U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

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

For the transition period from                      to                     

THORATEC CORPORATION

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

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

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

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

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

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

As of July 31, 2010, the registrant had 58,460,160 shares of common stock outstanding.

 

 

THORATEC CORPORATION

TABLE OF CONTENTS

Part I. Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements			3
Condensed Consolidated Balance Sheets as of July 3, 2010 and January 2, 2010			3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended July 3, 2010 and July 4, 2009			4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 3, 2010 and July 4, 2009			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3. Quantitative and Qualitative Disclosures About Market Risk			37
Item 4. Controls and Procedures			38
Part II. Other Information
Item 1A. Risk Factors			40
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds			40
Item 6. Exhibits			41
Signatures			42
Exhibits
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

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

CentriMag is a registered trademark of Levitronix LLC.

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

PART I. FINANCIAL INFORMATION

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THORATEC CORPORATION

		July 3, 2010				January 2, 2010
ASSETS
Current assets:
Cash and cash equivalents		$	37,435			$	27,787
Short-term available-for-sale investments			314,724				279,174
Receivables, net of allowances of $1,086 and $322, respectively			50,798				48,058
Inventories			48,505				44,635
Deferred tax assets			12,564				12,261
Prepaid expenses and other assets			4,611				4,831
Prepaid income taxes			20,188				1,234
Assets held for sale			60,848				63,798
Total current assets			549,673				481,778
Property, plant and equipment, net			37,106				37,115
Goodwill			95,015				95,015
Purchased intangible assets, net			93,409				96,876
Long-term available-for-sale investments			24,166				24,634
Other long-term assets			9,935				12,465
Total Assets		$	809,304			$	747,883
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	16,187			$	6,221
Accrued compensation			12,692				17,417
Other accrued liabilities			10,499				12,469
Senior subordinated convertible notes			133,882				—
Liabilities related to assets held for sale			12,084				12,377
Total current liabilities			185,344				48,484
Senior subordinated convertible notes			—				131,929
Long-term deferred tax liability			28,192				31,720
Other			9,996				10,622
Total Liabilities			223,532				222,755
Shareholders’ equity:
Common shares: no par, authorized 100,000; issued and outstanding 58,453 and 57,043 as of July 3, 2010 and January 2, 2010, respectively			—				—
Additional paid-in capital			595,141				557,418
Accumulated deficit			(4,947	)			(30,321	)
Accumulated other comprehensive loss:
Unrealized loss on investments			(1,355	)			(648	)
Cumulative translation adjustments			(3,067	)			(1,321	)
Total accumulated other comprehensive loss			(4,422	)			(1,969	)
Total Shareholders’ Equity			585,772				525,128
Total Liabilities and Shareholders’ Equity		$	809,304			$	747,883

See notes to unaudited condensed consolidated financial statements.

THORATEC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended								Six Months Ended
		July 3,				July 4,				July 3,				July 4,
		2010				2009				2010				2009
Product sales		$	95,098			$	69,222			$	194,370			$	133,851
Cost of product sales			30,579				26,780				62,150				47,051
Gross profit			64,519				42,442				132,220				86,800
Operating expenses:
Selling, general and administrative			21,065				23,862				42,906				44,343
Research and development			11,812				10,327				31,803				21,100
Amortization of purchased intangible assets			2,468				2,359				4,880				5,082
Total operating expenses			35,345				36,548				79,589				70,525
Income from operations			29,174				5,894				52,631				16,275
Other income and (expense):
Interest expense and other			(3,275	)			(3,040	)			(6,155	)			(5,906	)
Interest income and other			1,293				1,313				2,899				2,244
Impairment on investment			(46	)			—				(2,046	)			—
Income before income taxes			27,146				4,167				47,329				12,613
Income tax expense			(9,609	)			(1,281	)			(16,428	)			(3,558	)
Net income from continuing operations			17,537				2,886				30,901				9,055
Net loss from discontinued operations (net of tax)			(1,583	)			(1,054	)			(2,514	)			(1,596	)
Net income		$	15,954			$	1,832			$	28,387			$	7,459
Net income (loss) per share — Basic:
Continuing operations		$	0.30			$	0.05			$	0.54			$	0.16
Discontinued operations			(0.02	)			(0.02	)			(0.05	)			(0.03	)
Net income		$	0.28			$	0.03			$	0.49			$	0.13
Net income (loss) per share — Diluted:
Continuing operations		$	0.29			$	0.05			$	0.52			$	0.16
Discontinued operations			(0.02	)			(0.02	)			(0.04	)			(0.03	)
Net income		$	0.27			$	0.03			$	0.48			$	0.13
Shares used to compute net income (loss) per share(1):
Basic			57,635				55,789				57,139				55,658
Diluted			66,436				57,161				65,986				57,014

See notes to unaudited condensed consolidated financial statements.

THORATEC CORPORATION

		Six Months Ended
		July 3,				July 4,
		2010				2009
Cash flows from continuing operating activities:
Net income from continuing operations		$	30,901			$	9,055
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation and amortization			8,219				8,758
Investment premium amortization, net			2,492				1,329
Loss on extinguishment of senior subordinated convertible notes			99				—
Non-cash expenses, net			591				547
Non-cash interest expense			4,133				3,820
Impairment on investment			2,046				—
Tax benefit related to stock options			10,013				1,832
Share-based compensation expense			6,653				5,477
Excess tax benefits from share-based compensation			(9,265	)			(1,594	)
Loss on disposal of assets			74				104
Change in net deferred tax liability			(3,577	)			(4,504	)
Changes in assets and liabilities:
Receivables			(4,325	)			(1,860	)
Inventories			(6,032	)			(5,057	)
Prepaid expenses and other assets			272				(570	)
Accounts payable and other liabilities			8,328				(3,065	)
Prepaid income taxes, net			(21,780	)			854
Net cash provided by continuing operating activities			28,842				15,126
Cash flows from continuing investing activities:
Purchases of available-for-sale investments			(300,576	)			(90,237	)
Sales of available-for-sale investments			229,863				25,808
Maturities of available-for-sale investments			32,090				44,773
Restricted cash and cash equivalents			—				(20,000	)
Purchases of patents			(1,414	)			—
Purchases of property, plant and equipment			(2,133	)			(4,420	)
Net cash used in continuing investing activities			(42,170	)			(44,076	)
Cash flows from continuing financing activities:
Excess tax benefits from share-based compensation			9,265				1,594
Proceeds from stock option exercises			21,779				2,925
Proceeds from stock issued under employee stock purchase plan			1,884				1,628
Repurchase and retirement of common shares			(4,505	)			(3,100	)
Extinguishment of senior subordinated convertible notes			(5,345	)			—
Net cash provided by continuing financing activities			23,078				3,047
Effect of exchange rate changes on cash and cash equivalents			(102	)			(91	)
Net increase (decrease) in cash and cash equivalents from continuing operations			9,648				(25,994	)
Cash and cash equivalents from continuing operations at beginning of period			27,787				108,388
Cash and cash equivalents from continuing operations at end of period		$	37,435			$	82,394
Cash flows from discontinued operations:
Net cash provided by operating activities		$	2,495			$	1,950
Net cash used in investing activities			(1,746	)			(1,535	)
Net increase in cash from discontinued operations			749				415
Bank overdraft from discontinued operations at beginning of period			(1,326	)			(1,335	)
Bank overdraft from discontinued operations at end of period		$	(577	)		$	(920	)
Supplemental disclosure of consolidated cash flow information:
Cash paid for taxes		$	29,562			$	4,852
Cash paid for interest		$	1,707			$	1,707
Supplemental disclosure of consolidated non-cash investing and financing activities:
Transfers of equipment from inventory		$	2,029			$	1,120
Purchases of property, plant and equipment through accounts payable and accrued liabilities		$	34			$	370

See notes to unaudited condensed consolidated financial statements.

THORATEC CORPORATION

1. Operations and Significant Accounting Policies

Basis of Presentation

     The interim unaudited condensed consolidated financial statements of Thoratec Corporation (“we,” “our,” “us,” or the “Company”) have been prepared and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”), without audit, and reflect all adjustments necessary (consisting only of normal recurring adjustments) to present fairly our financial position, results of operations and cash flows. Certain information and footnote disclosures normally included in our annual financial statements, prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted. The accompanying financial statements should be read in conjunction with our fiscal 2009 consolidated financial statements, and the accompanying notes thereto, filed with the SEC in our Annual Report on Form 10-K (the “2009 Annual Report”). The operating results for any interim period are not necessarily indicative of the results that may be expected for any future period.

     The preparation of our unaudited condensed consolidated financial statements necessarily requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities on the unaudited condensed consolidated balance sheet dates and the reported amounts of revenues and expenses for the periods presented. The actual amounts could differ from those estimated amounts.

     The financial information presented herein includes continuing operations, unless otherwise stated. On April 25, 2010, our board of directors made a decision to sell International Technidyne Corporation (“ITC”) and expects to complete this sale within a year. As such, in the second quarter of 2010, ITC has met the conditions in Financial Accounting Standards Board (“FASB”) Codification (“ASC”) 360, Property, Plant and Equipment, to be classified as an asset held for sale for all periods presented, as described in Note 15, “Assets Held for Sale.”

Revenue Recognition and Product Warranty

     We recognize revenue from product sales when evidence of an arrangement exists, and title has passed (generally upon shipment) or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured. Sales to distributors are recorded when title transfers.

     The majority of our products are covered by up to a one-year limited manufacturer’s warranty. Estimated contractual warranty obligations are recorded when related sales are recognized and any additional amounts are recorded when such costs are probable, can be reasonably estimated and are included in “Cost of product sales.” The change in accrued warranty expense is summarized in the following table:

		Three Months Ended								Six Months Ended
		July 3,				July 4,				July 3,				July 4,
		2010				2009				2010				2009
		(in thousands)
Balance at beginning of period		$	1,777			$	705			$	1,706			$	554
Accruals for warranties issued			1,182				1,122				1,931				1,900
Settlements made			(1,212	)			(631	)			(1,890	)			(1,258	)
Balance at end of period		$	1,747			$	1,196			$	1,747			$	1,196

2. Recently Issued Accounting Standards

     In July 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-20, Receivables (Topic 320): Disclosures About Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU No. 2010-20 provides accounting guidance which expands disclosures regarding the credit quality of an entity’s receivables portfolio and its related allowance for credit losses. This ASU No. 2010-20 amended guidance is effective for us commencing in the third quarter of 2011. We are currently evaluating the effect of the amended guidance on our unaudited condensed consolidated financial statements.

     In April 2010, the FASB issued ASU No. 2010-17, Revenue Recognition (Topic 605): Milestone Method. ASU No. 2010-17 provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. Under the milestone method of revenue recognition, consideration that is contingent upon achievement of a milestone in its entirety can be recognized as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. ASU No. 2010-17 provides the criteria to be met for a milestone to be considered substantive which includes that: (i) performance consideration earned by achieving the milestone be commensurate with either performance to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from performance to achieve the milestone; and (ii) relate to past performance and be reasonable relative to all deliverables and payment terms in the arrangement. ASU No. 2010-17 is effective on a prospective basis for us for milestones achieved on or after January 2, 2011. Earlier application is permitted. We are currently evaluating the application date and the effect of the amended guidance on our unaudited condensed consolidated financial statements.

     In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU No. 2010-06 amends ASC 820 and includes separate roll forward activity in Level 3 fair value measurements for purchases, sales, issuances and settlements. This amendment is effective after fiscal year 2010. We are currently evaluating the application of this standard on our unaudited condensed consolidated financial statements.

     In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force), which amends ASC 605-25, Revenue Recognition: Multiple-Element Arrangements. ASU No. 2009-13 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how to allocate consideration to each unit of accounting in the arrangement. This ASU replaces all references to fair value as the measurement criteria with the term selling price and establishes a hierarchy for determining the selling price of a deliverable. ASU No. 2009-13 also eliminates the use of the residual value method for determining the allocation of arrangement consideration. Additionally, ASU No. 2009-13 requires expanded disclosures. This ASU will become effective for revenue arrangements entered into or materially modified after our fiscal year 2010. Earlier application is permitted with required transition disclosures based on the period of adoption. We are currently evaluating the application date and the impact of this standard on our unaudited condensed consolidated financial statements.

3. Cash and Cash Equivalents

     Cash and cash equivalents are defined as short-term, highly liquid investments with original maturities of 90 days or less at the date of purchase. The fair value of these investments was determined by using quoted prices for identical investments in active markets.

4. Investments in Available-for-Sale Securities

     Our investment portfolio is comprised of short-term and long-term investments. Investments classified as short-term available-for-sale consist primarily of municipal bonds, corporate bonds, commercial paper and variable demand notes. All investments mature within two years or less from the date of purchase. Investments with maturities beyond one year may be classified as short-term, if they are available and intended for use in current operations, based on their highly liquid nature or due to the frequency with which the interest rate is reset. Investments classified as long-term available-for-sale consist of auction rate securities, whose underlying assets are student loans. In addition, our long-term investments associated with the deferred compensation plans are classified as trading and consist of the cash surrender value of our corporate owned life insurance policies.

     Our investments in available-for-sale securities are recorded at estimated fair value on our financial statements, and the temporary differences between cost and estimated fair value are presented as a separate component of accumulated other comprehensive loss.

     As of July 3, 2010, we had unrealized gains before tax from our investment in municipal bonds and corporate bonds of $1.3 million and unrealized losses before tax from our auction rate securities of $3.5 million.

     The aggregate market value, cost basis and gross unrealized gains and losses for available-for-sale investments as of July 3, 2010 and January 2, 2010 by major security type are as follows:

						Gross
		Amortized				unrealized				Fair
		cost				gains (losses)				value
						(in thousands)
July 3, 2010:
Short-term investments:
Municipal bonds		$	250,969			$	1,028			$	251,997
Variable demand notes			45,605				—				45,605
Corporate bonds			13,865				265				14,130
Commercial paper			2,992				—				2,992
Total		$	313,431			$	1,293			$	314,724
Long-term investments:
Auction rate securities		$	27,700			$	(3,534	)		$	24,166
January 2, 2010:
Short-term investments:
Municipal bonds		$	196,650			$	1,526			$	198,176
Variable demand notes			66,865				—				66,865
Corporate bonds			13,785				348				14,133
Total		$	277,300			$	1,874			$	279,174
Long-term investments:
Auction rate securities		$	27,700			$	(3,066	)		$	24,634

     As of July 3, 2010, we owned approximately $27.7 million face amount of auction rate securities classified as long-term. The assets underlying these investments are student loans backed by the U.S. government under the Federal Family Education Loan Program or by private insurers and are rated between A- and AAA. Historically, these securities have provided liquidity through a Dutch auction process that resets the applicable interest rate periodically every seven to thirty-five days. Beginning in February of 2008, these auctions began to fail. The principal amount of these auction rate securities will not be accessible until future auctions for these securities are successful, a secondary market is established, these securities are called for redemption, or they are paid at maturity.

     As a result of these auction failures, these auction rate securities do not have a readily determinable market value. We estimated fair values as of July 3, 2010 using a discounted cash flow model based on estimated interest rates, the present value of future principal and interest payments discounted at rates considered to reflect current market conditions, and the credit quality of the underlying securities. Specifically, our management estimated the future cash flows over a five-year period, and applied a credit default rate to reflect the risk in the marketplace for these investments has arisen due to the lack of an active market.

     As of July 3, 2010 we recorded an estimated cumulative unrealized loss of $3.5 million ($2.1 million, net of tax) related to the temporary impairment of the auction rate securities, which was included in accumulated other comprehensive loss within shareholders’ equity. In addition, our management reviews impairments and credit losses associated with its investments, including auction rate securities, to determine the classification of the impairment as “temporary” or “other-than-temporary” and to bifurcate the credit and non-credit component of other-than-temporary impairment event. We (i) do not intend to sell any of the auction rate securities prior to maturity at an amount below the original purchase value; (ii) intend to hold the investment to recovery and, based on a more-likely-than-not probability assessment, will not be required to sell the security before recovery; and (iii) deem that it is not probable that we will receive less than 100% of the principal and accrued interest from the issuer. Therefore, 100% of the impairment was charged to other comprehensive loss. Our auction rate securities are classified as long-term valued at $24.2 million using significant unobservable inputs. Subsequent to the second quarter of 2010 we liquidated $3.0 million of our auction rate securities at par value through a successful auction.

     If the issuers of the auction rate securities are unable to successfully complete future auctions and their credit ratings deteriorate, we may in the future be required to record an impairment charge to earnings on these investments. It could conceivably take until the final maturity of the underlying notes (up to 30 years) to realize the investments’ carrying value.

     The aggregate market value of our trading investments included in our deferred compensation plan as of July 3, 2010 and January 2, 2010 were as follows:

		July 3,				January 2,
		2010				2010
		(in thousands)
Deferred compensation plan		$	2,357			$	2,436

     The investments associated with the deferred compensation plans are included in “Other long-term assets” on our condensed consolidated balance sheets at the fair value of the cash surrender value of our corporate owned life insurance policies. The realized loss before tax from the change in the fair value of the cash surrender value for the three months ended July 3, 2010 of approximately $0.2 million and for the six months ended July 3, 2010 of approximately $80,000 is included in “Interest income and other.”

5. Fair Value Measurements

     ASC 820, Fair Value Measurements and Disclosure, defines fair value as the price that would be received to sell an asset or paid to transfer a liability (“exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, we used various approaches, including market, income and/or cost approaches, and each of these approaches requires certain inputs. Fair value measurement establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions as compared to the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances.

     We value our financial and nonfinancial assets and liabilities based on the observability of inputs used in the valuation of such assets and liabilities using the following fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial and nonfinancial assets and liabilities carried or disclosed at fair value were classified and disclosed in one of the following three categories:

Level 1:		Quoted prices in active markets for identical assets or liabilities.
Level 2:		Quoted prices of similar investments in active markets, of similar or identical investments in markets that are not active or model based valuations for which all significant inputs and value drivers are observable, directly or indirectly.
Level 3:		Inputs that are unobservable and significant to the overall fair value measurement.

     The following table represents the hierarchy of our financial assets and financial liabilities measured at fair value on a recurring basis:

		July 3, 2010
		Assets and												Significant
		liabilities								Quoted prices in				other				Significant
		at carrying				Total				active markets for				observable				unobservable
		value				fair value				identical assets				inputs				inputs
										(Level 1)				(Level 2)				(Level 3)
										(in thousands)
Assets
Short-term investments:
Municipal bonds		$	251,997			$	251,997			$	—			$	251,997			$	—
Variable demand notes			45,605				45,605				—				45,605				—
Corporate bonds			14,130				14,130				—				14,130				—
Commercial paper			2,992				2,992				—				2,992				—
Prepaid expenses and other assets — mark to market on foreign exchange instruments (Note 6)			3				3				—				3				—
Long-term investments — auction rate securities			24,166				24,166				—				—				24,166
Other long-term assets — deferred compensation plan			2,357				2,357				—				2,357				—
Liabilities
Make-whole provision (Note 10)			15				15				—				—				15

		January 2, 2010
		Assets and												Significant
		liabilities at								Quoted prices in				other				Significant
		carrying				Total				active markets for				observable				unobservable
		value				fair value				identical assets				inputs				inputs
										(Level 1)				(Level 2)				(Level 3)
										(in thousands)
Assets
Short-term investments:
Municipal bonds		$	198,176			$	198,176			$	—			$	198,176			$	—
Variable demand notes			66,865				66,865				—				66,865				—
Corporate bonds			14,133				14,133				—				14,133				—
Prepaid expenses and other assets — mark to market on foreign exchange instruments (Note 6)			8				8				—				8				—
Long-term investments — auction rate securities			24,634				24,634				—				—				24,634
Other long-term assets — deferred compensation plan			2,436				2,436				—				2,436				—
Liabilities
Make-whole provision (Note 10)			23				23				—				—				23

     Assets measured at fair value on a recurring basis using significant unobservable Level 3 inputs consist of securities with an auction reset feature (“auction rate securities”) whose underlying assets are student loans issued by various tax-exempt state agencies, most of which are supported by federal government guarantees and some of which are supported by private insurers. To estimate the fair value of the auction rate securities, the present value of future cash flows are estimated by discounting future principal and interest payments over a five year period. Significant inputs which vary by issuer include (1) basis point spread of 0.54% per annum (2) credit default rate which ranges from 1.35% to 6.59% and (3) discount yield rate of 1.82%.

     Our short-term available-for-sale investments, which are recorded at fair value, are valued using quoted prices of similar or like securities that are traded in active markets. Our foreign exchange instruments are measured at fair value using internal models based on observable market inputs such as forward prices and exchange rates. Our long-term available-for-sale investments are measured at fair value based on unobservable market inputs using a discounted cash flow model based on estimated interest rates, the present value of future principal and interest payments discounted at rates considered to reflect current market conditions, and the credit quality of the underlying securities. Our carrying value of investments on our deferred compensation plan is recorded at fair value of similar securities that are traded in markets that are not active.

     The make-whole provision is measured at fair value, using valuation techniques, based on an internal model using observable inputs such as our stock price, the volatility of our stock, and unobservable inputs such as the probability of the Company being acquired and the probability of the type of consideration used by a potential acquirer.

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

		Fair Value Measurement Using
		Significant Unobservable Inputs
		(Level 3)
		Auction
		Rate
		Securities				Liabilities
		(in thousands)
Balance at January 2, 2010		$	24,634			$	23
Unrealized holding gain on make-whole provision, included in interest income and other			—				(11	)
Unrealized holding loss on auction rate securities, included in other comprehensive income			(688	)			—
Balance as of April 3, 2010		$	23,946			$	12
Unrealized holding loss on make-whole provision, included in interest income and other			—				3
Unrealized holding gain on auction rate securities, included in other comprehensive income			220				—
Balance as of July 3, 2010		$	24,166			$	15

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

     In addition, we are using significant unobservable Level 3 inputs for the fair value of our convertible debenture with Levitronix, LLC as of July 3, 2010 and January 2, 2010 of $2.4 million and $3.0 million, respectively. This convertible debenture is recorded at the carrying value of $2.8 million as of both July 3, 2010 and January 2, 2010, and is included in “Other long-term assets” on the condensed consolidated balance sheets. Levitronix repaid the receivable balance of approximately $2.8 million in full on August 3, 2010.

     Senior subordinated convertible notes measured at fair value on a recurring basis using Level 2 inputs include quoted prices of identical or similar liabilities and are measured at a fair value of $316.8 million and $205.4 million, as of July 3, 2010 and January 2, 2010, respectively. The senior subordinated convertible notes have been reclassified to current liabilities during the second quarter of 2010 due to a redemption feature which may require us to repurchase all or a portion of the senior subordinated convertible notes as early as May 16, 2011. For a detailed discussion, see Note 10 “Senior Subordinated Convertible Notes.”

6. Foreign Exchange Instruments

     We utilize foreign currency forward exchange contracts and options to mitigate against future movements in foreign exchange rates that affect certain existing and forecasted foreign currency denominated sales and purchase transactions (primarily assets and liabilities on our U.K. subsidiary’s consolidated balance sheet). We do not use derivative financial instruments for speculative or trading purposes. We routinely hedge our exposure to certain foreign currencies with various financial institutions in an effort to minimize the impact of certain currency exchange rate fluctuations. If a financial counterparty to any of our hedging arrangements experiences financial difficulties or is otherwise unable to honor the terms of the foreign currency forward contract, we may experience material financial losses.

     The impacts of the current foreign currency contracts with a maximum maturity of three months, which do not qualify for hedge accounting, were as follows:

		Notional Amounts
		July 3, 2010				July 4, 2009
		(in thousands)
Purchases		$	—			$	8,414
Sales			12,860				11,973

     Effective January 3, 2010, we changed our functional currency for our U.K subsidiary from U.K pounds to euros. This change did not have a material impact on our condensed consolidated financial statements: however the change did impact our foreign currency hedging contracts. As of July 3, 2010, we owned forward contracts to sell euros to U.S. dollars with a notional value of €7.1 million, to sell U.S. dollars to euro with a notional value of $2.3 million and to sell U.K. pounds to euros with a notional value of £1.0 million, as compared to July 4, 2009, when we owned forward contracts to sell euros to U.S dollars with a notional value of €8.5 million and to purchase U.K. pounds from U.S. dollars with a notional value of £5.1 million. As of July 3, 2010, our forward contracts had an average exchange rate of one U.S. dollar to 1.2546 euros and one U.K. pound to 1.2094 euros. The fair value of these contracts is $3,000 and is included in “Prepaid expenses and other assets” in our condensed consolidated balance sheets.

     The following represents our realized fair value of the foreign currency contracts and offsets to the foreign currency exchange gains and losses which were included in “Interest income and other” in the condensed consolidated statements of operations:

		Three Months Ended								Six Months Ended
		July 3, 2010				July 4, 2009				July 3, 2010				July 4, 2009
		(in thousands)
Foreign currency exchange gain on foreign currency contracts		$	482			$	487			$	746			$	935
Foreign currency exchange loss on foreign translation adjustments			(296	)			(498	)			(626	)			(1,448	)

7. Inventories

     Inventories are stated at the lower of cost or market. Cost is based on the first in, first out method and consisted of the following:

		July 3,				January 2,
		2010				2010
		(in thousands)
Finished goods		$	10,102			$	12,920
Work in process			11,739				7,350
Raw materials			26,664				24,365
Total		$	48,505			$	44,635

8. Property, Plant and Equipment, net

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

		July 3,				January 2,
		2010				2010
		(in thousands)
Land, building and improvements		$	18,305			$	18,134
Equipment and capitalized software			39,316				38,281
Furniture and leasehold improvements			21,052				20,655
Subtotal			78,673				77,070
Less accumulated depreciation			(41,567	)			(39,955	)
Total		$	37,106			$	37,115

9. Goodwill and Purchased Intangible Assets

     The carrying amount of goodwill was $95.0 million as of July 3, 2010 and January 2, 2010.

     In February 2001, we merged with Thermo Cardiosystems, Inc. The components of identifiable intangible assets related to the merger include: patents and trademarks, core technology (Thoralon, our proprietary bio-material), and developed technology (patented technology, other than core technology, acquired in the merger).

     During the first quarter of 2010, we purchased patents at a fair value of $1.4 million, which we capitalized under ASC 350, Intangibles — Goodwill and Other. These patents have an estimated useful life of approximately ten years.

     The purchased intangibles on the condensed consolidated balance sheets are summarized as follows:

		July 3, 2010
		Gross Carrying				Accumulated				Net Carrying
		Amount				Amortization				Amount
		(in thousands)
Patents and trademarks		$	40,832			$	(30,143	)		$	10,689
Core technology			37,180				(16,530	)			20,650
Developed technology			121,805				(59,735	)			62,070
Total purchased intangible assets		$	199,817			$	(106,408	)		$	93,409

		January 2, 2010
		Gross Carrying				Accumulated				Net Carrying
		Amount				Amortization				Amount
		(in thousands)
Patents and trademarks		$	39,418			$	(29,625	)		$	9,793
Core technology			37,180				(15,558	)			21,622
Developed technology			121,805				(56,344	)			65,461
Total purchased intangible assets		$	198,403			$	(101,527	)		$	96,876

     Amortization expense related to purchased intangible assets for the three months ended July 3, 2010 and July 4, 2009 was $2.5 million and $2.4 million, respectively. Amortization expense related to purchased intangible assets for the six months ended July 3, 2010 and July 4, 2009 was $4.9 million and $5.1 million, respectively. Our amortization expense is expected to be approximately $9.7 million in 2010, declining to $8.7 million by 2014. This decline in amortization expense is due to certain intangibles being fully amortized. Patents and trademarks have useful lives ranging from eight to ten years, and core and developed technology assets have useful lives ranging from zero to eleven years.

10. Senior Subordinated Convertible Notes

     In 2004, we completed the sale of $143.8 million initial principal amount of senior subordinated convertible notes due in 2034. The convertible notes were sold to Qualified Institutional Buyers pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended, provided by Rule 144A thereunder.

     The senior subordinated convertible notes were issued at an issue price of $580.98 per note, which is 58.098% of the principal amount at maturity of the notes. The senior subordinated convertible notes bear interest at a rate of 1.3798% per year on the principal amount at maturity, payable semi-annually in arrears in cash on May 16 and November 16 of each year, from November 16, 2004 until May 16, 2011. Beginning on May 16, 2011, the original issue discount will accrue daily at a rate of 2.375% per year on a semi-annual bond equivalent basis and, on the maturity date, a holder will receive $1,000 per note. As a result, the aggregate principal amount of the outstanding notes at maturity will be $243.4 million.

     Holders of the senior subordinated convertible notes may convert their convertible notes into shares of our common stock at a conversion rate of 29.4652 shares per $1,000 principal amount of senior subordinated convertible notes, which represents a conversion price of $19.72 per share, subject to adjustments upon the occurrence of certain events as set forth in the indenture. Holders have been and are able to convert their convertible notes at any point after the close of business on October 30, 2004 if, as of the last day of the preceding calendar quarter, the closing price of our common stock for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of such preceding calendar quarter is more than 120% of the accreted conversion price per share of our common stock. Commencing October 1, 2008, this market price conversion feature was satisfied, such that holders of the senior subordinated convertible notes may convert their notes through the final maturity date of the notes into shares of our common stock at a conversion rate of 29.4652 shares per $1,000 principal amount of senior subordinated convertible notes, subject to adjustments as provided in the indenture. If holders elect conversion, we may, at our option, deliver shares of common stock, pay a holder in cash, or deliver a combination of shares and cash, as determined pursuant to the terms of the notes. As of July 3, 2010, 4,035 bonds of the 247,427 bonds originally issued had been submitted to be converted and we have elected to pay cash in lieu of shares for these bonds.

     Holders may require us to repurchase all or a portion of their senior subordinated convertible notes on each of May 16, 2011, 2014, 2019, 2024 and 2029 at a repurchase price equal to 100% of the issue price, plus accrued original issue discount, if any. Based on this redemption feature, we reclassified the net carrying amount of the senior subordinated notes to current liabilities during the second quarter of 2010. In addition, if we experience a change in control or a termination of trading of our common stock each holder may require the Company to purchase all or a portion of such holder’s notes at the same price, plus, in certain circumstances, to pay a make-whole premium. This premium is considered an embedded derivative and has been bifurcated from the senior subordinated convertible notes and recorded at its estimated fair value, $15,000 as of July 3, 2010. There are significant variables and assumptions used in valuing the make-whole provision including, but not limited to, our stock price, the volatility of our stock, the probability of the Company being acquired and the probability of the type of consideration used by a potential acquirer.

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

     In accordance with ASC 470-20, Debt, which applies to certain convertible debt instruments that may be settled in cash or other assets, or partially in cash, upon conversion, we recorded the debt and equity components on the senior subordinated convertible notes separately. This accounting pronouncement increased interest expense associated with our senior subordinated convertible notes by adding a non-cash component to amortize a debt discount calculated based on the difference between the cash coupon rate (2.375% per year) of the senior subordinated convertible notes and the effective interest rate on debt borrowing (9% per year). The discount, which represents the non-cash interest expense, classified as interest expense on the condensed consolidated statements of operations, is being amortized to interest expense over a seven-year period ending May 16, 2011 (the expected life of the liability component) using the effective interest method. Additionally, we allocated transaction costs on the same percentage as the liability and equity component, such that a portion of the deferred debt issuance costs is allocated to the liability component to be amortized using the effective interest method until May 16, 2011, and the equity component to be included in additional paid-in capital.

     Interest expense primarily includes interest and amortization of discount related to senior subordinated convertible notes as follows:

		Three Months Ended								Six Months Ended
		July 3, 2010				July 4, 2009				July 3, 2010				July 4, 2009
		(in thousands)
Interest expense — cash component		$	847			$	853			$	1,701			$	1,706
Interest expense — non-cash component			2,052				1,910				4,139				3,820

     The debt and equity component (recorded in additional paid-in-capital, net of income tax benefit) consisted of the following:

		July 3, 2010				January 2, 2010
		(in thousands)
Senior subordinated convertible notes
Principal amount		$	141,406			$	143,750
Unamortized discount			(7,524	)			(11,821	)
Net carrying amount		$	133,882			$	131,929
Equity component, net of income tax benefit		$	25,325			$	28,462

     We may redeem either in whole or in part any of the senior subordinated convertible notes at any time beginning May 16, 2011, by giving the holders at least 30 days notice, at a redemption price equal to the sum of the issue price and the accrued original issue discount. If the holders converted the senior subordinated convertible notes into shares of our stock as of July 3, 2010, the if-converted value would be $309.8 million, based on our stock price of $43.20 per share on July 2, 2010, which amount exceeds the original value of the bonds outstanding, or $141.4 million, by $168.4 million. This if-converted value is $66.4 million more than the $243.4 million face amount of the outstanding bonds at maturity in 2034.

     The aggregate fair value of the senior subordinated convertible notes at July 3, 2010 was $316.8 million.

11. Comprehensive Income

     Comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in accumulated other comprehensive income or loss, a component of shareholders’ equity within the condensed consolidated balance sheets, rather than the condensed consolidated statements of operations. Under our existing accounting standards, comprehensive income includes unrecognized gains and losses on investments and currency translation adjustments.

		Three Months Ended								Six Months Ended
		July 3, 2010				July 4, 2009				July 3, 2010				July 4, 2009
		(in thousands)
Net income from continuing operations		$	17,537			$	2,886			$	30,901			$	9,055
Unrealized gains (losses) on investments (net of taxes of $31 and $1,595 for the three months ended July 3, 2010 and July 4, 2009, respectively, and $471 and $1,531 for the six months ended July 3, 2010 and July 4, 2009, respectively)			(47	)			2,393				(707	)			2,297
Foreign currency translation adjustments			(940	)			1,229				(1,746	)			1,276
Comprehensive income from continuing operations			16,550				6,508				28,448				12,628
Comprehensive loss from discontinued operations			(1,583	)			(1,054	)			(2,514	)			(1,596	)
Comprehensive income		$	14,967			$	5,454			$	25,934			$	11,032

     There are no reconciling items between net loss from discontinued operations and comprehensive loss from discontinued operations.

12. Share-Based Compensation

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

     Share-based compensation expense and related stock option and restricted stock award activity is presented on a consolidated basis, unless otherwise presented as continuing operations and discontinued operations.

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

		Three Months Ended								Six Months Ended
		July 3, 2010				July 4, 2009				July 3, 2010				July 4, 2009
		(in thousands)
Cost of product sales		$	359			$	261			$	626			$	555
Selling, general and administrative			1,895				1,665				4,216				3,544
Research and development			809				585				1,811				1,398
Total share-based compensation expense before taxes			3,063				2,511				6,653				5,497
Tax benefit for share-based compensation expense			1,405				956				2,800				1,959
Total share-based compensation — continuing operations (net of taxes)		$	1,658			$	1,555			$	3,853			$	3,538
Total share-based compensation — discontinued operations (net of taxes)		$	718			$	852			$	1,656			$	1,784

     As of July 3, 2010 and July 4, 2009, share-based compensation expense of $0.3 million and $0.2 million, respectively, was capitalized to inventory.

     We receive a tax deduction for certain stock option exercises during the period the options are exercised, generally for the excess of the fair market value of the options at the date of exercise over the exercise prices of the options. Our unaudited condensed consolidated statements of cash flows presentation reports the excess tax benefits (i.e., windfall only for tax deductions in excess of the share-based compensation expense recognized) as financing cash flows of $9.3 million and $1.6 million for the six months ended July 3, 2010 and July 4, 2009, respectively.

     Cash proceeds from the exercise of stock options were $21.8 million and $2.9 million for the six months ended July 3, 2010 and July 4, 2009, respectively. Cash proceeds from our employee stock purchase plan were $1.9 million and $1.6 million for the six months ended July 3, 2010 and July 4, 2009, respectively. The Company purchased $4.5 million and $3.1 million of restricted stock for payment of income tax withholding due upon vesting for the six months ended July 3, 2010 and July 4, 2009, respectively.

Equity Plan

     In April 2006, the Board of Directors approved the 2006 Incentive Stock Plan (“2006 Plan”). In May 2006 the 2006 Plan was amended by the Board of Directors and approved by our shareholders, in May 2008 the 2006 Plan was further amended by the Board of Directors and approved by our shareholders and in May 2010 the 2006 Plan was further amended by the Board of Directors and approved by our shareholders. The 2006 Plan allows us to grant to our employees, directors and consultants up to a total of 8.6 million shares of stock awards. Each share issued from May 20, 2008 through May 18, 2010 as restricted stock bonuses, restricted stock units, phantom stock units, performance share bonuses, or performance share units reduces the number of shares available for issuance under the 2006 Plan by one and seventy-four hundredths (1.74) shares, and each share issued as stock options, restricted stock purchases or stock appreciation rights reduced the shares available for issuance under the 2006 Plan on a share-for-share basis. Each share issued from and after May 19, 2010 as restricted stock bonuses, restricted stock units, phantom stock units, performance share bonuses, or performance share units reduces the number of shares available for issuance under the 2006 Plan by one and seven-tenths (1.7) shares, and each share issued as stock options, restricted stock purchases or stock appreciation rights reduces the shares available for issuance under the 2006 Plan on a share-for-share basis. During the six months ended July 3, 2010, approximately 443,000 options were granted under the 2006 Plan at an exercise price equal to the fair market value on the date of grant, and approximately 580,000 shares of restricted stock and restricted stock units were granted under the 2006 Plan. As of July 3, 2010, approximately 3.9 million shares remained available for grant under the 2006 Plan.

Stock Options

     Upon approval in May 2006, the 2006 Plan replaced our previous common stock option plans and equity incentive plans. As of July 3, 2010, we had 2.9 million options issued and outstanding under the 2006 Plan and the replaced plans. Options under the 2006 Plan may be granted by the Board of Directors at the fair market value on the date of grant and generally become fully exercisable within four years after the grant date and expire between five and ten years from the date of grant. Vesting on some options granted to officers may be accelerated in certain circumstances following a change in control of the Company.

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

		Three Months Ended								Six Months Ended
		July 3, 2010				July 4, 2009				July 3, 2010				July 4, 2009
Risk-free interest rate (weighted average)			2.87	%			2.97	%			3.05	%			2.32	%
Expected volatility			40	%			53	%			40	%			53	%
Expected option term (years)			4.82				4.91 to 6.02				4.88 to 6.04				4.90 to 6.04
Dividends		None				None				None				None

     The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term of options represents the period of time that options are expected to be outstanding. We use separate assumptions for groups of employees (for example, officers) that have similar historical exercise behavior. The range above reflects the expected option impact of these separate groups. We base the expected volatility on a combination of historical volatility trends and market-based implied volatility because we have determined that this combination of historical volatility trends and market-based implied trends are reflective of market conditions.

     At July 3, 2010, there was $5.0 million of unrecognized compensation expense from continuing operations, net of estimated forfeitures, related to stock options, which expense we expect to recognize over a weighted average period of 1.63 years. At July 3, 2010, there was $1.1 million of unrecognized compensation expense from discontinued operations, net of estimated forfeitures, related to stock options, which expense we expect to recognize over a weighted average period of 1.63 years. The aggregate intrinsic value of in-the-money options outstanding was $67.9 million, based on the closing price of our common stock on July 2, 2010, the last trading day in the six months ended July 3, 2010, of $43.20. As of July 3, 2010, the aggregate intrinsic value of options currently exercisable was $48.8 million and the intrinsic value of options vested and expected to vest was $66.7 million.

     The total intrinsic value of options exercised for the three months ended July 3, 2010 and July 4, 2009 was $27.3 million and $1.7 million, respectively. The total intrinsic value of options exercised for the six months ended July 3, 2010 and July 4, 2009 was $32.0 million and $2.6 million, respectively.

     Stock option activity is summarized as follows:

		Number of				Weighted				Weighted Average
		Options				Average Exercise				Remaining Contract
		(in thousands)				Price Per Share				Life (years)
Outstanding options at January 2, 2010			3,857			$	17.29				5.60
Granted			443				30.17
Exercised			(1,361	)			16.01
Forfeited or expired			(31	)			19.43
Outstanding options at July 3, 2010			2,908			$	19.83				6.16
Outstanding options exercisable at July 3, 2010			1,897			$	17.49				4.84
Outstanding options vested at July 3, 2010 and expected to vest			2,724			$	19.42				5.97

     The weighted average grant-date fair value of options granted during the six months ended July 3, 2010 and July 4, 2009 was $12.61 per share and $12.03 per share, respectively.

Restricted Stock Awards and Units

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

Restricted Stock Awards

     Share-based compensation expense from continuing operations related to restricted stock awards was $1.7 million for the six months ended July 3, 2010. As of July 3, 2010, we had $2.8 million of unrecognized compensation expense from continuing operations, net of estimated forfeitures, related to restricted stock awards, which amount we expect to recognize over 1.29 years. As of July 3, 2010, we had $0.9 million of unrecognized compensation expense from discontinued operations, net of estimated forfeitures, related to restricted stock awards, which amount we expect to recognize over 1.29 years. There were no restricted stock awards granted during the six months ended July 3, 2010.

     Restricted stock activity is summarized as follows:

		Number of				Weighted Average
		Shares				Grant Date Fair
		(in thousands)				Value
Outstanding unvested restricted stock at January 2, 2010			609			$	16.63
Granted			—				—
Vested			(264	)			17.08
Forfeited or expired			(18	)			16.03
Outstanding unvested restricted stock at July 3, 2010			327			$	16.31

Restricted Stock Units

     Share-based compensation expense from continuing operations related to restricted stock units was $2.5 million for the six months ended July 3, 2010. As of July 3, 2010, we had $15.0 million of unrecognized compensation expense from continuing operations, net of estimated forfeitures, related to restricted stock units, which amount we expect to recognize over 3.30 years. As of July 3, 2010, we had $4.6 million of unrecognized compensation expense from discontinued operations, net of estimated forfeitures, related to restricted stock units, which amount we expect to recognize over 3.30 years. The aggregate intrinsic value of the units outstanding, based on our stock price on July 2, 2010, was $38.2 million.

     Restricted stock unit activity is summarized as follows:

		Number of				Weighted Average				Weighted Average
		Units				Grant Date Fair				Remaining Contract
		(in thousands)				Value				Life (in years)
Outstanding units at January 2, 2010			463			$	24.17				3.12
Granted			580				30.82
Released			(136	)			25.15
Forfeited or expired			(22	)			25.68
Outstanding units at July 3, 2010			885			$	28.34				3.30

Employee Stock Purchase Plan

     In May 2002, our shareholders approved our Employee Stock Purchase Plan (“ESPP”) under which 500,000 shares of common stock were reserved for issuance. In addition, the ESPP provides for an annual, automatic increase of up to 250,000 shares in the total number of shares available for issuance thereunder on March 1 of each year, unless our Board of Directors specifies a smaller increase or no increase. Under this provision, an additional 250,000 shares were reserved for issuance under the ESPP on each of March 1, 2006, March 1, 2008 and March 1, 2009; our Board of Directors specified no increase as of each other year. Eligible employees may purchase a limited number of shares, over a six month period, of our common stock at 85% of the lower of the market value on the offering date or the market value on the purchase date. During the six months ended July 3, 2010, 83,791 shares of common stock were issued under the ESPP. As of July 3, 2010, approximately 215,909 shares remained available for issuance under this plan.

     The estimated subscription date fair value of the current offering under the ESPP is approximately $0.6 million using the Black-Scholes option pricing model and the following assumptions:

Risk-free interest rate			0.25	%
Expected volatility			43	%
Expected option life		0.50 years
Dividends		None

     As of July 3, 2010, there was approximately $0.2 million of unrecognized compensation expense from continuing operations and $0.2 million of unrecognized expense from discontinued operations related to ESPP subscriptions that began on May 1, 2010, which amount we expect to recognize during the second half of 2010.

13. Income Taxes

      Our effective income tax rates for the three months ended July 3, 2010 and July 4, 2009, were 35.4% and 30.7%, respectively. Our effective income tax rates for the six months ended July 3, 2010 and July 4, 2009 were 34.7% and 28.2%, respectively. The increase in our reported income tax rates are primarily due to the reduced impact that tax exempt income has on our tax rate due to our pretax increase in earnings. In addition, federal research credits which were available in 2009 are not currently available in 2010 as a result of the expiration of federal research credit legislation. Also in the first quarter of 2009, we recorded a discrete benefit to reflect the change in California tax law that will permit us to make a beneficial apportionment election in 2011.

     During the next twelve months, it is reasonably possible that audit resolutions and the expiration of statutes of limitations could potentially reduce our unrecognized tax benefits by up to $4.8 million. However, this amount may change because we continue to have ongoing negotiations with various taxing authorities throughout the year.

14. Geographic Information

     Our functional entities operate in two segments: Cardiovascular and ITC. Due to our intent to sell ITC, segment disclosure is no longer presented. For a discussion of our ITC segment, which is classified as discontinued operations, refer to Note 15, “Assets Held for Sale.” Our Cardiovascular segment is classified as continuing operations.

     Our geographic information for our product revenue sold by our continuing operations to the domestic and international markets is discussed below.

     Revenue attributed to a country or region includes product sales to hospitals, physicians and distributors and is based on final destination where the products are sold. During the three and six months ended July 3, 2010 and July 4, 2009, no customer or international country represented individually greater than 10% of the Company’s total product sales. The geographic composition of the Company’s product sales from continuing operations was as follows:

		Three Months Ended								Six Months Ended
		July 3, 2010				July 4, 2009				July 3, 2010				July 4, 2009
		(in thousands)
Domestic		$	79,906			$	56,014			$	162,144			$	108,032
International			15,192				13,208				32,226				25,819
Total product sales from continuing operations		$	95,098			$	69,222			$	194,370			$	133,851

15. Assets Held For Sale

     On April 25, 2010, we entered into a Stock Purchase Agreement to sell the ITC division to Danaher Corporation (“Danaher”) for $110.0 million in cash upon closing, subject to certain purchase price adjustments as set forth in the agreement. As such, the ITC division is classified as held for sale on the condensed consolidated balance sheets as of July 3, 2010 and January 2, 2010 and its results of operations displayed in discontinued operations for all periods presented.

     On July 26, 2010, the sale was terminated as a result of the failure of the parties to agree on the status of certain aspects of ITC’s quality system and regulatory filings. We expect to locate another buyer and complete the sale of ITC within the next twelve months.

     The results of the ITC business are included in discontinued operations in the second quarter and first half of 2010 and 2009 as follows:

		Three Months Ended								Six Months Ended
		July 3,				July 4,				July 3,				July 4,
		2010				2009				2010				2009
		(in thousands)
Product sales		$	24,182			$	22,836			$	46,488			$	47,674
Cost of product sales			16,723				14,523				30,857				29,692
Gross profit			7,459				8,313				15,631				17,982
Operating expenses:
Selling, general and administrative			7,551				6,914				14,179				13,887
Research and development			3,019				3,099				6,096				6,412
Amortization of purchased intangible assets			67				209				269				418
Total operating expenses			10,637				10,222				20,544				20,717
Loss from operations			(3,178	)			(1,909	)			(4,913	)			(2,735	)
Other income:
Other income			103				324				204				380
Loss before income taxes			(3,075	)			(1,585	)			(4,709	)			(2,355	)
Income tax benefit			1,492				531				2,195				759
Net loss from discontinued operations		$	(1,583	)		$	(1,054	)		$	(2,514	)		$	(1,596	)

     The assets and liabilities of ITC are classified as held for sale as of July 3, 2010 and January 2, 2010. Such amounts are comprised of the following:

		July 3, 2010				January 2, 2010 (1)
		(in thousands)
ASSETS
Current assets:
Receivables, net of allowances of $383 and $522, respectively		$	14,591			$	18,030
Inventories (1)			22,272				22,300
Prepaid expenses and other assets			632				881
Total current assets			37,495				41,211
Property, plant and equipment, net (2)			15,783				14,737
Goodwill			4,271				4,271
Purchased intangible assets, net			2,715				2,984
Other long-term assets			584				595
Total assets held for sale		$	60,848			$	63,798
LIABILITIES
Current liabilities:
Bank overdraft		$	577			$	1,326
Accounts payable			2,891				2,310
Accrued compensation			4,647				4,990
Other accrued liabilities			2,550				2,305
Total current liabilities			10,665				10,931
Other long-term liabilities			1,419				1,446
Total liabilities related to assets held for sale		$	12,084			$	12,377

		July 3, 2010				January 2, 2010
		(in thousands)
Finished goods		$	4,740			$	5,083
Work in process			2,885				3,068
Raw materials			14,647				14,149
Total		$	22,272			$	22,300

		July 3, 2010				January 2, 2010
		(in thousands)
Land, building and improvements		$	4,600			$	4,606
Equipment and capitalized software			36,841				35,465
Furniture and leasehold improvements			3,176				3,098
Subtotal			44,617				43,169
Less accumulated depreciation			(28,834	)			(28,432	)
Total		$	15,783			$	14,737

16. Net Income (Loss) Per Share

     On January 4, 2009, we adopted authoritative accounting guidance that requires participating securities to be included in the calculation of the net income (loss) per share using the two-class method. Our restricted share awards subject to repurchase and settled in shares of common stock upon vesting have non-forfeitable rights to receive dividends on an equal basis with common stock and therefore are considered participating securities. Under the two-class method, basic and diluted net income (loss) per common share is determined by calculating net income (loss) per share for common stock and participating securities based on participation rights in undistributed earnings. Dilutive net income (loss) per common share also considers the dilutive effect of the in-the-money stock options and restricted stock units, calculated using the treasury stock method. Under the treasury stock method, the amount of assumed proceeds from unexercised stock options and restricted stock units includes the amount of unrecognized compensation cost attributable to future services, assumed proceeds from the exercise of the options, and the incremental income tax benefit or liability that would be recorded in additional-paid-in capital when the award becomes deductible.

     Basic and diluted net income (loss) per common share attributable to common shareholders under the two-class method were calculated as follows:

		Three Months Ended								Six Months Ended
		July 3, 2010				July 4, 2009				July 3, 2010				July 4, 2009
		(in thousands, except per share data)
Basic net income per share calculation
Net income from continuing operations		$	17,537			$	2,886			$	30,901			$	9,055
Net income from continuing operations allocated to participating securities			(103	)			(35	)			(224	)			(123	)
Net income from continuing operations attributable to common shareholders		$	17,434			$	2,851			$	30,677			$	8,932
Net loss from discontinued operations		$	(1,583	)		$	(1,054	)		$	(2,514	)		$	(1,596	)
Net loss from discontinued operations allocated to participating securities			9				13				18				22
Net loss from discontinued operations attributable to common shareholders		$	(1,574	)		$	(1,041	)		$	(2,496	)		$	(1,574	)
Net income		$	15,954			$	1,832			$	28,387			$	7,459
Net income allocated to participating securities			(94	)			(22	)			(206	)			(102	)
Net income attributable to common shareholders		$	15,860			$	1,810			$	28,181			$	7,357
Weighted average number of common shares used to compute basic net income per common share			57,635				55,789				57,139				55,658
Basic net income (loss) per common share from:
Continuing operations		$	0.30			$	0.05			$	0.54			$	0.16
Discontinued operations			(0.02	)			(0.02	)			(0.05	)			(0.03	)
Total		$	0.28			$	0.03			$	0.49			$	0.13