10-K405

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                    U. S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549
                                    FORM 10-K

(Mark one)

[X]  Annual report under Section 13 or 15(d) of the Securities Exchange Act of
     1934 (Fee Required) for the fiscal year ended December 28, 1996

[ ]  Transition report under Section 13 or 15(d) of the Securities Exchange
     Act of 1934 (No Fee Required) for the transition period from     to

COMMISSION FILE NUMBER:  1-8145


                        THORATEC LABORATORIES CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

              California                               94-2340464
   -------------------------------       ------------------------------------
   (State or Other Jurisdiction of       (I.R.S. Employer Identification No.)
    Incorporation or Organization)             

   2023 Eighth Street, Berkeley, California              94710
   ----------------------------------------            ----------
   (Address of Principal Executive Offices)            (Zip Code)

Registrant's telephone number, including area code:  (510) 841-1213
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

         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]

         The aggregate market value of the voting stock held by non-affiliates
was $78,736,000 computed by reference to the last sale reported of such stock on
March 10, 1997 as reported by the Nasdaq National Market tier of The Nasdaq
Stock Market.(1)

         As of March 10, 1997, registrant had 17,974,591 shares of common stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:   

         The registrant is incorporating by reference into Part III (Items 10,
11, 12 and 13) certain portions of the registrant's definitive Proxy Statement
for the 1997 Annual Meeting of Shareholders.

- -------------
1  Exclusion of shares held by any person should not be construed to indicate
   that such person possesses the power, direct or indirect, to cause the
   direction of the management or policies of the issuer, or that such person is
   controlled by or under common control with the issuer.


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                                     PART 1


   The statements in this Annual Report on Form 10-K and other statements made
by the Company from time to time that relate to future plans, events or
performance 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. The risk factors set forth at pages 20 to 29 should be considered 
carefully in evaluating the Company and its business by the Company's
shareholders and prospective investors in the Company.

ITEM. 1        BUSINESS

GENERAL

   Thoratec develops, manufactures and markets medical devices for circulatory
support and vascular graft applications. The Company's first product, the VAD
System, is being marketed in the U.S. and internationally for use as a bridge to
heart transplant and is currently the only device approved by the FDA that can
provide left, right or biventricular support for this indication. The Company
believes that the VAD System provides a number of significant advantages over
other ventricular assist devices. The Company is pursuing additional indications
for the VAD System and is developing other circulatory support products for
patients suffering from heart failure. The Company is also developing vascular
grafts for hemodialysis and coronary artery bypass surgery. These products
utilize the Company's proprietary biomaterial, Thoralon(TM), which provides
improved thromboresistance, biocompatibility, patency and durability.

BACKGROUND

CIRCULATORY SUPPORT PRODUCTS

   Cardiac failure is the leading cause of death in the U.S., accounting for
more deaths than all forms of cancer combined. Deaths associated with cardiac
failure fall into two broad categories: chronic heart failure ("CHF"), which is
a slow degenerative process leading to cardiac insufficiency, and acute cardiac
failure resulting from heart attacks and various infections of the heart muscle
(myocarditis).

   CHF is a chronic disorder that occurs when the pumping power of the heart is
reduced by a weakening of the heart muscle. This results in a decreased supply
of oxygen and nutrient rich blood to various vital organs such as the lungs,
brain and kidneys. CHF tends to be progressive and is associated with profound
symptoms that limit daily activities. Long-term survival rates are low and it is
estimated that more than 50% of patients die within five years of diagnosis. CHF
is estimated to be the most common cause of hospitalization in patients over 65
years of age. According to the National Heart, Lung and Blood Institute and the
American Heart Association, there are approximately two to three million CHF
patients in the U.S., and 400,000 to 500,000 newly diagnosed patients each year.
Most patients suffering from CHF are initially treated with medication


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and, while conventional drug therapy may delay the progress of CHF, it is not
curative. The only available method of treating end-stage CHF is a heart
transplant.

   Although heart transplants have been very successful, there are too few donor
hearts available to address adequately the problem of cardiac failure. The
United Network for Organ Sharing reported that there were only 2,340 heart
transplants performed in the U.S. in 1994, a level that has remained relatively
unchanged for the last several years. However, published government sources
estimate that the number of patients suffering from CHF who need some form of
permanent cardiac assist is 30,000 to 50,000 per year. The average wait for a
donor heart by patients on a heart transplant wait list is approximately eight
months, and many patients have to wait as long as one to two years before
receiving one of the few donor hearts available each year. In 1993,
approximately 30% of the patients died while waiting for a donor heart.

   Ventricular assist devices are mechanical systems used to assist the heart's
function, and, when other therapies are unsuccessful, they can be used to
support one or both sides of the patient's heart until a donor heart can be
found. In patients awaiting heart transplants, the decision to use a ventricular
assist device is made when death appears imminent. In addition to providing a
bridge to heart transplant, ventricular assist devices have potential usefulness
for other applications. It is estimated that out of approximately 350,000 open
heart surgeries performed annually in the U.S., some 15,000 to 18,000 patients
die following such procedures. Many of these deaths are caused by heart failure
when the heart, weakened by disease and the additional trauma of surgery, fails
to maintain adequate blood circulation. The use of a ventricular assist device
after surgery can provide support to the heart until it can recover. In
addition, ventricular assist devices may also be useful in assisting the
recovery of the heart in a small portion of patients suffering from acute
cardiac failure that may result from myocardial infarction, myocarditis or other
acute cardiomyopathies.

   While there is significant demand for effective ventricular assist devices,
most systems available today or under development have certain limitations.
Certain systems cannot be used in smaller patients because the blood pump must
be implanted in the abdomen and is too large to fit in such patients. Other
systems require large incisions at the apex of the heart muscle, making recovery
of the heart more difficult if too large an incision is made. Some systems
cannot be used for more than a few days because their blood contacting parts
cause an adverse reaction in the body, resulting in clotting which clogs the
system or can cause a stroke. In addition, much of the development work on
ventricular assist devices has historically been in the area of left ventricular
support, and most systems available today or under development only provide left
ventricular support. While many patients do well with isolated left ventricular
support, some patients supported with systems designed solely for isolated left
ventricular assist also have or can develop right ventricular failure and
require right ventricular device support with another system. Mortality and
morbidity are extremely high for this patient group. It has been reported that
20% to 40% of patients supported by a left ventricular assist device either died
of right heart failure or required the placement of a right heart ventricular
assist device. The one available system that provides biventricular assistance
for postcardiotomy recovery confines the patient to the bed and is recommended
for short term use only. There are no risk factors that allow a surgeon to
predict reliably which patients will require biventricular support.


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   Thoratec believes that the VAD System is able to make ventricular support
available to a broader patient population and to better serve the existing
patient population by (i) providing biventricular support, which is necessary in
20% to 40% of patients receiving ventricular assistance, (ii) placing the pump
paracorporeally (worn on the outside of the body), enabling it to support
patients of varying sizes, including very small patients, (iii) providing the
surgeon with multiple options in positioning the cannulae and in the size and
shape of the cannulae used, potentially reducing damage to the heart, and (iv)
incorporating proprietary Thoratec Thoralon(TM) in most blood contacting parts,
potentially reducing or eliminating the risks of certain adverse reactions by
the body and permitting the system to be used for potentially extended periods.

VASCULAR GRAFTS

   Vascular Access. The principal use of vascular access grafts is for
hemodialysis. Severe acute and chronic diseases, including kidney disease,
diabetes and hypertension, may destroy normal kidney function, resulting in
acute renal failure. End stage renal disease is irreversible and currently
approximately 60% of all patients suffering from this disease are maintained by
hemodialysis. According to the U.S. Renal Data Systems database, there were
187,000 patients in the U.S. at the end of 1995 undergoing hemodialysis. The
Company estimates that the U.S. represents less than one-half of the worldwide
hemodialysis patient population.

   Hemodialysis removes blood from the body and routes it to an artificial
kidney machine where it is cleansed and returned to the patient. Patients
undergoing hemodialysis require easy, routine access to the blood stream at a
high flow rate, which generally requires the attachment of a high pressure
artery to a low pressure vein. Two different methods are typically used. The
first, called an autologous arterio-venous ("A/V") fistula, involves cutting one
of the arteries in the patient's arm and sewing the artery to an adjacent vein.
The second method uses a synthetic vascular graft, most often an ePTFE graft,
which is surgically connected between an artery and a vein. A hemodialysis
technician inserts two large needles into either the vein of the A/V fistula or
the synthetic graft. One needle removes the blood and routes it to the
artificial kidney machine and the second returns the blood to the patient. This
procedure is generally repeated three times per week.

   Vascular access methods currently available for hemodialysis applications
have certain limitations. Both natural and ePTFE access grafts must mature for
three to four weeks before use and therefore patients receiving such grafts
require temporary routes of access. These temporary access procedures entail
additional cost and risk to the patient. ePTFE grafts are relatively inflexible,
which often leads to kinking and a higher risk of thrombosis. ePTFE grafts also
lose integrity after repeated punctures, which renders the patient susceptible
to bleeding and infection. If synthetic grafts bleed profusely when needles used
for hemodialysis are removed, a technician may need to apply pressure to the
graft for up to 20 minutes to permit clotting. Such problems associated with
currently available vascular grafts sometimes require them to be surgically
replaced or modified on a periodic basis. The Company estimates that
approximately 200,000 new and existing hemodialysis patients per year worldwide
undergo vascular access procedures. The Company estimates that approximately 50%
to 60% of these patients receive synthetic grafts.


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   Coronary Artery Bypass Surgery. Currently, obstructed coronary arteries are
either partially cleared through the use of angioplasty or related procedures or
treated surgically through coronary artery bypass surgery. Coronary artery
bypass surgery involves connecting one or more new vessels from the aorta to the
heart to re-route blood around blockages in the coronary arteries. Autologous
grafts using saphenous veins (from the leg) or the internal mammary artery have
been successfully used in bypass procedures for a number of years and have shown
a relatively high patency with no risk of tissue rejection. The Company
estimates that in 1995 there were approximately 300,000 coronary artery bypass
surgery procedures performed in the U.S. and approximately 195,000 performed
internationally. The Company estimates that on average at least two bypasses are
performed in each surgical procedure.

   While healthy natural vessels are preferred for use in coronary artery bypass
surgery, the harvesting of vessels for autologous grafts involves significant
trauma and expense. Use of these vessels requires additional time in surgery and
results in patient morbidity associated with removal of the blood vessel. In
addition, a significant number of patients requiring coronary artery bypass
surgery have insufficient autologous vessels as a result of previous bypass
surgeries, or their vessels are of inferior quality due to trauma or disease. No
synthetic graft is currently commercially available in the U.S. for coronary
artery bypass surgery, but the Company believes a significant market opportunity
for such grafts exists. The major reason for the unavailability of a synthetic
graft for this indication has been that synthetic grafts configured in small
diameters (less than five mm) necessary for this indication generally do not
remain patent.

THORATEC TECHNOLOGIES

   The Company's products and products under development employ several key
proprietary technologies, including the following:

THORATEC BIOMATERIALS - THORALON(TM)

   The Company has developed expertise in the design and production of
proprietary biomaterials that are highly biocompatible (i.e., they do not cause
adverse reactions within the body), strong and flexible. This technology is
critical to the successful performance of all of Thoratec's products that come
into contact with human tissue. All of the Company's current products and those
under development incorporate these proprietary biomaterials in order to
minimize clotting and inflammatory responses. In addition, these products must
maintain their strength and flexibility. A VAD System blood pump, for instance,
must contract and expand approximately 40 million times per year without a
decrease in performance or failure. The two major components of Thoratec's
Thoralon(TM) are surface modifying additives ("SMAs") and BPS-215
polyurethaneurea ("BPS-215"), a high flex life elastomer.





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   SMAs are proprietary multipolymers and their precursors designed to enhance
the biocompatibility of the surface of the device that comes into contact with
blood or other tissues. SMAs are added to the base polymer component of the
biomaterial in the bulk fabrication stage. A unique property of SMAs is their
ability to concentrate at the surface of any finished part, thus determining its
surface properties independent of the base polymer. This SMA-based surface layer
is not a coating but a fully integrated part of the polymer which is not soluble
in water or blood. The result is a biocompatible, thromboresistant surface.
BPS-215 is the base component that provides the bulk properties of strength and
flexibility to Thoratec's Thoralon(TM).

   The combination of bulk and surface properties provided by SMAs and BPS-215
provide Thoratec's Thoralon(TM) with the critical properties necessary for
implantable cardiovascular and other medical devices. In 1992, Thoratec granted
COBE a royalty-bearing license and sublicense to use Thoratec's SMAs in certain
COBE medical devices.

CIRCULATORY SUPPORT PRODUCTS

   Thoratec received FDA approval in December 1995 to market the VAD System as a
bridge to heart transplant in patients suffering from heart failure, and began
marketing the VAD System in the U.S. in January 1996. The VAD System has also
received a European CE mark, and is currently marketed in major European
countries, Canada and certain other major international markets. Building on the
proprietary technologies contained in the VAD System, Thoratec is attempting to
develop a broad line of circulatory support products to meet the wide range of
needs of patients suffering from heart failure.

   OVERVIEW OF THE VAD SYSTEM. The VAD System consists of three major
components: the blood pump, a type of artificial heart; the Thoratec Dual Drive
Console (the "Dual Drive Console"), which pneumatically activates the blood
pump; and cannulae which connect the blood pump to the heart and vessels. The
VAD System provides partial or total circulatory assistance when the natural
heart is unable to maintain adequate circulation to perfuse vital organs and
permits left, right, or biventricular support.

   ADVANTAGES OF THE VAD SYSTEM. Compared to other ventricular assist devices,
Thoratec believes that the VAD System has the following principal advantages:

- -    BIVENTRICULAR SUPPORT. Development of ventricular assist devices evolved
     from the concept that most patients could be successfully supported with a
     left ventricular assist device ("LVAD"). While many patients do well with
     isolated left ventricular support, some patients supported with systems
     designed solely for isolated left ventricular assist also have or can
     develop right ventricular failure and require right ventricular assist
     device ("RVAD") support with another system. Mortality and morbidity are
     extremely high for this patient group if not adequately supported. Most
     systems available today provide only left ventricular support and the only
     system other than the VAD System that provides biventricular support is
     indicated for temporary use in postcardiotomy


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     recovery and post-transplant patients and severely limits patient mobility.
     There are no risk factors that allow a surgeon to predict reliably which
     patients will require biventricular support.

     The decision for univentricular or biventricular support is simplified with
     the VAD System. In situations where there are no physiologic markers of
     right heart failure, an LVAD can be used. An RVAD can be used in addition
     to an LVAD if right heart failure is evident or subsequently occurs.
     Biventricular support is also indicated in patients with potentially lethal
     arrhythmias, or severe right ventricular infarction that could result in
     death during univentricular support. With the VAD System, RVAD support may
     be employed at the time of LVAD placement, thus eliminating the need for
     reoperation to insert an RVAD. Isolated RVAD support may also be suitable
     for patients with right heart failure only.

- -    PARACORPOREAL ATTACHMENT. In the VAD System, the pump is worn outside of
     the body, allowing the system to support patients of varying sizes,
     including very small patients such as small women and adolescents. To date,
     the VAD System has been used in patients as small as 57 pounds. In
     contrast, other commercially available ventricular assist devices for
     bridge to heart transplant must be implanted and can only be used in
     patients large enough to accommodate the device within their abdomen. The
     other benefit derived from paracorporeal attachment is that it does not
     require invasive abdominal surgery. This makes the VAD System more suitable
     for critically ill patients who may potentially recover normal function of
     the heart without this additional surgical trauma. Finally, the attachment
     of the pump to the body facilitates patient movement, allowing patients to
     walk, exercise and move around the hospital.

- -    MULTIPLE CANNULATION OPTIONS. Cannulae for the VAD System come in a number
     of shapes and sizes, allowing the surgeon to fit the size of the cannulae
     to the size of the patient and to place the cannulae in different parts of
     the heart. Other commercially available systems have only limited cannula
     shape and size. The small size of the Thoratec cannulae, compared to other
     systems, could make it easier for the heart to recover when the cannulae
     are removed. Variations of the Thoratec cannulae also allow the surgeon to
     place the cannulae in places other than the apex of the heart (the only
     place used by the currently available left ventricular only system) when
     heart shape or disease state make apex cannulation undesirable.

- -    THORATEC BIOMATERIALS. Thoratec's proprietary biomaterials are used in most
     portions of the VAD System that contact blood or are implanted in the body,
     providing biocompatibility, thromboresistance, flex life and strength.

   CURRENT AND POTENTIAL INDICATIONS. Thoratec has identified three basic
clinical needs for circulatory support products: as a bridge to heart
transplant; for recovery of the natural heart weakened or damaged by surgery or
disease; and as permanent support as an alternative to heart transplant.


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Bridge to Heart Transplant

   The Company commenced marketing the VAD System in the U.S. in January 1996
for use as a bridge to heart transplant in patients suffering from heart failure
following receipt of PMA approval from the FDA in December 1995. As of December
1996, approximately 110 Dual Drive Consoles were placed in heart transplant
centers worldwide and in 1996 the Company sold 285 pumps.

   As of December 1996, the VAD System had been used in more than 750 patients
worldwide. The Company's submission to the FDA included clinical results in 375
patients (299 males, 76 females) ranging in age from 11 to 67 years and in
weight from 57 to 277 pounds. All patients were awaiting donor hearts and were
in imminent risk of dying without ventricular assistance. In spite of the
extreme illness and the zero percent survival rate expected with the use of
conventional therapy alone for these patients, the VAD System was successful in
assisting 233 (62%) of the 375 patients to survive until a donor heart was
available. Of the 233 patients who received a heart transplant, 85% survived the
transplant and were discharged from the hospital, and the longest duration of
VAD System support was 247 days. Sixty-five percent of the 375 patients received
biventricular ("BiVAD") support and 34% received LVAD-only support. The large
percentage of patients needing BiVAD support reflects the greater severity of
disease in patients selected for biventricular support with the VAD System. As a
result, LVAD and RVAD patients showed correspondingly improved survival rates:
92% for LVAD and RVAD and 82% for BiVAD post-transplant. The PMA approval was
granted based on an in-depth analysis performed in 71 of the 375 patients. Of
these patients, 49 (69%) survived to receive a heart transplant and 44 of those
(90%) were discharged. None of the control patients survived to receive a heart
transplant. Based on these clinical results, the FDA determined that the VAD
System was safe and effective in restoring hemodynamic stability to patients
awaiting heart transplant.

Recovery of the Natural Heart

   A certain portion of patients who undergo open heart surgery have difficulty
recovering normal cardiac function, which makes it difficult to wean the patient
from the heart/lung machine. Patients can only stay on the heart/lung machine
after surgery for a limited period of time (generally less than 12 hours), and
if they are unable to regain normal heart function, they will not survive
without ventricular support. The use of a ventricular assist device after
surgery can provide support to the heart until the heart can recover. The
Company has completed clinical trials in this indication and submitted a PMA
Supplement to the FDA in February 1997 for approval to market the VAD System for
postcardiotomy recovery of the natural heart. In addition, ventricular assist
devices may also be useful in assisting the recovery of hearts in patients
suffering from acute heart failure, such as myocardial infarction and
myocarditis, or other acute cardiomyopathies.

   Thoratec believes that since the Thoratec Thoralon(TM) used in the
blood-contacting parts of the VAD System may not cause an adverse reaction by
the body, the VAD System may be used for both short-term and long-term support.
In contrast, the one system that is currently approved for the


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post-cardiotomy recovery indication can only be used for temporary circulatory
support and requires that the patient remain bed-ridden. Thoratec believes that
other ventricular assist devices currently available or under development are
not suitable for recovery of the natural heart because (i) they require surgical
implantation and removal of the blood pump from the abdomen, which adds greater
surgical trauma to critically ill patients, (ii) they cannot be used in smaller
patients due to their size, (iii) the large incision required to be made at the
apex of the heart may make recovery of the natural heart more difficult, leaving
heart transplant or chronic ventricular assist device support as the only
alternatives and (iv) they do not provide biventricular support, which is often
required by patients in recovery.

   As of January 1996, the VAD System had been used in 126 patients who were
unable to regain normal heart function following coronary artery bypass surgery
and were, therefore, unable to be removed from the heart/lung machine following
surgery. Of the 126 patients who have been placed on the VAD System, 39% (49
patients) recovered sufficiently to be weaned from the heart/lung machine, and
of those patients, 57% were discharged from the hospital. Duration of patient
cardiac support ranged from one to 80 days. Although most patients were
supported less than ten days, several required support for between one and three
months before they successfully recovered cardiac function.

Alternative to Heart Transplant

   Given the shortage of donor hearts for patients requiring heart transplant,
the Company believes that ventricular assist devices may become a long-term
solution for many patients who would otherwise require a heart transplant. To
address this need, the Company is currently developing the TLC-II, a compact and
lightweight portable driver to substitute for the Dual Drive Console currently
used with the VAD System. The Company believes that this product may enable
patients to eventually return home and to work and receive long-term ventricular
support without undergoing a heart transplant.

   PRODUCTS UNDER DEVELOPMENT. Thoratec currently has under development the
circulatory support products described below. There can be no assurance that the
Company will successfully develop any of these products, or if successfully
developed, that these products will obtain regulatory approval or market
acceptance or can be manufactured and sold on commercially acceptable terms.

TLC-II Portable VAD Driver

   Although patients supported with the Dual Drive Console can ambulate
throughout the hospital and transfer from critical care units to general wards,
they usually cannot leave the hospital because of the size of the console.
Thoratec is developing the TLC-II, a compact and lightweight (8kg), battery or
line-operated biventricular pneumatic drive unit designed to promote greater
mobility and self-care. It is intended to allow the patient to more easily
exercise and move freely around the




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hospital grounds, and eventually away from the medical facility. This device
provides several portability options, either by hand-carrying the driver or by
using a shoulder strap or a small custom trolley. This portable device will
connect with a central system cart, which will house a battery charger and the
external monitoring computer.

   Thoratec intends to submit an IDE application to the FDA by mid-1997 to begin
a clinical trial of this device in the U.S. for use in conjunction with the
approved VAD System. Thoratec is also pursuing a CE Mark for this product. The
Company believes that the regulatory path to approval for this device will be
facilitated by the fact that it activates the same VAD System blood pumps that
have received FDA approval.

Implantable VAD

   While the paracorporeal placement of the VAD System has certain advantages,
especially for small patients and patients in whom additional abdominal surgery
presents a high risk, Thoratec is developing an implantable version of its
existing VAD blood pump and cannulae to provide additional options for surgeons.
Thoratec believes that the regulatory process for this product may be
facilitated, in part, by the fact that the VAD System has already undergone
preclinical testing in the implantable configuration prior to being introduced
for clinical use in the paracorporeal configuration.

Muscle Powered VAD ("MVAD")

   Thoratec is in the early stage of developing an implantable, muscle powered
circulatory support device to serve as an alternative to heart transplant. The
MVAD utilizes conventional pacemaker technology, along with a linear
mechanical-to-hydraulic energy converter, to harness the power available in a
patient's latissimus dorsi muscle to drive an implanted ventricular assist
device. This system is designed to operate without batteries, electrical power
transmission systems and other bulky hardware required with electromechanical
systems. The MVAD is undergoing laboratory testing, and the Company has received
a $100,000 Phase I grant from the Small Business Technology Transfer Program of
the National Institutes of Health to support research and development of the
energy converter. Extensive technical development and laboratory testing will be
required before clinical trials could begin, and this project could be
discontinued at any time if feasibility is not demonstrated. There can be no
assurance that this product can be successfully developed.

VASCULAR GRAFT PRODUCTS

   Thoratec is developing small diameter vascular graft products intended
initially to address the vascular access and coronary artery bypass surgery
markets. Both products utilize the Company's proprietary biomaterial,
Thoralon(TM), and are protected by several patents covering Thoralon (TM) as
well as the graft design and manufacturing processes. Thoratec believes that its
vascular grafts are highly compliant, have excellent handling and suturing
properties and have the "feel" of a natural


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vessel. The fabrication process creates a structure in which the three different
layers in the 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 thromboresistance, the solid middle layer gives
the graft its strength and self sealing properties, and the outer textured layer
is designed to promote tissue ingrowth to promote graft stability.

   VASCULAR ACCESS GRAFT ("VAG"). Currently available vascular access grafts are
commonly made out of ePTFE, which can lose integrity after repeated punctures
and render the patient susceptible to bleeding and infection. The VAG 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. The Company believes that the VAG may provide
significant advantages over existing synthetic vascular access grafts and may
encourage its use by surgeons who are currently using natural vessels for
vascular access. The VAG received marketing approval from the Canadian Ministry
of Health in March 1996 and is also marketed in Australia. Thoratec is
conducting preclinical testing and expects to submit an IDE application to the
FDA in the first half of 1997 to commence clinical trials in the U.S. The
Company believes that these clinical trials will be necessary to support the
submission of a 510(k) premarket notification to the FDA.

   To date, more than 1,000 patients outside of the U.S. have been implanted
with the VAG. In one retrospective study of the VAG in Australia, 134 patients
who were implanted by 31 different surgeons were evaluated. Based on data
obtained in this study as well as other clinical trials conducted outside the
U.S., the Company believes that the VAG offers the following advantages: (i)
reduced inflammatory response after implantation; (ii) the ability to begin
hemodialysis within one to three days after implantation, as opposed to several
weeks for ePTFE grafts; (iii) reduced bleeding complications during routine use
because of the VAG's self-sealing properties; and (iv) improved handling and
suturability. In the Australian study, the median hospital stay was four days
and initial use of the VAG for dialysis was performed with a median time after
implant of three days. The median follow-up period was 306 days. The patency at
both one and two years of dialysis use was comparable to or better than ePTFE
grafts, notwithstanding that 73% of the patients who received the Thoratec graft
previously demonstrated that they could not tolerate ePTFE grafts.

   CORONARY ARTERY BYPASS GRAFT ("CABG"). Coronary artery bypass surgery
requires the insertion of substitute vessels to bypass one or more blocked
arteries in the heart. These substitute vessels typically require either
harvesting the patient's saphenous veins or using the internal mammary artery.
These procedures, however, can involve significant trauma and expense, and are
sometimes not an option for patients who have undergone previous bypass surgery
or who have vessels of inferior quality. The CABG graft is designed for use in
coronary artery bypass surgery patients who have no suitable vessels of their
own. To date, a total of 27 patients in Canada and Germany have received
Thoratec's CABG grafts ranging in size from 2.0 to 3.5mm. All patients were
extremely ill at the time of surgery, and the grafts were implanted on a
compassionate use basis (i.e., the patients were found to have no other viable
therapeutic options). While patency in the implanted grafts has not been
evaluated in all patients, 22 of these patients were asymptomatic as of December
1996, with the longest term patient implanted for approximately three and a half
years. The remaining five


   12


                                      -11-

patients died from causes unrelated to the graft. However, long-term test
results on a much larger patient population are required before the capabilities
of this graft can be demonstrated. Follow-up studies in some patients have
demonstrated patent grafts several months after implantation.

   The potential for improved long-term patency in small diameter grafts is the
most unique aspect of the CABG graft. The Company believes that to date no other
suitable small diameter graft has been developed which will remain patent over
long periods of time when used in this critical application. Thoratec is
currently in preclinical testing of the CABG graft in the U.S. The Company
believes this product will require submission of a PMA application to the FDA.

   PERIPHERAL GRAFT APPLICATIONS. In addition to the VAG and CABG grafts,
Thoratec's graft products may potentially be used in other applications such as
peripheral vascular grafts for patients who require restoration of circulation
to their arms or legs due to blockages caused by certain disease processes.
While the Company is not currently pursuing development of these applications,
it has performed limited early stage preclinical work in this area and believes
its graft products could be developed for these applications.

SALES AND MARKETING

CIRCULATORY SUPPORT PRODUCTS

   The potential customers for Thoratec's circulatory support products are
hospitals that perform open heart surgery procedures and heart transplants.
Based on published sources, the Company estimates that 130 of the approximately
800 hospitals in the U.S. that perform open heart surgery also perform heart
transplants. The Company is initially targeting these 130 heart transplant
hospitals.

   Thoratec has trained a five person sales force, including clinical
specialists, to sell the VAD System in the U.S. and Canada. The sales force
focuses on promoting the product line to cardiac surgeons who perform heart
transplants and to cardiologists who refer the patients for transplantation.
Cardiovascular and vascular surgeons and interventional cardiologists influence
medical device selection and purchase decisions for a large portion of the
target cardiac patient population. The Company has developed working
relationships with a number of leading medical centers. In addition, surgical
teams at these medical institutions have performed clinical trials to support
the Company's FDA submissions. A continuing working relationship with these
physicians and medical centers will be important to the acceptance of the VAD
System.

   When a hospital or other medical institution decides to acquire a VAD System,
it must acquire at least two Dual Drive Consoles so that a backup is available.
It typically takes six to 12 months from the time a surgeon is contacted to the
time a VAD System is ordered, and the Company generally ships the VAD System
within 30 days of receiving a purchase order. In 1996 the Company initiated a
rental program whereby hospitals may rent Dual Drive Consoles.



   13


                                      -12-

   The introduction of a new system requires training of the appropriate
personnel. Initial training takes place for the surgical as well as the clinical
support teams when a center purchases and takes delivery of the VAD System. As a
follow-up to the initial training, Thoratec provides clinical support at the
first implant whenever possible. The Company is also developing a 24-hour
support line. The Thoratec sales force will also assist customers with obtaining
reimbursement from third-party payors.

   Outside the U.S. and Canada, the Company markets the VAD System through a
network of distributors. The Company estimates that there are approximately 110
heart transplant hospitals in Europe. In late 1992 and 1993, Thoratec and
several COBE affiliates entered into distribution agreements whereby the COBE
affiliates had exclusive rights to distribute the VAD System in several major
European markets. In 1994, 1995, and 1996, sales to these markets represented
26%, 20% and 2% of all sales, respectively. In early 1995, the Company signed an
agreement with Arrow to take over distribution of the VAD System in all of the
COBE territories except Belgium and Scandinavia. Arrow has a dedicated sales
team of two individuals to market the VAD System in its territories. In 1995 and
1996, sales to Arrow represented 18% and 20% of all sales, respectively. In
other international markets, the Company sells the VAD System through selected
distributors.

VASCULAR GRAFT PRODUCTS

   The Company intends to market the VAG through distributors both domestically
and internationally and to market the CABG graft through a direct sales force in
the U.S. and Europe and through distributors in other international markets. The
Company envisions the market positioning of the VAG as one which replaces an
existing product used in an accepted procedure, and at a comparable price. The
Company plans to commission studies comparing its products to ePTFE grafts. The
Company believes the VAG will have significant advantages over these existing
products and will therefore offer significant benefits to users and patients,
without the need for additional clinical training. The Company also believes
that more clinicians using natural A/V fistulas will utilize a synthetic option
when presented with these benefits, and intends to target these users as well.

   The CABG graft will be positioned initially as a preferable clinical option
for patients who lack suitable native vessels. The Company believes that more
clinician education will be required for the CABG graft in terms of patient
indications, product use, and product capabilities. This may be accomplished
through company-sponsored educational programs, video educational tools, and
scientific lecture programs. The Company also anticipates a much larger domestic
sales force structure to effectively market the CABG graft, which may overlap or
work with the VAD System sales force. Finally, the Company recognizes the impact
of clinical thought-leaders in any surgical specialty, and will begin
cultivating these relationships during the clinical trials of the graft.






   14


                                      -13-

MANUFACTURING

   Thoratec manufactures specialty polymers for use in the VAD blood pumps,
cannulae and grafts, fabricates the grafts, and VAD blood pumps and cannulae,
and assembles and tests the VAD System at its Berkeley, California facility.
This facility is cGMP-approved for the U.S. market and has received ISO 9002
certification.

The Company's manufacturing processes for the VAD System consist of the assembly
of standard and custom component parts, including blood-contacting components
fabricated from Thoratec's proprietary biomaterials, and the testing of
completed products. The Company relies on single sources of supply for several
components of the VAD System. The Company is aware of alternative suppliers for
all single-sourced items other than the mechanical valves, and believes the loss
of any one supplier would have only a short-term impact on its production
schedule. The supplier of mechanical valves for the VAD System stopped
production in 1995.

The Company negotiated a contract for supply of the valves that it believes will
satisfy its needs at least through 1997, during which time it must qualify a
replacement valve or qualify a new vendor for the current valve. The Company has
identified a new vendor and is in negotiations for additional supply.

   The Company devotes significant attention to quality control. Its quality
control measures begin at the manufacturing level where components are assembled
in a "clean-room" environment designed and maintained to reduce product exposure
to particulate matter. Products are tested throughout the manufacturing process
for adherence to specifications. Finished components are shipped to outside
processors for sterilization through radiation or treatment with ethylene oxide
gas. After sterilization, the products are quarantined and tested before they
are shipped to customers.

   The Company believes its Berkeley facility is capable of supplying the
Company's expected sales of VAD Systems during 1997. The Company plans to
relocate to a larger facility in the San Francisco Bay Area in 1997. A lease was
executed in 1996 for this new 62,000 square foot facility. The scale-up and
validation of a new manufacturing facility and the purchase of necessary
equipment at the new facility will require significant expenditures in 1997.

PATENTS AND PROPRIETARY RIGHTS

   The Company has adopted a policy of seeking to patent certain aspects of its
technology. The Company holds, or has exclusive rights to, 18 U.S. patents and
has five additional submissions currently in prosecution. Except for the
biomaterials patents mentioned below, which are utilized in the VAD blood pump
and cannulae, the VAD System is not protected by any patents. The Company does
not believe that this lack of patent protection will have a material adverse
effect on the Company or its ability to sell the VAD System because of the
lengthy regulatory period required to obtain approval of a ventricular assist
device. The Company is not aware of any ventricular assist devices currently
approved by the FDA or undergoing clinical trials based on the Company's product


   15


                                      -14-

design. Thoratec's proprietary biomaterials technology is covered by seven
patents. Five of these were sold to Th. Goldschmidt AG, a German chemical
manufacturer, in 1989, but the Company has retained worldwide, royalty-free,
exclusive rights to these patents for most medical applications. The Company's
vascular graft products are covered by three manufacturing process patents. The
MVAD is currently covered by two patents. One patent covers the overall design
of the device, while the other applies to one component of the energy conversion
part of the system. One of these patents is owned by Dr. Hill, Chairman of the
Board of Directors of the Company, and the Company currently has a nonexclusive
right to use that patent. Seven of the Company's 18 patents are for products
which are not commercially pertinent to Thoratec today. International patent
coverage includes the two basic biomaterial patents which are licensed from
Goldschmidt (patented in 13 countries). Also, all three of the graft patents are
filed in Canada, France and the U.K. Of Thoratec's five currently pending patent
applications, one is a design patent for the TLC-II (filed for protection in 20
countries), one relates to the biomaterials and three relate to the MVAD.

   The validity of any patents issued to the Company may be challenged by
others, and the Company could encounter legal and financial difficulties in
enforcing its patent rights against alleged infringers. In addition, there can
be no assurance that other technologies cannot or will not be developed or that
patents will not be obtained by others which would render the Company's patents
obsolete. Although the Company does not believe the patents are the sole
determinant in the commercial success of its products, the loss of a significant
percentage of its patents or its patents relating to its graft products could
have a material adverse effect on the Company's business, financial condition
and results of operations.

   The Company has developed significant technical knowledge which, although
nonpatentable, is considered by the Company to be significant in enabling it to
compete. However, the proprietary nature of such knowledge may be difficult to
protect. The Company has entered into an agreement with each key employee
prohibiting such employee from disclosing any confidential information or trade
secrets of the Company. In addition, these agreements also provide that any
inventions or discoveries relating to the business of the Company by these
individuals will be assigned to the Company and become the Company's sole
property.

   Claims by competitors and other third parties that the Company's products
allegedly infringe the patent rights of others could have a material adverse
effect on the Company. 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 to the Company and
significant diversion of the efforts of the Company's technical and management
personnel. An adverse determination in any such proceeding could subject the
Company to significant liabilities or require the Company to seek licenses from
third parties or pay royalties that may be substantial. Furthermore, there can
be no assurance that necessary licenses would be




   16


                                      -15-

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 the Company from manufacturing or selling certain of its
products, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.

COMPETITION

   Principal competitors of the VAD System include Thermo Cardiosystems Inc.,
which manufactures and markets an implantable left ventricular assist device
approved only for bridge to heart transplant in the U.S., and ABIOMED, Inc.,
which manufactures and markets an FDA-cleared biventricular assist device for
temporary circulatory support of patients in postcardiotomy shock and treatment
of cardiogenic shock following heart transplants. In addition, Novacor, a
division of Baxter International, Inc., is developing a left ventricular assist
device currently in clinical trials in the U.S. The Company believes that the
principal competitive factors in the ventricular assist device market are impact
on patient outcomes, product performance, quality, cost-effectiveness and
customer service. The Company believes that its principal competitive advantages
are the fact that the VAD System can provide left, right or biventricular
support, the smaller size and paracororeal placement of the system that allows
its use with a greater range of patients than competitive devices, the greater
range of cannulation options available and the quality of its biomaterials.
Although Thoratec believes that these attributes of the VAD System offer certain
advantages over existing ventricular assist devices, current competitors can be
expected to defend their market positions vigorously.

   The principal competitors in the vascular access graft market are W.R. Gore,
Inc. and IMPRA, Inc., which manufacture and market ePTFE grafts, Corvita
Corporation and Cardiotech International, Inc. ("Cardiotech"), which are
developing polyurethene grafts, and Possis Medical, Inc. ("Possis"), which is
developing spun polyester grafts. In addition, Cardiotech and Possis are
developing coronary artery bypass grafts. There are currently no coronary artery
bypass graft products approved for use in the U.S. The Company believes that the
principal competitive factors in the graft market are biocompatibility, patency,
reliability, cost, suturability and ease of use. The Company expects that
significant competition in the synthetic vascular graft market will continue.

   There are many companies focusing on the development of circulatory support
devices or vascular grafts that have substantially greater financial resources,
have substantially larger and more experienced sales and marketing organizations
and engage in substantially greater research and development efforts than the
Company. One or more of these or other companies could design and develop
products that compete directly with the Company's products, in which case the
Company would face intense competition. Moreover, certain academic institutions,
government agencies and other research organizations are conducting research in
areas in which the Company is working. These institutions are becoming
increasingly aware of the commercial value of their findings and are becoming
more active in seeking patent protection and licensing arrangements to collect
royalties





   17


                                      -16-

for use of technology that they have developed. These institutions may also
market competitive commercial products on their own or through joint ventures
and will compete with the Company in recruiting highly qualified scientific
personnel. Competition from commercial or other institutions or organizations
could have a material, adverse effect on the Company's business, financial
condition and results of operations.

GOVERNMENT REGULATION

   Regulation by governmental authorities in the U.S. and foreign countries is a
significant factor in the manufacture and marketing of the Company's current and
future products and in its ongoing product research and development activities.
All of the Company's 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 U.S., the Food and Drug Administration ("FDA") regulates the
manufacture, distribution and promotion of medical devices pursuant to the Food,
Drug and Cosmetics ("FDC") Act. The VAD System, TLC-II, MVAD and graft products
are, or will be regulated as medical devices. To obtain FDA approval to market
medical devices similar to those under development by the Company, the FDA
requires proof of safety and efficacy in human clinical trials performed under
an IDE. An IDE application must contain preclinical test data demonstrating the
safety of the product for human investigational use, information on
manufacturing processes and procedures, and proposed clinical protocols. If the
IDE application is accepted, human clinical trials may begin. 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 the Company is
permitted in the U.S.

   The PMA application must be supported by extensive data, including
preclinical and human clinical data, to prove the safety and efficacy of the
device. 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 responded to PMA applications
within the allotted time period, reviews more often occur over a significantly
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 device, the
manufacturer may seek marketing clearance from the FDA to market the device by
filing a 510(k) premarket notification with the FDA. The 510(k) premarket
notification must be supported by data establishing the claim of substantial


   18


                                      -17-

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 reviewed and approved by the FDA prior to
sale and marketing of the device in the U.S. Both a 510(k) and a PMA, if
granted, may include significant limitations on the indicated uses for which a
product may be marketed. FDA enforcement policy strictly 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. Although the
Company believes that certain products currently in development will be eligible
for the 510(k) submission process, there can be no assurance that the FDA will
agree with this view.

   In December 1995 the Company received FDA approval of its PMA for the bridge
to heart transplant indication for the VAD System. The same system continues to
be sold in the U.S. for controlled clinical use under an IDE for recovery of the
natural heart. The VAD System is classified as a Class III medical device under
the FDC Act. Prior to approval by the FDA, this device was marketed pursuant to
an IDE for use in clinical trials under controlled conditions by a limited
number of qualified medical institutions. The process of obtaining FDA approval
for the VAD System required 13 years after approval of the IDE.

   The Company expects that its graft products will be classified as either
Class II or Class III medical devices. The Company does not anticipate 
submitting an IDE for its VAG until the first half of 1997, but believes that it
will then be able to file a 510(k) after the clinical data is gathered. The
Company has limited clinical experience with its CABG graft product outside the
U.S. Substantial additional preclinical testing will need to be completed in the
U.S. before commencement of clinical trials on the CABG grafts in the U.S.

   The approval process for any of the Company's products is expensive and time
consuming and no assurance can be given that any regulatory agency will grant
its approval. The inability to obtain, or delays in obtaining, such approval
would adversely affect the Company's ability to commence marketing therapeutic
applications of its products. There can be no assurance that the Company will
have sufficient resources to complete the required testing and regulatory review
processes. Furthermore, the Company is unable to predict the extent of adverse
governmental regulation which might arise from future United States or foreign
legislative or administrative action.

   In addition, any products distributed by the Company 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 cGMP and GLP regulations. 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 also is subject to regulation in certain instances. See "Risk Factors
- -- U.S. Government Regulations."


   19


                                      -18-

FOREIGN REGULATIONS

   The Company is also subject to regulation in each of the foreign countries in
which it sells its products with regard to product standards, packaging
requirements, labelling requirements, import restrictions, tariff regulations,
duties and tax requirements. Many of the regulations applicable to the Company's
products in such countries are similar to those of the FDA. The national health
or social security organizations of certain countries require the Company's
products to be qualified before they can be marketed in those countries.

   To position itself for access to European and other international markets,
Thoratec 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 1946. ISO has over 92
member countries. ISO certification is widely regarded as essential to enter
Western European markets. The Company obtained certification and was registered
as an ISO 9002 compliant company in January 1995. Commencing in mid 1998, all
companies will be required to obtain "CE" marking for medical devices sold or
distributed in the European Community. The "CE" mark is an international symbol
of quality and with it, medical devices can be distributed within the European
Community which is comprised of fifteen European countries representing a
population of over 360 million people. A pre-requisite for the Company obtaining
authority to "CE" mark its 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. The Company has undergone a quality system audit for the purpose of
achieving ISO 9001/EN 46001 certification by a Notified Body (independent third
party auditor) and anticipates accomplishing this goal in 1997. The Company
plans to obtain authority to "CE" mark the TLC-II Portable Driver, other VAD
System accessories, as well as the Vascular Access Graft, in 1997.

OTHER REGULATIONS

   The Company is 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 the Company's research
and development work. Specifically, the manufacture of the Company's
biomaterials is subject to compliance with federal environmental regulations and
by various state and local agencies. Although the Company believes it is in
compliance with these laws and regulations in all material respects, there can
be no assurance that the Company will not be required to incur significant costs
to comply with environmental laws or regulations in the future.







   20


                                      -19-

THIRD PARTY REIMBURSEMENT AND COST CONTAINMENT

   The Company's 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 Medicare, Medicaid, private insurance
companies and managed care organizations, reimburse part or all of the costs and
fees associated with the procedures performed with these devices.

   Medicare and Medicaid reimbursement for hospitals is based on a fixed amount
for admitting a patient with a specific diagnosis. Because of this fixed
reimbursement method, hospitals have incentives to use less costly methods in
treating Medicare and Medicaid patients, and will frequently make capital
expenditures to take advantage of less costly treatment technologies.
Frequently, reimbursement is reduced to reflect the availability of a new
procedure or technique, and as a result hospitals are generally willing to
implement new cost saving technologies before these downward adjustments take
effect. Likewise, because the rate of reimbursement for certain physicians who
perform certain procedures has been and may in the future be reduced in the
event of further changes in the resource-based relative value scale method of
payment calculation, physicians may seek greater cost efficiency in treatment to
minimize any negative impact of reduced reimbursement. 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. Changes in reimbursement
policies and practices of third party payors could have a substantial and
material impact on sales of certain of the Company's products. The development
or increased use of more cost-effective treatment could cause such payors to
decrease or deny reimbursement to favor these treatments. To date HCFA and some
private insurers have determined to reimburse the costs of the VAD System. It is
uncertain what legislative proposals will be adopted or what actions federal,
state or private payors for healthcare goods and services may take to limit
their payments for such goods and services. The Company cannot predict whether
the VAD System will be approved for reimbursement and cannot predict the effect
the changes in the healthcare system may have on its business. As a result, no
assurance can be given that any such changes will not have a material adverse
effect on the Company's business, financial condition and results of operations.

EMPLOYEES

At February 28, 1997, the Company had 89 full-time employees, 29 of whom worked
in manufacturing, 16 in engineering, 9 in quality control and regulatory
affairs, 13 in marketing and sales support, 11 in administration and finance and
11 in other support functions (including personnel, management information,
purchasing, facility). None of the Company's employees are covered by a
collective bargaining agreement. The Company believes that its relations with
its employees are good.





   21


                                      -20-

RISK FACTORS

   The statements in this Annual Report on Form 10-K and other statements made
by the Company from time to time that relate to future plans, events or
performance 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. The following risk factors should be considered carefully in
evaluating the Company and its business by the Company's shareholders and
prospective investors in the Company.

   CURRENT FINANCIAL CONDITION; REQUIREMENT FOR ADDITIONAL FUNDS. The Company
anticipates its working capital, will be sufficient to meet its present
operating and capital requirements for at least the next year, but that it may
need substantial additional funds to continue operations thereafter. The
Company's future liquidity and capital requirements will depend upon numerous
factors, including the progress of clinical trials, the timing and cost of
future filings with, and obtaining approval from, the FDA and foreign government
authorities, the timing and cost of product introductions, the cost of
developing marketing and distribution capabilities assuming the required
regulatory approvals are received, and market acceptance of the Company's
products. The Company anticipates that it will seek additional funds primarily
through public or private offerings of debt or equity securities. There can be
no assurance that additional financing will be available on acceptable terms, if
at all. The unavailability of such financing could delay research and
development, regulatory approval, manufacturing or marketing of some or all of
the Company's products and would have a material adverse effect on the Company's
business, financial condition and results of operations.

   LACK OF PROFITABILITY; EXPECTED FUTURE LOSSES. The Company was formed in 1976
and has reported a loss from operations in all but one year of its existence. As
of December 28, 1996, the Company's accumulated deficit was approximately
$46,700,000. Thoratec has generated limited revenues to date from the sale of
the VAD System and VAG products and expects to continue to incur substantial
additional losses until it can achieve substantial product revenues.
Furthermore, the Company expects that its expenses will increase as a result of
increased research and development, preclinical and clinical testing, and
selling, general and administrative expenses. Although sales of the VAD System
as a bridge to heart transplant have commenced in the U.S., sales of the
Company's other products in the U.S. cannot begin until the products have
received FDA approval, which may not occur for several years, if at all. There
can be no assurance that any other products of the Company will be approved, can
be successfully commercialized or that the Company will achieve significant
revenues from sales of such products. In addition, there can be no assurance
that the Company will achieve profitability in the future. Failure to achieve
significant revenues or profitability would have a material adverse effect on
the Company's business, financial condition and results of operations.





   22


                                      -21-

   NO ASSURANCE OF MARKET ACCEPTANCE. The commercial success of the Company's
current and future products will require acceptance by cardiovascular and
vascular surgeons, and interventional cardiologists. Such acceptance will depend
on clinical results and the conclusion by these physicians that the products are
safe, cost-effective and acceptable alternative methods of treatment. There can
be no assurance that the Company's products will provide benefits considered
adequate by providers of cardiovascular and vascular treatments or that a
sufficient number of such providers will use the Company's products for
commercial success to be achieved. In addition, because the Company's products
are based on innovative technologies and, in some cases, represent new methods
of treatment, there may be greater reluctance to accept these products than
would occur with products utilizing established technologies or methods of
treatment. Even if the safety and efficacy of these products are established,
physicians may elect not to use them for a number of reasons including the high
cost of equipment and training associated with the use of the Company's products
or unfavorable reimbursement from healthcare payors. Failure of the Company's
products to achieve significant market acceptance would have a material adverse
effect on the Company's business, financial condition and results of operations.

   A limited number of cardiovascular and vascular surgeons, and interventional
cardiologists influence medical device selection and purchase decisions for a
large portion of the target cardiac patient population. The Company has
developed working relationships with cardiac surgeons and cardiologists at a
number of leading medical centers in connection with the development of the VAD
System. In addition, surgical teams at these medical institutions have performed
clinical trials to support the Company's applications to be filed with the FDA.
A continuing working relationship with these and other physicians and medical
centers will be important to the commercial acceptance of the VAD System and
future circulatory support and graft products. No assurance can be given that
existing relationships and arrangements can be maintained or that new
relationships will be established in support of the Company's circulatory
support and graft technology. Furthermore, economic, psychological, ethical and
other concerns may limit general acceptance of ventricular assist devices.

   SUBSTANTIAL DEPENDENCE ON LIMITED PRODUCT LINE; DEPENDENCE ON DEVELOPMENT AND
INTRODUCTION OF NEW PRODUCTS. To date, substantially all of the Company's
revenues have resulted from sales of the VAD System. The Company expects sales
from the VAD System worldwide and limited sales of the VAG products in certain
international markets outside of the U.S. to account for a significant portion
of the Company's near-term revenues. As a result, factors adversely affecting
the pricing of or demand for such products such as market acceptance,
competition or technological change could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
future financial performance will depend, in significant part, on the successful
development, introduction and customer acceptance of the Company's products
under development. Existing preclinical and clinical data relating to the
Company's products under development are very limited. Prior to any commercial
use, the products and technologies currently under development by the Company
will require significant additional research and development efforts, extensive
preclinical and clinical testing and regulatory approval. New product
development is highly uncertain and unanticipated developments, clinical and
regulatory delays, adverse or


   23


                                      -22-

unexpected side effects or inadequate therapeutic efficacy could slow or prevent
the successful completion of the Company's products and technology development
efforts. There can be no assurance that the Company will not experience
difficulties that could delay or prevent the successful development, regulatory
approval, introduction or market acceptance of these products.

   LIMITED SALES AND MARKETING EXPERIENCE; DEPENDENCE UPON DISTRIBUTORS.
Thoratec intends to market the VAD System and, if regulatory approval is
obtained, other circulatory support products and certain of its graft products
in the U.S. either through a small direct sales force or through distribution
arrangements with third parties. The Company currently has limited sales and
marketing capabilities, and expects to expend substantial resources in 1997 to
increase its sales and marketing capability in the U.S. In order to market the
Company's products effectively, such sales staff will need to develop
significant technical expertise. There can be no assurance that the Company will
be able to recruit and train adequate sales and marketing personnel or that such
sales and marketing efforts will be successful. In addition, Thoratec competes
with other companies that have extensive and well-funded sales and marketing
organizations. There can be no assurance that Thoratec's sales and marketing
staff will compete successfully against such other companies. The Company
intends to continue to rely on distributors for international sales of its graft
products and for the VAD System (other than Canada and certain areas of Europe)
and for sales of the VAG in the U.S. if regulatory approval is received. Any
international sales by the Company may be subject to certain risks, including
exchange rate fluctuations, international monetary conditions, tariffs, import
licenses, trade policies, domestic and foreign tax policies and foreign medical
regulations. To the extent the Company relies on distributors, its success will
depend upon the efforts of others, over which it may have little control. The
loss of, or lack of performance by, distributors could have a material adverse
effect on the Company's business, financial condition and results of operations.

   COMPETITION. Competition from medical device companies and medical device
subsidiaries of healthcare and pharmaceutical companies is intense and expected
to increase. Many of the Company's competitors have substantially greater
financial, technical, distribution and marketing resources than the Company. In
addition, many of these competitors have significantly greater experience than
the Company in obtaining regulatory approvals for medical devices. Accordingly,
the Company's competitors may succeed in obtaining regulatory approval for
products more rapidly than the Company. Furthermore, many of these competitors
have superior manufacturing capabilities, and such competitors may be able to
manufacture products more efficiently and at a lower cost than the Company and,
therefore, offer comparable products at a lower cost.

   Any product developed by the Company that gains regulatory approval will have
to compete for market acceptance and market share. An important factor in such
competition may be the timing of market introduction of competitive products.
Accordingly, the relative speed with which the Company can develop products,
complete clinical testing, receive regulatory approval and manufacture and sell
commercial quantities of products are expected to be important competitive
factors. The Company believes that the primary competitive factors in the market
for ventricular




   24


                                      -23-

assist devices are impact on patient outcomes, product performance, quality and
cost-effectiveness, and that the primary competitive factors for vascular graft
products are biocompatibility, patency, reliability, cost, suturability and ease
of use. The Company also believes that physician relationships and customer
support are important competitive factors.

   U.S. GOVERNMENT REGULATIONS. The research and development, manufacturing,
marketing and distribution of the Company's products in the U.S. are governed by
the Federal Food, Drug, and Cosmetic Act and the regulations promulgated
thereunder (the "FDC Act and Regulations"). The FDA administers the FDC Act and
Regulations, and the Company is subject to inspection by the FDA for compliance
with such regulations and procedures. The process of obtaining FDA approval is
lengthy and uncertain. In order for the Company to market future products in the
U.S., the Company must obtain clearance from the FDA of a 510(k) premarket
notification or approval of a more extensive submission known as a PMA. The
Company is also subject to the FDA's current Good Manufacturing Practice
("cGMP") and Good Laboratory Practice ("GLP") regulations. These regulations
require that the Company manufacture its products and maintain its records in a
prescribed manner. The FDA periodically inspects the Company's facilities for
compliance with cGMP.

   Under FDA requirements, if a manufacturer can establish that a newly
developed device is "substantially equivalent" to a device marketed prior to
1976, the manufacturer may seek marketing clearance by filing a 510(k) premarket
notification with the FDA. 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
reviewed and approved by the FDA prior to sale and marketing of the device in
the U.S. The process of obtaining approval for a PMA can be expensive, uncertain
and lengthy, frequently requiring anywhere from one to several or more years
from the date of FDA submission, but it could take longer. Both a 510(k) and a
PMA, if accepted or approved, may include significant limitations on the
indicated uses for which a product may be marketed. FDA enforcement policy
strictly prohibits the promotion of approved medical devices for unapproved
indications. In addition, product approvals can be withdrawn for failure to
comply with regulatory requirements or the occurrence of unforeseen problems
following initial marketing.

   In December 1995 the Company received FDA approval to market the VAD System
in the U.S. as a bridge to heart transplant. The same system continues to be
sold in the U.S. for controlled clinical use under an IDE for recovery of the
natural heart. In March 1997 the Company submitted a PMA Supplement to the
FDA for preliminary review for the postcardiotomy recovery indication, and the
Company may file other PMA Supplements for other changes, such as changes in
manufacturing operations. The Company also plans to submit an IDE application
for the TLC-II in mid-1997. All of the Company's other circulatory support
products are in preclinical development. The Company anticipates submitting an
IDE application for the VAG in the first half of 1997 and expects to file a
510(k) premarket notification after the clinical data is gathered. However,
there can be no assurance that


   25


                                      -24-

such filings will be made, or that the filings will be accepted or products will
be approved by the FDA. The Company will need to complete extensive preclinical
testing before an IDE application can be filed for the CABG graft. The PMA
application required for the CABG graft will need to include the results of
extensive clinical studies and manufacturing information.

   There can be no assurance that the FDA will act favorably or quickly in its
review of the Company's 510(k) submissions or PMA applications, and significant
difficulties and costs may be encountered by the Company in its efforts to
obtain FDA clearance that could delay or preclude the Company from selling its
graft or additional circulatory support products in the U.S. Furthermore, there
can be no assurance that the FDA will not limit the intended use of the
Company's products as a condition of 510(k) acceptance or PMA approval. Further,
if the Company proposes modifications to a product after FDA clearance of a
510(k) premarket notification or approval of a PMA, including changes in
indications (as is the case with the VAD System) or other significant
modifications to labeling or manufacturing, the Company will be required to
obtain additional approvals from the FDA. Failure to receive or delays in
receipt of FDA clearances or approvals, including the need for extensive
clinical trials or additional data as a prerequisite to clearance or approval,
or any FDA limitations on the intended use of the Company's products, would have
a material adverse effect on the Company's business, financial condition and
results of operations.

   INTERNATIONAL REGULATIONS. A significant percentage of the Company's product
revenues are derived from sales outside the U.S., and distribution of the
Company's products outside the U.S. is subject to extensive government
regulation. These regulations, including the requirements for approvals or
clearance to market, and the time required for regulatory review and the
sanctions imposed for violations, vary from country to country. There can be no
assurance that the Company will obtain regulatory approvals in such countries or
that it will not be required to incur significant costs in obtaining or
maintaining its foreign regulatory approvals. In addition, the export by the
Company of certain of its products which have not yet been cleared for domestic
commercial distribution may be subject to FDA export restrictions. Failure to
obtain necessary regulatory approvals, the restriction, suspension or revocation
of existing approvals or any other failure to comply with regulatory
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations.

   In order to sell its products in Europe, the Company is required to receive a
"CE" mark certification, an international symbol of quality and compliance with
applicable European medical device directives. The Company has received a CE
mark for the VAD System Dual Driver and is pursuing CE mark certification for
the VAG and TLC-II. Failure to receive a CE mark certification for subsequently
developed products will prohibit the Company from selling such products in
Europe and would have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will be successful in meeting such certification requirements for
its future products.





   26
                                      -25-

   To position itself for access to European and other international markets,
Thoratec also sought and obtained certification under the International
Standards Organization (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. Commencing in mid-1998,
all companies will be required to obtain "CE" marking for medical devices sold
or distributed in the European Community. The "CE" mark is an international
symbol of quality and with it, medical devices can be distributed within the
population of over 360 million people. A pre-requisite for the Company obtaining
authority to "CE" mark its 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. The Company has undergone a quality system audit for the purpose of
achieving ISO 9001/EN 46001 certification by a Notified Body (independent third
party auditor) and anticipates accomplishing this goal in 1997. The Company
plans to obtain authority to "CE" mark the TLC-II Portable Driver, other VAD
System accessories, as well as the Vascular Access Graft, in 1997.

   RISK OF TECHNOLOGICAL OBSOLESCENCE. The medical device industry is
characterized by rapid and significant technological change. There can be no
assurance that third parties will not succeed in developing or marketing
technologies and products that are more effective than those developed or
marketed by the Company or that would render the Company's technology and
products obsolete or noncompetitive. Additionally, new surgical procedures and
medications could be developed that replace or reduce the importance of current
procedures that use the Company's products. Accordingly, the Company's success
will depend in part on its ability to respond quickly to medical and
technological changes through the development and introduction of new products,
or modification of existing products. There can be no assurance that the Company
will be successful in these efforts.

   LIMITED MANUFACTURING CAPABILITY. The Company currently manufactures its
biomaterials, the VAD System and the VAG at its Berkeley, California facility.
The Company is leasing a build-to-suit 62,000 square foot corporate
headquarters and manufacturing plant which is scheduled for completion in 1997.
To date, the Company's manufacturing activities have consisted primarily of
manufacturing limited quantities of the VAD System and the VAG for international
sale and clinical trials in the U.S. Although the Company believes that it
currently has the ability to produce sufficient quantities of the VAD System and
the VAG to support its current needs and its needs for early-stage clinical
trials of the TLC-II, MVAD and certain of its graft products, it will need to
acquire additional manufacturing facilities and improve its manufacturing
technology in order to meet the volume and cost requirements for significant
commercial sales of these products. In addition, the Company does not have
experience in manufacturing its products in the commercial quantities that might
be required if the Company successfully receives FDA approval of several or all
of the products currently under development. The failure to acquire additional
manufacturing facilities or to develop the necessary manufacturing expertise
would have a material adverse effect on the Company's business, financial
condition and results of operations.





   27


                                      -26-

   In addition, the manufacture of the Company's products is complex and costly,
involving a number of separate processes and components. Certain manufacturing
processes of the VAD System are labor intensive, and achieving significant cost
reductions will depend in part upon reducing the time required to complete these
processes. There can be no assurance that the Company will be able to achieve
cost reductions in the manufacture of its products. In addition, manufacturers
often encounter difficulties in scaling up manufacturing of new products,
including problems involving product yields, quality control and assurance,
component and service availability, adequacy of control policies and procedures
and lack of qualified personnel. The Company has and will continue to consider
as appropriate the internal manufacture of components currently provided by
third parties, as well as the implementation of new production processes. There
can be no assurance that Thoratec will be able to obtain or manufacture such
products in a timely fashion at acceptable quality and prices, that it or its
suppliers can comply with cGMP or GLP requirements, or that it or its suppliers
will be able to manufacture an adequate supply of products.

   DEPENDENCE ON THIRD PARTIES FOR SUPPLIES. Thoratec depends on single source
suppliers for certain of the raw materials used in the manufacture of its
products. The Company also utilizes materials and component parts supplied by
third parties in its products. In the event the Company must obtain alternative
sources for key raw materials or component parts, there can be no assurance that
such materials or component parts will be available for purchase from
alternative suppliers, that alternative suppliers will agree to supply the
Company, that the Company's use of such suppliers would be approved by the FDA,
or if unavailable, that the Company would have the expertise or resources
necessary to produce such materials or component parts internally. As such, any
interruption in supply of raw materials or component parts could have a material
adverse effect on the Company's ability to manufacture its products until a new
source of supply is located and, therefore, could have a material adverse effect
on its business, financial condition and results of operations. In 1995 the
supplier of mechanical valves for the VAD System stopped production. Although
the Company purchased a supply of these valves that it believes will satisfy its
needs through 1997 and is taking steps to secure a new supplier, there can be no
assurance that a new source of supply will be available when necessary. The
Company will also need to qualify a replacement valve or a new vendor for the
current valves with the FDA, the failure of which would have a material adverse
effect on the Company's business, financial condition and results of operations.

   UNCERTAINTY RELATED TO HEALTHCARE REIMBURSEMENT FOR THE VAD SYSTEM.
Significant uncertainty exists as to the reimbursement status of newly approved
healthcare products such as the VAD System. Government and other third party
payors are increasingly attempting to contain healthcare costs by limiting both
coverage and the level of reimbursement of new therapeutic products and 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 the Health Care Financing Administration ("HCFA"), the federal
agency responsible for determining whether, and to what extent, medical products
and procedures are reimbursable under Medicare and Medicaid, and some private
insurers, have determined to reimburse the costs of the VAD System. The Company
cannot predict whether the VAD System will continue to be approved for


   28


                                      -27-

reimbursement and cannot predict the effect the changes in the healthcare system
may have on the reimbursability of future products. Failure to obtain such
reimbursement could have a material adverse effect on the Company's business,
financial condition and results of operations.

   PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY. The Company's ability to
compete effectively with other companies will depend, in part, on its ability to
maintain the proprietary nature of its technology, products and manufacturing
processes. The Company relies on patents, trade secrets and know-how to maintain
its competitive position. The Company has been issued or has licensed a number
of U.S. and foreign patents covering its core biomaterials technology and its
graft technologies. In addition, many other U.S. and foreign patent applications
have been filed. Aside from the biomaterials patents mentioned above, which are
utilized in the VAD blood pump and cannulae, the VAD System is not protected by
any patents. The Company does not believe that this lack of patent protection
will have a material adverse effect on the Company or its ability to sell the
VAD System because of the lengthy regulatory period required to obtain approval
of a ventricular assist device. The Company is not aware of any ventricular
assist devices currently approved by the FDA or undergoing clinical trials based
on the Company's product design. There can be no assurance that any existing or
future patent applications by the Company will result in issued patents or that
any current or future issued or licensed patents, trade secrets or know-how will
afford sufficient protection against competitors with similar technologies or
processes, or that any patents issued will not be infringed upon or designed
around by others. In addition, there can be no assurance that others will not
independently develop proprietary technologies and processes which are the same
as or substantially equivalent to those of the Company. Further, there can be no
assurance that the Company will not infringe prior or future patents owned by
others, that the Company will not need to acquire licenses under patents
belonging to others for technology potentially useful or necessary to the
Company, or that such licenses will be available to the Company, if at all, on
terms acceptable to the Company. The Company could incur substantial costs in
defending itself in suits brought against it on such patents or in bringing
suits to protect the Company's patents or patents licensed by the Company
against infringement. The Company also protects its proprietary technology and
processes in part by confidentiality agreements with its licensees, employees
and consultants. There can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or independently
discovered by competitors.

   EXPOSURE TO CLAIMS. The Company's business exposes it to an inherent risk of
potential product liability claims related to the manufacturing, marketing and
sale of human medical devices. The Company maintains only a limited amount of
product liability insurance but will seek to obtain additional product liability
insurance as its products are commercialized. The Company also maintains
commercial general and property insurance. The Company's insurance policies
generally must be renewed on an annual basis. There can be no assurance that the
Company will be able to maintain or increase such insurance on acceptable terms
or at reasonable costs, or that such insurance will provide the Company with
adequate coverage against potential liabilities. A successful claim brought
against the Company in excess of, or outside of, its insurance coverage could
have a material adverse effect on the Company's business, financial condition
and results of operations. Claims


   29


                                      -28-

against the Company, regardless of their merit or potential outcome, may also
have a material adverse effect on the Company's ability to obtain physician
endorsement of its products or expand its business.

   ATTRACTION AND RETENTION OF KEY EMPLOYEES. The Company's future business and
operating results will depend in significant part on the continued contributions
of principal members of its management and scientific staff, the loss of any of
whose services might adversely impact the achievement of planned development and
product introduction objectives. In addition, the Company's anticipated growth
and product introductions will require additional expertise in the areas of
clinical testing, government approvals, finance, engineering and marketing, all
of which will place increased demand on the Company's resources. These demands
are expected to require the addition of new management personnel, particularly
in the regulatory and finance areas, and the development of additional expertise
by existing management personnel. Recruiting and retaining qualified personnel
to perform these functions will be critical to the Company's success.
Competition for such personnel is intense and there can be no assurance that the
Company will be able to recruit and retain such individuals on acceptable terms
given the competition for experienced personnel from numerous medical device,
healthcare and pharmaceutical companies and academic and other research
institutions. The loss of key employees, the Company's inability to attract and
retain skilled employees, as needed, or the failure to acquire or develop
necessary expertise could have a material adverse effect on the Company's
business, financial condition and results of operations.

   RISK OF HEALTHCARE REFORM. There are widespread efforts to control healthcare
costs in the U.S. on the federal, state and local levels. The Company
anticipates that Congress and state legislatures will continue to review and
assess alternative healthcare delivery systems and payment methods. To date,
several of the proposals have included measures that would limit or eliminate
payments for certain medical procedures and treatments. If enacted into law, any
of these proposals could affect the amount of reimbursement payments that are
made to hospitals and physicians and, in turn, demand for the Company's
products. Due to uncertainty regarding the ultimate features of reform
initiatives and their enactment and implementation, the Company cannot predict
which, if any, reform proposals will be adopted, when they may be adopted or
what impact they may have on the Company. There can be no assurance that such
reforms, if enacted, or administrative responses to budgetary constraints, will
not have a material adverse effect on the Company's business, financial
condition and results of operations.

   VOLATILITY OF STOCK PRICE. The price of the Company's Common Stock has been,
and is likely to continue to be, highly volatile. Future announcements
concerning the Company or its competitors, quarterly variations in operating
results, introduction of new products or changes in product pricing policies by
the Company or its competitors, acquisition or loss of significant customers,
partners, distributors and suppliers, changes in earnings estimates by analysts,
regulatory developments, or fluctuations in the economy or general market
conditions, among other factors, could cause the market price of the Common
Stock to fluctuate substantially. In addition, stock markets in general, and the
market for shares of healthcare stocks in particular, have experienced extreme
price and volume fluctuations in recent years which has frequently been
unrelated to the operating


   30


                                      -29-

performance of the affected companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock. There can be no
assurance that the market price of the Company's Common Stock will not decline
below its current price or that it will not experience significant fluctuations
in the future, including fluctuations that are unrelated to the Company's
performance.

ITEM 2.  PROPERTY

FACILITIES

   Thoratec occupies a leased facility in Berkeley, California, totaling
approximately 28,000 square feet where its research and development, marketing,
engineering, and manufacturing activities are carried out. The manufacturing
areas have been inspected, approved, and licensed by the U.S. FDA and the State
of California Department of Health Services, Food and Drug Section for the
manufacture of medical devices. The lease on this building will expire in August
1999. The Company also has small leased facilities in Canada and the United
Kingdom.

   In 1996 the Company entered into a lease agreement on a new manufacturing
facility to be located within 50 miles of its current facility. This building,
when completed, will accommodate all of the Company's manufacturing, engineering
and administrative activities. The building is scheduled to be completed and
ready for occupancy in mid 1997. The company will invest approximately $5 to $7
million in equipment and leasehold improvements to the building prior to
occupancy. Annual lease payments, as amended, will initially be approximately
$657,000 for a lease term of 15 years and will commence four months after the
landlord has delivered the completed building shell to the Company. The lease
includes provisions, among others, for annual cost of living adjustments to the
lease payments, two five-year renewal options, a purchase option, and a security
deposit of $885,600, which the Company paid in 1996. A significant portion
($750,000) of the security deposit can be reduced or eliminated before the end
of the initial lease term if the Company meets certain criteria as specified by
the contract.

ITEM 3.  LEGAL PROCEEDINGS

          None.

ITEM 4.  SUBMISSIONS OF MATERS TO A VOTE OF SECURITY HOLDERS

          None.



   31


                                      -30-


EXECUTIVE OFFICERS OF REGISTRANT

          D. KEITH GROSSMAN, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR Mr.
Grossman joined Thoratec Laboratories Corporation as President and Chief
Executive Officer in January 1996. He was elected to the Board of Directors in
February 1996. Prior to joining Thoratec, Mr. Grossman was a Division President
of Major Pharmaceuticals, Inc., from May 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.

          CHERYL D. HESS, VICE PRESIDENT - FINANCE, CHIEF FINANCIAL OFFICER AND
SECRETARY Ms. Hess joined the Company as Vice President - Finance and Chief
Financial Officer in December 1983 and became Secretary in 1994. Prior to
joining Thoratec, Ms. Hess was a manager with the public accounting firm of
Deloitte & Touche LLP, where she specialized in audit and financial advisory
services for entrepreneurial, rapidly-growing, high technology companies. Ms.
Hess is responsible for the direction of all financial management, control and
reporting activities for Thoratec, as well as certain administrative and
operational activities. Ms. Hess is a Certified Public Accountant.

          THOMAS E. BURNETT, JR., VICE PRESIDENT - SALES AND MARKETING Mr.
Burnett joined the Company as Vice President - Sales and Marketing in August
1996. Prior to joining Thoratec, Mr. Burnett was Vice President of Sales and
Marketing at Calcitek, Inc. where he was responsible for global sales and
marketing which included a direct domestic salesforce and an international
network encompassing 30 countries as well as new business development, strategic
and operational planning. Prior to Calcitek, Mr. Burnett held a variety of sales
and sales management positions for Kendall McGaw Laboratories, a producer of
intravenous solutions, infusion equipment and parenteral pharmaceuticals.

          DAVID J. FARRAR, PH.D., VICE PRESIDENT - RESEARCH AND DEVELOPMENT Dr.
Farrar joined the Company as Program Manager of the VAD System 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.

          DAN E. NIELSEN, VICE PRESIDENT - OPERATIONS Mr. Nielsen joined the
Company as Vice President - Operations in 1977. Prior to joining Thoratec, Mr.
Nielsen was Vice President of Manufacturing with G.D. Searles Cardiopulmonary
Division for two years, and Manager of Manufacturing for Gould-Statham
Instruments, where he worked for 11 years.





   32


                                      -31-

          DONALD A. MIDDLEBROOK, VICE PRESIDENT - REGULATORY AFFAIRS/QUALITY
ASSURANCE Mr. Middlebrook joined the Company as Vice President - Regulatory
Affairs/Quality Assurance in September 1996. Before joining Thoratec, 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 this, Mr. Middlebrook spent fifteen years with
Baxter International in a number of progressing positions, including Vice
President of Regulatory Affairs and Quality Assurance for the CardioVascular
Group, a producer of a wide range of cardio, critical care, vascular, and less
invasive cardiovascular products.






   33


                                      -32-


                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

          The common stock of the Company is currently traded on the Nasdaq
National Market tier of The Nasdaq Stock Market under the symbol "THOR". The
following table sets forth the range of high and low bid quotations for the
common stock as reported prior to June 27, 1996 by the Boston Stock Exchange or
the Nasdaq Small Cap tier of The Nasdaq Stock Market, and since June 27, 1996
the high and low closing sale price as reported by the Nasdaq National Market
tier of The Nasdaq Stock Market. At February 28, 1997 there were approximately
850 registered holders of the Company's common stock.



   1995                      High                         Low
- -------------------
                                                     
1st Quarter             $    6.75                   $     4.88
2nd Quarter                  6.75                         5.25
3rd Quarter                 10.50                         5.63
4th Quarter                 15.75                        10.50



   1996
- -------------------
1st Quarter             $   21.75                   $    14.63
2nd Quarter                 31.00                        12.00
3rd Quarter                 13.50                         9.00
4th Quarter                 11.50                         9.00


             The Company has not declared any dividends on its common stock.



   34


                                      -33-

ITEM 6.      SELECTED FINANCIAL DATA


ITEM                                                   1996            1995           1994            1993          1992
- --------------------------------------------------------------------------------------------------------------------------

Income Statement Data:
                                                                                                          
Revenue                                            $ 8,086,942     $ 3,547,925    $ 2,787,989    $ 3,933,079    $3,733,151
Research and development                             3,723,713       1,984,101      1,360,253      1,478,448     1,007,028
Net loss before extraordinary item                  (3,262,741)     (1,894,166)    (1,646,898)      (725,087)     (459,934)
Net income/(loss)*                                  (3,262,741)     (1,894,166)    (1,646,898)      (725,087)    1,429,629
Fully diluted:
  Net loss per share before extraordinary item           (0.20)          (0.13)         (0.12)         (0.05)        (0.08)
  Net income (loss) per share                            (0.20)          (0.13)         (0.12)         (0.05)         0.25
Number of shares used in the computation**          16,693,820      14,428,539     14,192,621     14,122,221     5,771,241
- --------------------------------------------------------------------------------------------------------------------------

Balance Sheet Data:

Working capital                                   $ 17,265,874     $ 2,807,667    $ 2,025,073    $ 2,105,807    $2,961,831
Total assets                                        21,970,445       4,380,037      3,605,008      3,598,930     4,188,034
Long-term obligations                                                1,675,000      1,675,000
Shareholders' equity                                19,329,890       1,662,671      1,057,204      2,636,835     3,308,991



  *   Net income in 1992 is after a $1.89 million extraordinary gain on 
      debt restructuring.
  **  As adjusted to reflect the one-for-three reverse split of the 
      Company's Common Stock effected in June 1996.  See Notes to Financial
      Statements.


   35
                                      -34-

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

       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. 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 under "Item 1 - Risk Factors" and
elsewhere 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. The Company undertakes 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.

       LIQUIDITY AND CAPITAL RESOURCES

       At the end of 1996 the Company had working capital of $17,266,000
compared with $2,808,000 at the end of 1995. The increase in working capital was
due to proceeds received from the public offering of the Company's common stock
discussed below, proceeds received upon the exercise of warrants to purchase
common stock in the first quarter of 1996 and proceeds received from option
exercises, partially offset by increased loss from operations and capital
expenditures, including deposits on leased facilities. Concurrent with the above
noted warrant exercise, all outstanding secured notes payable were converted
into common stock. Receivables increased principally due to increasing sales.
Inventory increased in preparation for planned increases in sales activity.
Accounts payable and accrued liabilities increased due to capital asset
purchases made near year end and costs associated with increased research and
development activity, increased personnel costs, and increased patent, FDA and
legal costs.

       In July 1996, the Company sold, through an underwritten public offering,
1,644,000 shares of common stock at $12.00 per share. Included in the 1,644,000,
are 144,000 shares sold pursuant to an underwriters' over-allotment option. Net
proceeds received by the Company related to this offering were approximately
$17,591,000 after underwriters' commissions and approximately $1,050,000 of
other costs.

       Also in July, the Company entered into a lease agreement on a new
manufacturing facility to be located within 50 miles of its current facility.
This building, when completed, will accommodate all of the Company's
manufacturing, engineering and administrative activities. The building is
scheduled to be completed and ready for occupancy in mid 1997. The Company will
invest approximately $5 to $7 million in equipment and leasehold improvements to
the building prior to occupancy. Annual lease payments will initially be
approximately $657,000 for a lease term of 15 years and will commence four
months after the landlord has delivered the completed building shell to the
Company. The lease includes provisions, among others, for annual cost of living
adjustments to the lease payments, two five-year renewal options, a purchase
option, and a security deposit of



   36


                                      -35-

$885,600, which the Company paid in July 1996. A significant portion ($750,000)
of the security deposit can be reduced or eliminated and returned to the Company
before the end of the initial lease term if the Company meets certain criteria
as specified by the contract. See Note 5 of Notes to the Financial Statements.

       With the proceeds of the above noted public offering, the Company
believes that it has sufficient funds to increase its marketing efforts, to
increase manufacturing efficiencies through construction of its new
manufacturing facility and to develop new sources of revenue, including new
products. However, the Company expects that its operating expenses will increase
in future periods as the Company expends increased amounts on product
manufacturing and marketing and on research and development of new product
lines. As a result, the Company expects to incur net losses for at least the
next year. There can be no assurance that the Company will achieve profitability
or positive cash flow.

       The Company does not expect that inflation will have a material impact on
its operations.

       RESULTS OF OPERATIONS

       Product sales in 1996 were $7,503,000 compared to $3,489,000 in 1995. The
115% increase is primarily the result of increased sales of the VAD System in
the United States following FDA approval of the System in late 1995 and efforts
of a direct sales organization established in late 1995 and early 1996. Domestic
sales increased $3,943,000, or 258%, in 1996. Interest and other income
increased $525,000 to $584,000 in 1996 due principally to higher cash balances
primarily as a result of proceeds received from the Company's public stock
offering in July 1996.

       Cost of sales increased $1,281,000, or 65%, in 1996 compared to 1995 as a
result of the higher sales volume in 1996 and approximately $200,000 incurred to
upgrade existing investigational center equipment. Gross margins increased from
43% in 1995 to 57% in 1996 due to the ability of the Company to raise selling
prices of its VAD pumps beginning in the second quarter of 1996, offset by the
$200,000 upgrade charge.

       Research and development expenses for 1996 increased $1,740,000, or 88%,
compared to 1995 due to increased costs associated with the development of the
Company's portable VAD driver, the TLC-II, and its graft products and
preparation for a PMA supplement for a new indication for use for its existing
VAD System. Selling, general and administrative expenses in 1996 increased
$2,654,000, or 205%, compared to 1995 principally as a result of establishing
the domestic sales and marketing organization, increased recruiting costs for
both marketing and administrative personnel, corporate and legal expenses
associated with trademark and patent submissions and general support needed for
expected growth. Interest expense for 1996 was $46,000 compared to $185,000 for
1995 due to conversion of $1,675,000 of convertible notes in the first quarter
of 1996 into 342,537 shares of common stock. In addition, the Company recorded a
$378,000 noncash debt conversion expense in the first quarter of 1996,
representing the amount of value given up by the Company in order to induce
early exercise of the related warrants.


   37


                                      -36-

       Sales of Thoratec products in 1995 were 26% higher than product sales in
1994. This is the net result of a 58% increase in international sales of the
Thoratec(R) VAD System due primarily to the start up of new centers and a
$35,000 decrease in sales of grafts. Domestic sales of VAD Systems were up 6%,
representing increased usage at existing IDE sites. No new centers were started
in the United States in 1995, pending the receipt of approval of the VAD System
by the FDA, which was received December 20, 1995. Research and development costs
increased in 1995 compared to 1994 due to increased spending on the TLC-II, the
Company's new portable driver for its VAD System. Marketing expense increased in
1995 in preparation for the commercial introduction of the VAD System.
Administrative expenses decreased in 1995 from 1994 due to decreased spending on
outside professional services used for various corporate projects. Interest
expense increased $141,000 in 1995 compared to 1994 due to the convertible notes
placed in October 1994.

       The Company expects profitability will continue to be adversely impacted
by various fixed costs until all its current products have received pre-market
approval in the United States and approval for sale in its major international
markets. In December 1995, the Company received FDA approval for its VAD System
as a bridge to transplantation. The Thoratec(R) VAD System continues to be sold
under an IDE for recovery of the natural heart.

        The Company has adopted only the disclosure requirements of Statement of
Financial Accounting Standards No. 123; "Accounting for Stock-Based
Compensation;" therefore adoption had no effect on the Company's consolidated
net loss or cash flows.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

       The financial statements of the Company, together with the report thereon
by Deloitte & Touche LLP, independent auditors, are set forth at pages F-1 to
F-15 of this Report on Form 10-K.


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

       Not applicable.





   38


                                      -37-

                                    PART III

       Certain information required by part III is omitted from this Report on
Form 10-K in that the Company will file its definitive Proxy Statement for its
Annual Meeting for Shareholders to be held on May 16, 1997, pursuant to
Regulation 14A of the Securities and Exchange Act of 1934, as amended (the
"Proxy Statement"), not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included in the Proxy Statement
is incorporated herein by reference.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

          (a)    Executive Officers - See the section titled "Executive
                 Officers" in Part I, Item 4 hereof.

          (b)    Directors - The information required by this Item is
                 incorporated by reference to the section entitled
                 "Election of Directors" in the Proxy Statement.

       The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Reporting Delinquencies" in the
Proxy Statement.

ITEM 11.  EXECUTIVE COMPENSATION

       The information required by this item is incorporated by reference to the
section entitled "Executive Compensation" in the Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

       The information required by this item is incorporated by reference to the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

       The information required by this item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.



   39


                                      -38-


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

             (a).   Exhibits and Index of Exhibits



Exhibit No.                          Exhibit
- --------------- --------------------------------------------------------
                                                                    
    3(a)       Registrant's Certificate of Incorporation, as amended.  (1)
    3(b)       Registrant's By-Laws, as amended.  (1)
    4(a)       Form of Convertible Secured Promissory Note. (7)
    10(p)      Lease Agreement dated July 5, 1979, between the Registrant and
               Scenic Arts Incorporated, as amended.  (2)
   10(ii)      Amended 1984 Incentive Stock Option Plan.  (4)
   10(eee)     Amended 1988 Non-Qualified Stock Option Plan.  (4)
   10(fff)     1993 Stock Option Plan.  (6)
   10(ggg)     Agreement for the Acquisition of Th. Goldschmidt AG of Certain
               of the Assets of Thoratec Laboratories Corporation dated as of
               March 29, 1989.  (3)
   10(jjj)     Thoratec Laboratories Corporation and COBE Laboratories, Inc.
               Common Stock Purchase Agreement dated November 23, 1992.  (5)
   10(kkk)     License Agreement Between Thoratec Laboratories Corporation and
               COBE Laboratories, Inc. dated as of November 23, 1992.  (5)
   10(lll)     Lease Agreement dated July 25, 1996, between Registrant and Main
               Street Associates, as amended(8).
   10(mmm)     1996 Stock Option Plan(9).
   10(nnn)     1996 Nonemployee Directors Stock Option Plan(9).
     11        Statement Re: Computation of Per-Share Earnings
     23        Independent Auditors' Consent-- Deloitte & Touche LLP.
     25        Power of Attorney-- Reference is made to pages 41 and 42 hereof.
     27        Financial Data Schedule.





   40


                                      -39-



     Footnotes
    to Exhibits
    -----------

       
    (1)   Filed as an Exhibit with corresponding exhibit number to Thoratec's
          Registration Statement on Form S-1 (Registration No. 2-87293) and
          incorporated herein by reference.

    (2)   Filed as an Exhibit with corresponding exhibit number to Thoratec's
          Registration Statement on Form S-1 (Registration No. 2-70903) and
          incorporated herein by reference.

    (3)   Filed as an Exhibit with corresponding exhibit number to Thoratec's
          Annual Report for the fiscal year ended December 30, 1989 and
          incorporated herein by reference.

    (4)   Filed as an Exhibit with corresponding exhibit number to Thoratec's
          Annual Report for the fiscal year ended December 29, 1990 and
          incorporated herein by reference.

    (5)   Filed as an Exhibit with corresponding exhibit number to Thoratec's
          Annual Report for the fiscal year ended January 2, 1993 and
          incorporated herein by reference.

    (6)   Filed as an Exhibit with corresponding exhibit number to Thoratec's
          Annual Report for the fiscal year ended January 1, 1994 and
          incorporated herein by reference.

    (7)   Filed as an Exhibit with corresponding exhibit number to Thortec's
          Annual Report for the fiscal year ended December 31, 1994 and
          incorporated herein by reference.

    (8)   Filed as an Exhibit with corresponding exhibit number to Thoratec's
          Quarterly Report on Form 10-Q for the fiscal quarter ended June
          29, 1996 and incorporated herein by reference.

    (9)   Filed as an Exhibit with corresponding exhibit number to Thoratec's
          Registration Statement on Form S-8 (Registration No. 333-11883) and 
          incorporated herein by reference.


(b)    Reports on Form 8-K

        None filed in 1996.


   41


                                      -40-

                                   SIGNATURES


             In accordance with Section 13 or Section 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                           THORATEC LABORATORIES CORPORATION



                           By:        /s/ D. Keith Grossman
                              ---------------------------------
                              D. Keith Grossman, Chief Executive Officer

                           Date: March 13, 1997
                                -------------------------------



   42


                                      -41-

                                POWER OF ATTORNEY

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

          In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.

        Signature                    Title                       Date
- -------------------------   -------------------------  -------------------------


  /s/ D. Keith Grossman      Chief Executive Officer,        March 6, 1997
- -------------------------    President and Director    -------------------------
    D. Keith Grossman                  



  /s/ Christy W. Bell        Director                        March 6, 1997
- -------------------------                              -------------------------
     Christy W. Bell



   /s/ Howard E. Chase       Director                        March 6, 1997
- -------------------------                              -------------------------
     Howard E. Chase



  /s/ J. Donald Hill         Director and Chairman of        March 6, 1997
- -------------------------    the Board of Directors    -------------------------
     J. Donald Hill                    




   43


                                      -42-

                          POWER OF ATTORNEY (continued)


        Signature                    Title                       Date
- -------------------------   -------------------------  -------------------------


 /s/ William M. Hitchcock   Director                         March 6, 1997
- -------------------------                              -------------------------
    William M. Hitchcock



 /s/George Holbrook, Jr.    Director                         March 6, 1997
- -------------------------                              -------------------------
   George Holbrook, Jr.



 /s/ Cheryl D. Hess         Vice President - Finance         March 6, 1997
- -------------------------   (Principal Financial and   -------------------------
    Cheryl D. Hess          Accounting Officer)


   44
INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors of
Thoratec Laboratories Corporation:


We have audited the accompanying consolidated balance sheets of Thoratec
Laboratories Corporation and Subsidiary (the "Company") as of December 28, 1996
and December 30, 1995, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the fiscal years ended December 28,
1996, December 30, 1995 and December 31, 1994. 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 generally accepted auditing
standards. 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 consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Thoratec Laboratories Corporation
and Subsidiary at December 28, 1996 and December 30, 1995, and the result of
their operations and their cash flows for the fiscal years ended December 28,
1996, December 30, 1995 and December 31, 1994 in conformity with generally
accepted accounting principles.


/s/ DELOITTE & TOUCHE LLP
- -------------------------------



San Francisco, California
February 14, 1997


                                                                             F-1

   45

THORATEC LABORATORIES CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS



                                                                                       Fiscal Year End
                                                                     ---------------------------------------------------

                                                                          December 28,                December 30,
ASSETS                                                                        1996                        1995
                                                                     -----------------------     -----------------------
                                                                                                               
CURRENT ASSETS:
Cash and cash equivalents                                            $             5,348,000     $             1,645,523
Short-term investments available-for-sale                                         10,631,990
Receivables (Note 10)                                                                833,700                     581,298
Inventories (Note 4)                                                               2,826,220                   1,374,164
Prepaid expenses and other (Note 6)                                                  266,519                     249,048
                                                                     -----------------------     -----------------------
Total current assets                                                              19,906,429                   3,850,033
EQUIPMENT AND IMPROVEMENTS -- AT COST:
Equipment                                                                          1,714,407                   1,333,521
Leasehold improvements                                                               794,692                     785,564
Construction in progress (Note 5)                                                    534,089
                                                                     -----------------------     -----------------------
Total                                                                              3,043,188                   2,119,085
Accumulated depreciation and amortization                                         (1,908,667)                 (1,725,726)
                                                                     -----------------------     -----------------------
Equipment and improvements - net                                                   1,134,521                     393,359
OTHER ASSETS (Notes 5 and 6 )                                                        929,495                     136,645
                                                                     -----------------------     -----------------------
TOTAL ASSETS                                                         $            21,970,445     $             4,380,037
                                                                     =======================     =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable                                                     $             1,352,732     $               598,100
Accrued compensation                                                                 527,497                     101,006
Product sales advances                                                               267,128                     217,708
Accrued warranty and other                                                           184,881                      63,595
Other                                                                                308,317                      61,957
                                                                     -----------------------     -----------------------
Total current liabilities                                                          2,640,555                   1,042,366
LONG TERM DEBT (Note 7)                                                                                        1,675,000
COMMITMENTS (Note 13)
SHAREHOLDERS' EQUITY: (Notes 2, 7, 8, 9 and 10)
Preferred shares - none issued and outstanding
Common shares, 100,000,000 authorized;
   issued and outstanding -
   17,942,117 in 1996 and 14,933,136 in 1995                                      63,519,139                  42,746,421
Additional capital                                                                 2,471,877                   2,333,689
Accumulated deficit                                                              (46,679,195)                (43,416,454)
Unrealized gain on investments - net                                                   5,651
Cumulative translation adjustment                                                     12,418                        (985)
                                                                     -----------------------     -----------------------
Total shareholders' equity                                                        19,329,890                   1,662,671
                                                                     -----------------------     -----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                           $            21,970,445     $             4,380,037
                                                                     =======================     =======================

See notes to consolidated financial statements.

                                                                             F-2
   46
THORATEC LABORATORIES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS



                                                                          For the Fiscal Years Ended
                                                         ------------------------------------------------------------
                                                            December 28,         December 30,         December 31,
                                                                1996                 1995                 1994
                                                         ------------------   ------------------   ------------------
                                                                                                 
REVENUE:
Product sales - net (Notes 10 and 12)                    $        7,502,536   $        3,488,599   $        2,763,632
Interest and other                                                  584,406               59,326               24,357
                                                         ------------------   ------------------   ------------------
Total revenue                                                     8,086,942            3,547,925            2,787,989
                                                         ------------------   ------------------   ------------------
COSTS AND EXPENSES:
Cost of products sold                                             3,253,626            1,972,467            1,575,524
Research and development                                          3,723,713            1,984,101            1,360,253
Selling, general, and administrative                              3,952,277            1,297,815            1,455,714
Debt conversion expense (Note 7)                                    378,295
Interest expense (Note 7)                                            45,811              184,886               43,396
Foreign currency expense                                             (4,039)               2,822
                                                         ------------------   ------------------   ------------------
Total costs and expenses                                         11,349,683            5,442,091            4,434,887
                                                         ------------------   ------------------   ------------------

NET LOSS                                                 $       (3,262,741)  $       (1,894,166)  $       (1,646,898)
                                                         ==================   ==================   ==================
Primary and fully diluted loss per common
and common equivalent share                              $             (.20)  $            (0.13)  $            (0.12)
                                                         ==================   ==================   ==================
Primary and fully diluted weighted average
number of common and common equivalent
shares outstanding                                               16,693,820           14,428,539           14,192,621


See notes to consolidated financial statements.


                                                                             F-3

   47



THORATEC LABORATORIES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY



                                                                                        Unrealized    Cumulative      Total
                                                Common       Additional   Accumulated    Gain On      Translation  Shareholders'
                                                 Stock        Capital       Deficit     Investments   Adjustment      Equity
                                             ------------   ------------  ------------  ------------  ------------  ----------  
                                                                                                  
BALANCE, JANUARY 1, 1994                     $ 40,178,536   $  2,333,689  $(39,875,390)                             $ 2,636,835

Exercise of COBE common stock option
   for cash                                        13,120                                                                13,120
Exercise of 91,846 common stock options
   for cash and exchange for 2,065 shares
   of common stock which were canceled             54,147                                                                54,147
Net Loss                                                                    (1,646,898)                              (1,646,898)
                                             ------------   ------------  ------------    ---------    ----------   -----------
BALANCE, DECEMBER 31, 1994                     40,245,803      2,333,689   (41,522,288)                               1,057,204
Exercise of 49,329 common stock options
  for cash and exchange for 832 shares
  of common stock which were canceled              59,053                                                                59,053
Issuance of 641,029 shares of common stock
  for cash                                      2,441,565                                                             2,441,565
Foreign currency translation adjustments                                                               $     (985)         (985)
Net Loss                                                                    (1,894,166)                              (1,894,166)
                                             ------------   ------------  ------------    ---------    ----------   -----------
BALANCE, DECEMBER 30, 1995                     42,746,421      2,333,689   (43,416,454)                      (985)    1,662,671

Issuance of 342,537 shares of common
  stock for conversion of notes payable         1,675,000                                                             1,675,000
Exercise of 880,304 common stock
  warrants for cash and exchange for
  83 shares of common stock which were
  canceled                                      1,340,034                                                             1,340,034
Issuance of 1,644,000 shares of common
  stock for cash                               17,591,204                                                            17,591,204
Exercise of 146,185 common stock options
  for cash and exchange for 3,518 shares  
  of common stock which were canceled             166,480                                                               166,480
Issuance of common stock options for
  nonemployee services                                          138,188                                                 138,188
Unrealized gain on investments                                                            $   5,651                       5,651
Foreign currency translation adjustments                                                                   13,403        13,403
Net Loss                                                                    (3,262,741)                              (3,262,741)
                                             ------------   ------------  ------------    ---------    ----------   -----------
BALANCE, December 28, 1996                   $ 63,519,139   $  2,471,877  $(46,679,195)   $   5,651    $   12,418   $19,329,890
                                             ============   ============  ============    =========    ==========   ===========


 See notes to consolidated financial statements.

                                                                             F-4
                                                                                

   48



THORATEC LABORATORIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                                                              For the Fiscal Years Ended
                                                                               -----------------------------------------------------
                                                                             
                                                                                December 28,       December 30,       December 31,
                                                                                    1996               1995               1994
                                                                                ------------       ------------       ------------
                                                                                                               
Cash flows from operating activities:                         
   Net loss                                                                    $ (3,262,741)       $ (1,894,166)       $ (1,646,898)
   Adjustments to reconcile net loss
   to net cash used in operating activities:
     Debt conversion expense (Note 7)                                               378,295
     Common stock options granted for services
     (Note 9)                                                                       138,188
     Depreciation and amortization                                                  195,441             119,400             108,687
     Changes in assets and liabilities:
        Receivables                                                                (252,402)           (273,115)            306,789
        Prepaid expenses and other                                                  (17,471)           (188,582)             30,887
        Inventories                                                              (1,452,056)            128,835            (356,469)
        Other assets                                                               (791,947)            149,413            (239,425)
        Accounts payable and other liabilities                                    1,311,765             169,562             (89,291)
                                                                               ------------         -----------         ------------
            Net cash used in operating activities                                (3,752,928)         (1,788,653)         (1,885,720)
                                                                               ------------         -----------         ------------
Cash flows from investing activities:
     Purchases of short-term investments available-for-sale                     (69,738,523)
     Maturities of short-term investments available-for-sale                     47,560,000
     Sales of short-term investments available-for-sale                          11,552,184
     Capital expenditures                                                          (637,679)            (92,671)            (45,365)
                                                                               ------------         -----------         ------------
            Net cash used in investing activities                               (11,264,018)            (92,671)            (45,365)
                                                                               ------------         -----------         ------------
 Cash flows from financing activities:
     Common stock issued in private placement - net                                                   2,441,565
     Common stock issued upon exercise of warrants                                  961,739
     Common stock issued in public placement - net                               17,591,204
     Proceeds from issuance of long-term debt                                                                             1,675,000
     Common stock issued upon exercise of  options                                  166,480              59,053              67,267
                                                                               ------------         -----------         ------------
            Net cash provided by financing activities                            18,719,423           2,500,618           1,742,267
                                                                               ------------         -----------         ------------

Net increase (decrease) in cash and cash equivalents                              3,702,477             619,294            (188,818)
Cash and cash equivalents at beginning of year                                    1,645,523           1,026,229           1,215,047
                                                                               ------------         -----------         ------------
Cash and cash equivalents at end of year                                       $  5,348,000        $  1,645,523        $  1,026,229
                                                                               ============         ===========         ============
Noncash Financing Transaction:
      Conversion of notes into common stock
      (Note 7)                                                                 $  1,675,000
Noncash Investing Transactions:
      Construction costs in accounts payable
      (Note 5)                                                                 $    286,424
Other Cash Flow Information:
      Interest paid                                                            $     45,811        $    184,886        $     43,396
See notes to consolidated financial statements 


                                                                             F-5

   49



THORATEC LABORATORIES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

      Operations - Thoratec Laboratories Corporation and its subsidiary (the
      "Company") manufactures and markets medical devices utilizing specialty
      polymers and is engaged in ongoing research and development. Thoratec's
      products are marketed worldwide.

      The Company reports on a 52-53 week fiscal year, which ends on the
      Saturday closest to December 31. The fiscal years ended December 28, 1996
      (fiscal 1996), December 30, 1995 (fiscal 1995), and December 31, 1994
      (fiscal 1994) include 52 weeks.

      Principles of Consolidation - The consolidated financial statements
      include Thoratec Laboratories Corporation (a California corporation) and
      its subsidiary company. All significant intercompany balances and
      transactions are eliminated in consolidation.

      Inventories are stated at the lower of first-in, first-out cost or market.

      Depreciation and Amortization - Equipment is depreciated over estimated
      useful lives which range from two to eight years. Leasehold improvements
      are amortized over the remaining period of the lease or over the estimated
      useful life of the improvement, whichever is shorter. The straight-line
      method is used for depreciation and amortization.

      Foreign Currency Translation - All assets and liabilities of the Company's
      non-United States operations are translated into United States dollars at
      fiscal period-end exchange rates, and the resulting translation
      adjustments are recorded as cumulative translation adjustments in
      shareholders' equity. Income items are translated at actual or average
      monthly rates of exchange. The Company's sales are substantially all
      denominated in U.S. dollars.

      Income Taxes - The Company follows an asset and liability approach for
      financial accounting and reporting of income taxes. Under this approach,
      the Company computes its tax liability at each consolidated financial
      statement date by applying provisions of current tax laws to temporary
      differences between consolidated financial statement and income tax bases.
      Changes in tax law may result in an adjustment to deferred tax assets.

      Loss Per Share - Loss per common and common equivalent share are computed
      by dividing net loss by the weighted average number of common and common
      equivalent shares outstanding during the period. Both primary and fully
      diluted loss per common share for 1996, 1995 and 1994 assume no
      conversions because any such conversion would be antidilutive.

      Statement of Cash Flows - Cash equivalents consist of money market funds
      carried at cost which is equal to market value. Significant noncash
      investing and financing activities are discussed in Notes 7 and 9.

      Cash and Cash Expenditures - Cash and cash equivalents include money
      market securities stated at cost, which approximates market value.



                                                                             F-6

   50



      Investments - The Company's short-term investments are classified as
      available-for-sale and reported at fair value. Net unrealized gains and
      losses are excluded from earnings and reported as a separate component of
      shareholders' equity.

      A portion of the funds provided by a public offering of the Company's
      common stock in 1996 are currently being held for investment until such
      time that the funds are needed by the Company for operations and capital
      expenditures. As of the end of 1996, short-term investments were comprised
      primarily of certificates of deposit, commercial paper, corporate notes
      and U.S. government treasury and agency notes with maturity dates within
      12 months of the date of investment.

      Fair Value of Financial Instruments - The Company's financial instruments
      include cash and equivalents, customer receivables, accounts payable, and
      certain other accrued liabilities. The carrying amounts of these items are
      a reasonable estimate of their fair values.

      Revenue Recognition - The Company recognizes product revenues upon
      shipment of the related product. The Company provides a reserve for its
      estimate of warranty costs at the time of shipment.

      Use of Estimates - The preparation of the Company's consolidated financial
      statements in conformity with generally accepted accounting principles
      necessarily requires management to make estimates and assumptions that
      affect the reported amounts of assets and liabilities and disclosure of
      contingent assets and liabilities at the consolidated balance sheet dates
      and the reported amounts of revenues and expenses for the periods
      presented.

      Recently Issued Accounting Standard - The Company adopted Statement of
      Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
      Compensation effective for the fiscal year ended December 28, 1996. SFAS
      No. 123 establishes accounting and disclosure requirements using a fair
      value based method of accounting for stock based employee compensation
      plans. As allowed under provisions of SFAS No. 123, the Company has chosen
      to continue the intrinsic value based method and provide pro forma
      disclosures of net earnings and earnings per share as if the accounting
      provisions of SFAS No. 123 had been adopted. The Company has elected to
      adopt only the disclosure requirements of SFAS No. 123; therefore such
      adoption had no effect on the Company's consolidated net loss or cash
      flows. See Note 9.

      The Company adopted Statement of Financial Accounting Standards No. 121,
      Accounting for the Impairment of Long-Lived Assets and for Long-Lived
      Assets to Be Disposed Of effective for the fiscal year ended December 28,
      1996. This statement requires the Company to review long-lived assets for
      impairment whenever events or changes in circumstances indicate that the
      carrying amount of an asset may not be recovered. Implementation did not
      have a material impact on the Company's financial statements.

2.    FINANCIAL POSITION AND LIQUIDITY

      In July 1996, the Company sold, through an underwritten public offering,
      1,644,000 shares of common stock at $12.00 per share. Included in the
      1,644,000 shares are 144,000 shares sold pursuant to an underwriters'
      over-allotment option. Also issued to the underwriters in connection with
      the public offering were five-year warrants to purchase 164,400 shares of
      the Company's common stock at $14.40


                                                                             F-7


   51




      per share. The warrants are currently exercisable and include a net
      exercise provision. Net cash proceeds received by the Company related to
      this offering were approximately $17,591,000. Underwriters' commissions,
      the fair value of warrants issued to the underwriters, and approximately
      $1,050,000 of other estimated costs have been recorded as an offset to
      common stock at the closing of the offering.

      With the proceeds of this offering, the Company believes that it has
      sufficient funds to increase its marketing efforts, to increase
      manufacturing efficiencies through construction of a new manufacturing
      facility, and to develop new sources of revenue, including new products.
      However, the Company expects that its operating expenses will increase in
      future periods as the Company expends increased amounts on product
      manufacturing and marketing and on research and development of new product
      lines. As a result the Company expects to incur net losses for at least
      the next year. There can be no assurance that the Company will achieve
      profitability or positive cash flow.

3.    SHORT-TERM INVESTMENTS

      Short term investments available-for-sale are summarized as follows as of
      December 28, 1996:




                                                                 Gross                Gross
                                           Amortized           Unrealized           Unrealized             Fair
                                             Cost                Gains                Losses               Value
                                        ---------------     ----------------     ----------------     ---------------
                                                                                                
      Debt instruments issued by:
            Federal government and
            its agencies                $       636,715     $            997     $             0      $       637,712
            Corporations                      9,989,624                5,072                (418)           9,994,278
                                        ---------------     ----------------     ----------------     ---------------
      Short-term investments            $    10,626,339     $          6,069     $          (418)     $    10,631,990
                                        ===============     ================     ================     ===============


      The Company classifies those investments which mature in less than one
      year as short-term investments.

4.    INVENTORIES

      Inventories consist of the following:




                                                     Fiscal Year Ended
                                  --------------------------------------------------------

                                      December 28, 1996              December 30, 1995
                                  -------------------------      -------------------------
                                                                                 
               Finished goods     $               1,639,444      $                 397,462
               Work-in-process                      648,622                        540,673
               Raw materials                        538,154                        436,029
                                  -------------------------      -------------------------
                        Total     $               2,826,220      $               1,374,164
                                  =========================      =========================



                                      

                                                                             F-8
   52



5.    LEASES

      The Company leases offices, laboratory and manufacturing space under
      noncancelable operating leases. In 1996 the Company entered into a lease
      agreement on a new manufacturing facility to be located within 50 miles of
      its current facility. This building, when completed, will accommodate all
      of the Company's manufacturing, engineering and administrative activities.
      The building is scheduled to be completed and ready for occupancy in mid
      1997. The Company will invest approximately $5 to $7 million in equipment
      and leasehold improvements to the building prior to occupancy. Annual
      lease payments will initially be approximately $657,000 for a lease term
      of 15 years and will commence four months after the landlord has delivered
      the completed building shell to the Company. The lease includes
      provisions, among others, for annual cost of living adjustments to the
      lease payments, two five-year renewal options, a purchase option, and a
      security deposit of $885,600, which the Company paid in 1996 and is
      reported in other assets at the end of 1996. A significant portion
      ($750,000) of the security deposit can be reduced or eliminated before the
      end of the initial lease term if the Company meets certain criteria as
      specified by the contract. Future minimum lease payments as of December
      28, 1996, including payments for the new manufacturing facility, are noted
      below:

      
      
                                           As of
                                    December 28, 1996
                                   --------------------
                                
      Fiscal year:
      1997                          $          511,996
      1998                                     816,981
      1999                                     763,555
      2000                                     656,705
      2001                                     656,705
      Thereafter                             6,895,405
                                   -------------------
      Total                         $       10,301,347
                                   ===================
      

      Rent expense for all operating leases was $200,121 in 1996, $180,324 in 
      1995 and $165,019 in 1994.


6.    OTHER ASSETS

      As of December 28, 1996, the Company had a long-term purchase commitment
      for mechanical valves for its VAD of approximately $1,200,000 from a
      supplier who stopped production of these valves in 1995 but will continue
      to ship its existing stock to the Company. As of December 30, 1995,
      deposits related to this agreement were $192,000 included in current
      assets and $98,000 included in other assets. All of these deposits were
      applied to purchases made in 1996. The Company anticipates this supply
      will be sufficient to satisfy its needs for at least the next twelve
      months. The Company must qualify a replacement valve or qualify a new
      vendor for the current valves. The Company has identified a new vendor and
      has begun negotiations for additional supply.


                                                                                

                                                                             F-9
   53


7.    LONG-TERM DEBT

      In 1994, the Company placed $1.675 million of convertible secured debt
      with private lenders. The notes were convertible into common stock at
      rates ranging from $4.92 to $6.38 per share, bore interest at 11% and were
      due in three years. The debt was secured by the royalties payable pursuant
      to the Licensing Agreement with COBE Laboratories, Inc. ("COBE") (see Note
      10), all accounts receivable, equipment and inventory. Five-year warrants
      to purchase 210,201 shares of Thoratec common stock at $6.38 per share
      were also issued with the convertible notes.

      In the first quarter of 1996, all $1.675 million of these notes were
      converted into 342,537 shares of common stock, according to the terms of
      the original transaction. In connection with this conversion, the Company
      reduced the exercise price of the related five-year warrants to $4.50 per
      share for a thirty day period. All warrants issued in connection with the
      above noted convertible secured debt (representing 213,720 shares as
      adjusted for antidilutive provisions) were exercised for a total of
      approximately $960,000. As all warrants were exchanged and the exercise
      price reduced, $378,000 of noncash debt conversion expense was recorded.

8.    COMMON AND PREFERRED STOCK

      The Company has authorized 100,000,000 no par common shares, and 2,500,000
      shares of preferred stock, of which 540,541 shares have been designated
      Series A and 500,000 shares designated Series B. On April 26, 1996, the
      Board of Directors authorized a one-for-three reverse split of the
      Company's common stock which was approved by the shareholders on June 3,
      1996. All references in the consolidated financial statements to number of
      shares, per share amounts and prices of the Company's common stock have
      been retroactively restated to reflect the decreased number of common
      shares outstanding. For other common stock transactions, see Note 2.

      The Series A preferred stock is entitled to cumulative annual dividends of
      $1.30 per share and has a liquidation preference of $9.25 plus cumulative
      unpaid dividends. The Company may redeem the Series A preferred stock at
      any time for its liquidation preference. Each share of preferred stock is
      convertible into one-third shares of common stock, after adjusting for
      earned but unpaid dividends. At December 28, 1996, no shares of Series A
      preferred stock were outstanding.

      Series B preferred stock is senior to Series A in all preferences. Series
      B is entitled to cumulative annual dividends of $.96 per share and has a
      liquidation preference of $8.00 plus cumulative unpaid dividends. The
      Series B preferred stock is redeemable by the Company five years after
      issuance for $8.00 per share plus cumulative unpaid dividends. Each share
      of Series B preferred stock is convertible at any time into three and
      one-third shares of common stock and has certain anti-dilution provisions.
      Series B preferred votes on an as-converted basis. At December 28, 1996,
      no shares of the Series B preferred stock were outstanding.

9.    OPTIONS AND WARRANTS

      In 1993, the Directors approved the 1993 Stock Option Plan ("1993 SOP"),
      which permits the Company to grant options to purchase up to 666,667
      shares of common stock. During 1996, 1995, and 1994, 69,693, 66,667 and
      45,000 shares, respectively, were granted under this plan.






                                                                            F-10
   54



      In the first quarter of 1996, the Directors adopted the 1996 Stock Option
      Plan ("1996 SOP") and the 1996 Nonemployee Directors Stock Option Plan
      ("Directors Option Plan"). The 1996 SOP consists of two parts. Part one
      permits the Company to grant options to purchase up to 500,000 shares of
      common stock. During 1996, 184,333 options were granted at fair market
      value under this Part of the Plan. Part One of the 1996 SOP was approved
      by Shareholders at the Annual Meeting of Shareholders held on June 3,
      1996. In September of 1996, certain of these options were repriced to $12
      per share from prices that ranged between $16.125 and $17.625 per share.
      Part Two related to the Chief Executive Officer (CEO) and permits the
      Company to grant non-qualified options to the CEO to purchase up to
      333,333 shares of common stock. During 1996, 333,333 options were granted
      at fair market value under this Part of the Plan. Part Two of the 1996 SOP
      required Director approval only. The Directors Option Plan permits the
      Company to grant options to purchase up to 150,000 shares of common stock.
      The Company currently has five non-employee directors who are eligible to
      participate in the Directors Option Plan. During 1996, 16,665 options were
      granted at fair market value. The Directors Option Plan was approved by
      Shareholders at the Annual Meeting of Shareholders held on June 3, 1996.

      Including the 1993 SOP, the 1996 SOP, the Directors Option Plan, and
      several older plans, the Company had eight common stock option plans.
      Options may be granted by the Board of Directors at fair market value at
      the date of grant. Options under plans become exercisable within four or
      five years of grant and expire between five and ten years from date of
      grant. At December 28, 1996, 572,042 common shares remain available for
      grant.

      Agreements have been entered into with selected consultants whereby
      options to purchase the Company's common stock were accepted by these
      consultants as partial payment for the services they render to the
      Company. The fair market value of the consulting service is the basis for
      recording the transaction in the Company's financial records and is
      recognized as the related services are performed. Options issued under
      these agreements totaled 61,358 and are included in the grant activity
      previously discussed.

      The Company applies APB Opinion 25 and related Interpretations in
      accounting for its employee stock-based compensation plans. Accordingly,
      no compensation cost has been recognized for its stock option plans. Had
      compensation cost for the Company's stock-based plans been determined
      based on the fair value at the grant dates for awards under those plans
      consistent with the method of FASB Statement 123, the Company's net loss
      and net loss per share would have been increased to the proforma amounts
      indicated in the following table. As 1996 is the initial phase-in period
      for applying this Statement, the proforma results indicated are not
      necessarily representative of the effects on proforma disclosures of net
      income for future periods as they exclude options that were granted prior
      to January 1, 1995, with vesting periods in 1995 and later.



                                                         Fiscal Year
                                               ---------------------------------
                                                     1996              1995
                                               --------------      -------------
                                                                  
Net Loss                           As reported     $ (3,262,741)   $ (1,894,166)
                                   Pro Forma         (5,182,741)     (1,944,166)

Primary and fully diluted loss
per common and common              As reported   $       (.20)    $       (.13)
equivalent share                   Pro Forma             (.31)            (.13)


                                                                            F-11
   55

      The fair value of each option grant is estimated as of the date of grant
      using the Black-Scholes option-pricing model with the following
      weighted-average assumptions used for grants made in 1996 and 1995 under
      the 1993 SOP, the 1996 SOP and the Directors Option Plan: risk-free
      interest rates of 5.81% in 1996 and 6.14% in 1995; expected volatility of
      67% for both years; expected lives in both years of two years beyond each
      incremental vesting period (total life of 2-1/2 to 7 years, depending upon
      each grant's individual vesting schedule). No dividends are assumed for
      any plan in either year.

Option activity is summarized as follows:



                                                      Number of                     Weighted Average
                                                       Options                       Exercise Price
                                                ----------------------            ---------------------
                                                                                      
Outstanding at fiscal year end 1993
(672,306 exercisable)                                        1,360,945                  $         1.44
      Granted                                                   45,000                            7.13
      Canceled                                                (16,533)                            1.56
      Exercised(1)                                            (91,846)                            0.75
                                                ----------------------            ---------------------
Outstanding at fiscal year end 1994
(721,891 exercisable at $1.20 weighted
average exercise price per share)                            1,297,566                  $         1.68
      Granted ($3.81 weighted average
      fair value per share)                                     66,667                            6.28
      Canceled                                                (14,079)                            1.49
      Exercised (2)                                           (49,329)                            1.31
                                                ----------------------            ---------------------
Outstanding at fiscal year end 1995
(807,468 exercisable at $1.37 weighted
average exercise price per share)                            1,300,825                  $         1.94
      Granted ($7.71 weighted average
      fair value per share)                                    604,024                           14.14
      Canceled and expired                                   (183,473)                            6.06
      Exercised (3)                                          (146,185)                            1.47
                                                ----------------------            ---------------------
Outstanding at fiscal year end
1996 (783,396 exercisable at $2.18
weighted average exercise price per
share)                                                       1,575,191                  $         6.18
                                                ======================            =====================


(1)   Includes 79,032 options exercised for $54,147 cash and 12,814 options
      exercised by exchange for 2,065 shares of common stock which were
      canceled.
(2)   Includes 44,290 options exercised for $59,053 cash and 5,039 options
      exercised by exchange for 832 shares of common stock, which were canceled.
(3)   Includes 110,204 options exercised for $166,480 cash and 35,981 options
      exercised by exchange for 3,518 shares of common stock, which were
      canceled.


                                                                            F-12
   56



   The status of options outstanding as of December 28, 1996 is summarized as
follows:




                                                Options Outstanding                                  Options Exercisable
                            -----------------------------------------------------------      ------------------------------------
                                                      Weighted
                                                      Average              Weighted                                  Weighted
                                                     Remaining              Average                                   Average
      Range of                  Number              Contractual            Exercise              Number              Exercise
   Exercise Prices            Outstanding               Life                 Price            Exercisable              Price
- ---------------------       ---------------       ----------------      ---------------      --------------       ---------------
                                                                                                               
  $.18-$.75                         393,444          1.9 years          $           .63             377,539       $           .64
  $1.14 to $2.625                   522,724          5.4 years                     2.15             355,432                  2.15
  $6.00 to $7.125                   111,666          8.3 years                     6.62              31,334                  6.77
  $9.00 to $12.00                   172,667          9.5 years                    10.34                   0                     0
  $15.00 to $17.625                 361,358          9.0 years                    15.05               5,759                 15.75
  $30.00                             13,332          9.4 years                    30.00              13,332                 30.00
                            ---------------       ----------------      ---------------      --------------       ---------------
  $.18 to $30.00                  1,575,191          6.1 years          $          6.18             783,396       $          2.18
                            ===============       ================      ===============      ==============       ===============


      In the second quarter of 1996 the Company amended the terms of an
      outstanding warrant to purchase 666,667 shares of the Company's common
      stock at $.003 per share to add a net exercise provision. Subsequently,
      the warrant was exercised using this provision and the Company issued
      666,584 shares of stock to the warrant holder and withheld 83 shares to
      effect the exercise. For other warrant transactions, see Note 2.

10.    RELATED PARTIES

      In 1992 the Company entered into an agreement to sell common stock,
      representing 26% of the Company, to COBE Laboratories, Inc., which 
      included several provisions, including two seats on the Company's Board of
      Directors for COBE designees, a standstill agreement, and a participation
      agreement for future financings. The Company and COBE also finalized a
      licensing, manufacturing, and distribution agreement which provides for a
      royalty-bearing license to the Company's biomaterial technology for use in
      certain of COBE's products, the right for the Company to manufacture these
      biomaterials for a period of time before the royalty provisions become
      effective, a provision that COBE and the Company negotiate for COBE to be
      the distributor of certain future products of the Company, and a right of
      COBE to first negotiation on certain future licensing rights. For the
      fiscal years 1996, 1995 and 1994, COBE purchases of materials from the
      Company under the manufacturing agreement totaled $99,000, $87,000 and
      $90,000, respectively.

      Receivables at the end of fiscal 1995 included $92,000 from COBE
      affiliates. There were no receivables outstanding from COBE affiliates at
      the end of fiscal 1996.

      For other related party transactions, see Note 12.



                                                                            F-13
   57



11.     TAXES ON INCOME

        Deferred income taxes reflect the net tax effects of (a) temporary
        differences between the carrying amounts of assets and liabilities for
        financial reporting purposes and the amounts used for income tax
        purposes, and (b) operating loss and tax credit carryforwards.

        Significant components of the Company's net deferred taxes are as
        follows:



                                                           Fiscal Year Ended
                                            -----------------------------------------------

                                              December 28, 1996        December 30, 1995
                                            ---------------------    ----------------------
                                                                                  

        Deferred tax assets:
          Federal tax loss carryforward
          (as adjusted for the limitation
          on change in ownership)             $         5,400,000       $         4,198,000
          State tax loss carryforward                     325,000                   585,000
          Other, net                                       60,000                    19,000
                                            ---------------------    ----------------------
        Total                                           5,785,000                 4,802,000

          Less:  Valuation allowance                   (5,785,000)               (4,802,000)
                                            ---------------------    ----------------------
                                                           --                        --
                                            =====================    ======================


        At December 28, 1996, the Company had net operating loss ("NOL")
        carryforwards of approximately $15,900,000. The majority of such
        carryforwards expire from 2002 through 2011. Use of the $7.4 million NOL
        which arose prior to the greater than 50% change in ownership which
        occurred in 1992 is limited to approximately $440,000 per year due to
        such change.

        Due to these limitations and due to the fact that the Company has
        sustained cumulative losses, the potential future benefit from these
        deferred assets are fully reserved by means of a valuation allowance and
        will therefore produce a financial statement benefit if and when
        utilized.



                                                                            F-14
   58



12.     GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS

        The Company's sales for each year are shown in the table below for each
        major geographic area:

        
        
                                                      Fiscal Year
                                      ------------------------------------------
                                          1996           1995             1994
                                      ----------      ----------      ----------
                                                             
        Export sales:
              Europe                  $1,731,642      $1,524,080      $  777,446

              All Other                  302,170         438,462         550,055
                                      ----------      ----------      ----------
                    Subtotal           2,033,812       1,962,542       1,327,501

        Domestic sales                 5,468,724       1,526,057       1,436,131
                                      ----------      ----------      ----------
                    Total             $7,502,536      $3,488,599      $2,763,632
                                      ==========      ==========      ==========
        

       Included in European sales for 1996, 1995 and 1994 are $116,674, $688,610
       and $729,566, respectively, of sales to COBE and its affiliates, which
       began distributing the Company's Thoratec(R) VAD System in several
       European markets in late 1992. In the Spring of 1995, Thoratec signed an
       agreement with Arrow International ("Arrow") to take over the
       distribution in most of the COBE territories. Included in European sales
       for 1996 and 1995 are $1,476,253 and $632,639, respectively, of sales to
       Arrow.

       Included in domestic sales for 1996 are approximately $250,000 of income
       earned from the rental of certain Company product.

13.    COMMITMENTS

       In January 1996, the Company entered into a four-year employment
       agreement with a key executive officer. This employment agreement
       provides for, among other provisions, a minimum base salary, an annual
       bonus based on performance, a severance package and the issuance of
       333,333 non-qualified stock options. See Notes 5, 6 and 9.

14.    SUBSEQUENT EVENT

       Effective January 1997, the Company introduced a 401(k) plan for its
       employees. Subject to certain limitations, employees may elect to set
       aside up to 18% of earnings in tax-deferred accounts. In addition, the
       Company may provide matching contributions on up to 6% of the employee's
       compensation according to plan provisions.


                                                                            F-15

EX-11

   1



                        Thoratec Laboratories Corporation


                 STATEMENT RE: COMPUTATION OF PER-SHARE EARNINGS





                                                             Fiscal Years Ended
                                            --------------------------------------------------------------

                                                    1996                 1995                 1994
                                            --------------------  -------------------  -------------------
                                                                                              
Number of common shares                               14,933,136           14,243,610           14,149,457
outstanding for entire period

Weighted average number of shares                        809,011                   --                   --
issued in public placement

Weighted average number of shares                             --              170,824                   --
issued in private placement

Weighted average number of shares
issued upon conversion of convertible                    856,761                   --                   --
notes and exercise of warrants

Weighted average number of shares
issued upon exercise of options                           94,912               14,105               43,164
                                            --------------------  -------------------  -------------------

Weighted average number of common
shares outstanding                                    16,693,820           14,428,539           14,192,621
                                            ====================  ===================  ===================

Net loss                                    $         (3,262,741) $        (1,894,166) $        (1,646,898)
                                            ====================  ===================  ===================

Net loss per common share                   $               (.20) $              (.13) $              (.12)
                                            ====================  ===================  ===================



                                                    Exhibit 11

EX-23

   1
                                                                     EXHIBIT 23


INDEPENDENT AUDITORS REPORT

We consent to the incorporation by reference in Registration Statement No.
33-11883, Registration Statement No. 33-35549, Registration Statement No.
33-35719, Registration Statement No. 33-72502, Post-Effective Amendment No. 1
to Registration Statement No. 2-78926, and, Post-Effective Amendment No. 3 to
Registration Statement No. 2-78925 on Forms S-8 of our report dated February
14, 1997, appearing in this Annual Report on Form 10-K of Thoratec Laboratories
Corporation for the year ended December 28, 1996.


/s/ DELOITTE & TOUCHE LLP
- -------------------------------



San Francisco, California
March 10, 1997

EX-27

 

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FIANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS OF
THORATEC LABORATORIES CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH ANNUAL REPORT ON FORM 10-K PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996.

       
                             
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-28-1996
<PERIOD-START>                             DEC-31-1995
<PERIOD-END>                               DEC-28-1996
<CASH>                                       5,348,000
<SECURITIES>                                10,631,990
<RECEIVABLES>                                  833,700
<ALLOWANCES>                                         0
<INVENTORY>                                  2,826,220
<CURRENT-ASSETS>                            19,906,429
<PP&E>                                       3,043,188
<DEPRECIATION>                               1,908,667
<TOTAL-ASSETS>                              21,970,445
<CURRENT-LIABILITIES>                        2,640,555
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                    63,519,139
<OTHER-SE>                                (44,189,249)
<TOTAL-LIABILITY-AND-EQUITY>                21,970,445
<SALES>                                      7,502,536
<TOTAL-REVENUES>                             8,086,942
<CGS>                                        3,253,626
<TOTAL-COSTS>                                3,253,626
<OTHER-EXPENSES>                             8,050,246
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                              45,811
<INCOME-PRETAX>                            (3,262,741)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                        (3,262,741)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                               (3,262,741)
<EPS-PRIMARY>                                    (.20)
<EPS-DILUTED>                                    (.20)