01	)
Diluted		$	0.10			$	(0.01	)

     Basic net income (loss) per share is computed by dividing net income (loss) per share by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

		Three Months Ended
		April 4,				March 29,
		2009				2008
		(in thousands)
Options to purchase shares not included in the computation of diluted income (loss) per share because their inclusion would be antidilutive			164				3,067

     The computation of diluted net income (loss) per share for the three months ended April 4, 2009 and March 29, 2008 excludes the effect of assuming the conversion of the Company’s senior subordinated convertible notes, which are convertible at $19.72 per share into 7.3 million shares of common stock, because the effect would have been antidilutive for those periods.

17. Enterprise and Related Geographic Information

     The Company organizes and manages its business by functional operating entities. The functional entities operate in two segments: Cardiovascular and ITC. The Cardiovascular segment designs, develops, manufactures and markets proprietary medical devices used for circulatory support and vascular graft applications. The ITC segment designs, develops, manufactures and markets proprietary point-of-care diagnostic test systems and incision devices.

     Business Segments:

		Three Months Ended
		April 4,				March 29,
		2009				2008
						As adjusted (1)
		(in thousands)
Product sales:
Cardiovascular		$	64,629			$	40,221
ITC			24,837				24,206
Total product sales		$	89,466			$	64,427
Income (loss) before income taxes:
Cardiovascular (a)(c)		$	18,526			$	1,826
ITC (a)(c)			(1,065	)			805
Corporate (b)(c)			(7,906	)			(3,245	)
Total operating income (loss)			9,555				(614	)
Other income and (expense):
Interest expense and other			(2,866	)			(2,587	)
Interest income and other			988				2,178
Income (loss) before income tax (expense) benefit		$	7,677			$	(1,023	)

		April 4,				January 3,
		2009				2009
						As adjusted (1)
		(in thousands)
Total assets:
Cardiovascular		$	328,404			$	321,605
ITC			60,937				61,552
Corporate (b)			299,262				300,930
Total assets		$	688,603			$	684,087

Geographic Areas:

     The geographic composition of the Company’s product sales was as follows:

		Three Months Ended
		April 4,				March 29,
		2009				2008
		(in thousands)
Domestic		$	67,425			$	45,374
International			22,041				19,053
Total product sales		$	89,466			$	64,427

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

     This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements can be identified by the words “expects,” “projects,” “hopes,” “believes,” “intends,” “should,” “estimate,” “will,” “would,” “may,” “anticipates,” “plans,” “could” and other similar words. Actual results, events or performance could differ materially from these forward-looking statements based on a variety of factors, many of which are beyond our control. Therefore, readers are cautioned not to put undue reliance on these statements. 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 of our 2008 Annual Report on Form 10-K (the “2008 Annual Report”) and in other documents we file with the Securities and Exchange Commission (“SEC”). These forward-looking statements speak only as of the date hereof. We are not under any obligation, and we expressly disclaim any obligation, to publicly release any revisions or updates to these forward-looking statements that may be made to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.

     The following presentation of management’s discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

OVERVIEW

     Thoratec Corporation (“we,” “our,” “us,” or the “Company”) is the world leader in mechanical circulatory support with a product portfolio to treat the full range of clinical needs for advanced heart failure patients. We develop, manufacture and market proprietary medical devices used for circulatory support. We also develop, manufacture and market point-of-care diagnostic test systems and skin incision products. Our business is comprised of two operating divisions: Cardiovascular and International Technidyne Corporation (“ITC”), a wholly owned subsidiary.

     For advanced heart failure (“HF”), our Cardiovascular division develops, manufactures and markets proprietary medical devices used for mechanical circulatory support (“MCS”). Our primary product lines are our ventricular assist devices (“VADs”): the Thoratec Paracorporeal Ventricular Assist Device (“PVAD”), the Thoratec Implantable Ventricular Assist Device (“IVAD”), the HeartMate Left Ventricular Assist System (“HeartMate XVE”), and the HeartMate II Left Ventricular Assist System (“HeartMate II”). We refer to the PVAD and the IVAD collectively as the “Thoratec product line” and we refer to the HeartMate XVE and the HeartMate II collectively as the “HeartMate product line.” The PVAD, IVAD, HeartMate XVE and HeartMate II are approved by the U.S Food and Drug Administration (“FDA”) and Conformite Europeene (“CE”) Mark approved in Europe. In addition, for acute HF we market the CentriMag Blood Pumping System (“CentriMag”), which is manufactured by Levitronix LLC (“Levitronix”) and distributed by us in the U.S. under a distribution agreement with Levitronix. We also manufacture a vascular access graft for renal dialysis.

     VADs supplement the pumping function of the heart in patients with advanced HF. In most cases, a cannula connects the left ventricle of the heart to a blood pump. Blood flows from the left ventricle to the pump chamber via the cannula, powered by an electric or air driven mechanism that drives the blood through another cannula into the aorta. From the aorta, the blood then circulates throughout the body. Mechanical or tissue valves enable unidirectional flow in some devices. Currently, the power source remains outside the body for all FDA-approved VADs.

     Our ITC division develops, manufactures and markets two product lines: point-of-care diagnostic test systems for hospital point-of-care and alternate site point-of-care markets, including diagnostic test systems that monitor blood coagulation while a patient is being administered certain anticoagulants, and that monitor blood gas/electrolytes, oxygenation and chemistry status; and incision products including devices used to obtain a patient’s blood sample for diagnostic testing and screening for platelet function.

Our Business Model

     Our business is comprised of two operating divisions: Cardiovascular and ITC.

     The product line of our Cardiovascular division is:

•

Circulatory Support Products. Our mechanical circulatory support products include the PVAD, IVAD, HeartMate XVE, HeartMate II and CentriMag for acute, intermediate and long-term mechanical circulatory support for patients with advanced HF. We also manufacture and sell small diameter grafts using our proprietary materials to address the vascular access market for hemodialysis.

     The product lines of our ITC division are:

•

Point-of-Care Diagnostics. Our point-of-care products include diagnostic test systems that monitor blood coagulation while a patient is being administered certain anticoagulants, as well as monitor blood gas/electrolytes, oxygenation and chemistry status.