FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR

EXHIBIT 99.3
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO .

COMMISSION FILE NUMBER 0-28266
------------------------

HEARTPORT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 00-0000000

(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)

000 XXX XXXX, XXXXXXX XXXX, XXXXXXXXXX 00000
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(000) 000-0000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
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 [X] No [ ]

Indicate by 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. [ ]

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of January 31, 2001: approximately $36,958,740 (based on the last
reported sale price of $2.63 per share on January 31, 2001 on the Nasdaq
SmallCap Market). The number of shares of common stock outstanding as of
February 16, 2001 was 26,364,821.

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2

TABLE OF CONTENTS

ITEM PAGE
---- ----

PART I
1... Business.................................................... 1
2... Properties.................................................. 25
3... Legal Proceedings........................................... 25
4... Submission of Matters to a Vote of Security Holders......... 25

PART II
5. Market for Registrant's Common Equity and Related 26
Stockholder Matters.........................................
6. Selected Consolidated Financial Data........................ 27
7. Management's Discussion and Analysis of Financial Condition 27
and Results of Operations...................................
7A. Quantitative and Qualitative Disclosures about Market 31
Risks.......................................................
8. Financial Statements and Supplementary Data................. 31
9. Changes in and Disagreements with Accountants on Accounting 49
and Financial Disclosure....................................

PART III
10. Directors and Executive Officers of the Registrant.......... 49
11. Executive Compensation...................................... 51
12. Security Ownership of Certain Beneficial Owners and 58
Management..................................................
13. Certain Relationships and Related Transactions.............. 59

PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 61
8-K.........................................................

---------------
Heartport, the Heartport logo, DirectFlow, EndoAVR, EndoClamp, EndoCPB,
EndoDirect, EndoPlege, EndoVent, Precision-OP, QuickDraw, SoftClamp, StillSite
and EndoReturn are registered trademarks of the Company. InSite AVR, OPTrac,
Port-Access, and StraightShot are trademarks of the Company.

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The information in this report contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
are based upon current expectations that involve risks and uncertainties. Any
statements contained herein that are not statements of historical facts may be
deemed to be forward-looking statements. For example, words such as "may,"
"will," "should," "estimates," "predicts," "potential," "continue," "strategy,"
"believes," "anticipates," "plans," "expects," "intends," and similar
expressions are intended to identify forward-looking statements. Our actual
results and the timing of certain events may differ significantly from the
results discussed in the forward-looking statement. Factors that might cause or
contribute to such a discrepancy include, but are not limited to, those
discussed elsewhere in this report in the section entitled "Risk Factors."

PART I

ITEM 1. BUSINESS

Heartport, Inc. ("Heartport" or the "Company") is a cardiovascular device
company that develops, manufactures and markets proprietary products designed to
make cardiac surgery less invasive for patients. Our technologies allow surgeons
to perform a wide range of less invasive open-chest and minimally invasive heart
operations, including stopped heart and beating heart procedures. Our
Port-Access systems for stopped heart surgeries are designed to enable surgeons
to perform several types of cardiac surgeries in a minimally invasive manner
through small incisions, or "ports," between the ribs without the need to crack
open the chest as required in conventional heart surgery. While fundamentally
changing access to the heart, procedures performed with our Port-Access products
closely parallel the conventional procedures that have been used in heart
surgery since the mid-1950s. Studies based on the limited clinical experience to
date indicate that Port-Access products offer efficacy equal to that of
conventional heart surgery, but with the benefits of reduced trauma and
complications, reduced pain and suffering, shorter hospital stays and reduced
convalescence time. In 1999, we introduced several new cardiac surgery products,
including the Precision-OP system for cardiac surgery performed on a beating
heart. The Precision-OP system allows cardiac surgeons to perform coronary
artery bypass grafting without stopping the heart and placing the patient on a
cardiopulmonary bypass machine. We believe that procedures performed with our
Precision-OP system may have a reduced rate of neurological and other
complications as compared to conventional cardiac procedures. In 2000, we
expanded our product offering substantially, introducing several new cardiac
surgery products and systems including systems for aortic valve replacement and
beating heart coronary artery bypass grafting.

Heartport was incorporated in California in May 1991, and it was
reincorporated in Delaware in April 1995. It is headquartered in Redwood City,
California. The mailing address for the Company's headquarters is 000 Xxx Xxxx,
Xxxxxxx Xxxx, Xxxxxxxxxx, 00000. Its telephone number is (000) 000-0000.
Heartport can also be reached at its Web site xxx.xxxxxxxxx.xxx.

RECENT DEVELOPMENTS

In April 2000, the Company adopted a restructuring plan to reduce expenses
and improve operating efficiency. Under the restructuring plan, we reduced our
United States workforce by approximately 32%. The planned restructuring
activities resulted in a charge of $1.4 million, all of which related to
severance and other employee related costs associated with the termination of
approximately 43 employees primarily in sales and manufacturing.

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by the average per share closing price of Xxxxxxx & Xxxxxxx common stock as
reported on the New York Stock Exchange Composite Transactions Tape during a
period of 20 trading days ending on the second trading day immediately
proceeding the date on which the merger is completed. Heartport intends to
consummate this merger once it receives all necessary stockholder approvals and
regulatory clearance and all conditions to the consummation of the merger
contained in the merger agreement have been satisfied. Heartport can provide no
assurance that all of these conditions will be satisfied or waived by the party
entitled to do so. Xxxxxxx & Xxxxxxx filed a registration statement on Form S-4
with respect to this transaction on February 22, 2001, which includes a proxy
statement/prospectus that will be mailed to Heartport's stockholders once the
information contained in that document is finalized. The foregoing statements
regarding the pending acquisition of Heartport by Xxxxxxx & Xxxxxxx are
forward-looking statements subject to a number of risks and uncertainties
including the factors set forth below in "Risk Factors -- The proposed merger
involves risks and uncertainties and may not be completed."

BACKGROUND

Cardiovascular disease is the leading cause of death in the United States
and many other developed countries. Two of the principal types of cardiovascular
disease are coronary artery disease ("CAD") and valvular heart disease ("VHD").
In CAD, one or more coronary arteries are narrowed, resulting in the risk of
insufficient blood flow to the heart muscle. In VHD, one or more heart valves
are dysfunctional, resulting in suboptimal pumping of blood. Conventional
open-chest heart surgery (commonly referred to as "open-heart" surgery) is one
of the leading methods of treating CAD, VHD, and other types of cardiovascular
disease.

Heart surgery is widely regarded as one of the most important medical
advances of the twentieth century. This field of surgery was made possible
during the 1950s by the development of technology that enabled physicians to
perform cardiopulmonary bypass ("CPB") and stop the heart during surgery. CPB
protects the patient by taking over the function of the heart in circulating
oxygenated blood throughout the patient's organs and tissues, thereby permitting
the heart to be safely stopped. The procedure of placing the patient on CPB and
stopping the heart offers several advantages. First, stopping the heart creates
a motionless surgical field, which allows the surgeon to achieve a high degree
of surgical accuracy and precision. Second, stopping the heart protects the
heart muscle during surgery. Third, in valve repair and replacement, the heart
itself must be opened to repair or replace the diseased valve since the valves
are located inside the heart. Placing the patient on CPB and stopping the heart
is necessary to enable surgeons to safely and accurately operate in the interior
of the heart.

Since heart surgery was pioneered in the mid-1950s, remarkable advances
have occurred in the surgical treatment of cardiovascular disease. CAD is most
effectively treated by coronary artery bypass grafting ("CABG") procedures, in
which an artery or vein is used to bypass the narrowing in a coronary artery and
restore blood flow downstream of the narrowing. The treatment for VHD involves
either repairing the diseased heart valve, most commonly with the implantation
of a prosthetic annuloplasty ring, or replacing it with a prosthetic mechanical
or tissue valve. Until the introduction of Heartport's technology, CABG and
valve repair and replacement procedures were virtually always performed in a
highly invasive surgery in which the patient's chest is opened widely to gain
access to the heart, the patient is placed on CPB, and the patient's heart is
stopped. Worldwide, approximately 800,000 CABG and valve procedures are
performed each year in this manner.

Although highly efficacious, open-chest heart surgery is traumatic and
painful, typically requires a lengthy period of convalescence and is expensive.
The heart sits in the middle of the chest, protected by skeletal armor
consisting of the sternum or "breast bone," the rib cage, and the spine. In
conventional heart surgery, the heart is accessed by means of a sternotomy,
whereby a surgeon makes an incision of approximately 12 inches in the patient's
chest, the sternum is cut in half with a bone saw, and the rib cage is then
spread open with a steel retractor. The procedure is highly traumatic, resulting
in a lengthy and painful recovery period. In 1995, open-chest heart surgery
patients in the United States remained in the hospital for an average of ten
days and required a significant period of convalescence following discharge.
Conventional cardiac surgery is also expensive. Average charges for a CABG
procedure and for a valve procedure are approximately $45,000 and $55,000,
respectively. In addition, substantial costs are incurred during convales-
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cence. With approximately 500,000 open-chest heart surgeries performed in the
United States each year, the total cost to the U.S. healthcare system is
substantial.

The development and widespread adoption of minimally invasive surgical
approaches have revolutionized many surgical fields, including general surgery,
orthopedics, gynecology, urology and neurosurgery. Notable examples include
laparoscopic procedures in the field of general surgery and arthroscopic
procedures in the field of orthopedic surgery. Such procedures are designed to
be as efficacious as conventional surgery, but with substantially reduced
trauma, thereby decreasing complications, reducing pain and suffering, speeding
recovery, and decreasing costs associated with many aspects of patient care.
This movement toward minimally invasive surgery has been driven by advances in
both device technology and surgical technique. A minimally invasive approach is
most advantageous in cases in which significant trauma results from gaining
surgical access to an affected organ or site. Cardiac surgery represents a
particularly significant opportunity for a minimally invasive approach due to
the trauma associated with opening the chest. Heartport has demonstrated that
its Port-Access minimally invasive surgical approach has the potential to
significantly reduce complications, pain and suffering, convalescence and
expense, while maintaining the high efficacy of conventional open-chest surgery.

Less-invasive alternatives to conventional heart surgery began to emerge in
the early 1980s. For example, percutaneous transluminal coronary angioplasty
("PTCA"), or balloon angioplasty, was developed as an alternative to CABG
surgery. In a PTCA procedure, the cardiologist inserts a small balloon catheter
into the narrowed coronary artery and inflates the balloon to expand the
narrowed section, thereby increasing the internal diameter of the vessel to
increase blood flow. A PTCA procedure is less traumatic, requires less time in
the hospital, and involves a shorter recuperation period than a conventional
open-chest CABG procedure. As a result, a PTCA procedure in the United States is
less expensive on a per-procedure basis, with costs of approximately $20,000 in
1995. In 1996, approximately 480,000 PTCA procedures were performed in the
United States.

Although PTCA is less invasive than conventional CABG, a major drawback of
PTCA is the high rate of restenosis, or renarrowing of the blood vessel at the
treatment site. Restenosis within six months following a PTCA procedure occurs
at rates ranging from 15% to 50%. The majority of PTCA patients eventually
undergo another PTCA procedure or require CABG surgery. Although the cost of a
single PTCA procedure may be substantially less than a conventional CABG
procedure, a recent study indicated that three years after the procedure, PTCA
has no cost advantage over conventional open-chest CABG due to the need for
subsequent interventions. Furthermore, another recent study concluded that the
quality of life, post intervention, is better for conventional open-heart
surgery patients because of the follow-up interventions required in PTCA. More
recently, clinicians have begun to employ mechanical coronary artery stents,
metal prostheses designed to hold open arteries, as a means of preventing
restenosis. Although long-term clinical data is not yet available, stents appear
to reduce but not eliminate the problem of restenosis associated with
non-surgical treatment of CAD.

Restenosis rates for conventional open-chest CABG are significantly lower
than those for non-surgical approaches. Studies indicate that open-chest
coronary artery bypass grafts have 17-year patency rates (the maintenance of
sufficient blood flow through the affected artery) of 92% when the left internal
mammary artery ("IMA") graft is used, 85% when the right IMA graft is used, and
10-year patency rates of approximately 60% when a saphenous vein graft from the
patient's leg is used. In addition, a Duke University study suggests that
patients with three-vessel CAD and patients with severe two-vessel CAD have
improved survival after conventional open-chest CABG surgery in comparison to
PTCA and other medical treatments. Thus, conventional open-chest CABG remains
the preferred treatment for severe CAD because of these higher long-term success
rates.

The most recent development in less invasive alternatives to conventional
cardiac surgery is the Off Pump Coronary Artery Bypass Grafting ("OPCABG")
procedure performed on a beating heart. In an OPCABG procedure, surgeons use
specially-designed tools to reduce or eliminate motion in the area surrounding a
diseased coronary artery so that bypass grafting can be performed safely and
effectively while the heart remains beating. Such surgery eliminates the need to
stop the heart and place the patient on a CPB machine. Although CPB offers
several advantages in performing cardiac surgery, it is also associated with
neurological

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and other complications. OPCABG procedures are performed through a mid-line
incision in the chest wall (sternotomy or mini-sternotomy), providing maximum
visualization and enabling the surgeon to manipulate the heart to gain access to
vascular beds on the back and sides of the heart. OPCABG tools and techniques
have evolved such that the procedure is currently used for multi-vessel CABG
procedures.

THE HEARTPORT SOLUTION

Stopped Heart Surgery

Heartport has developed proprietary systems and products for performing
several different types of minimally invasive heart surgery on a stopped heart.
These systems and devices have been cleared or exempted by the Food and Drug
Administration ("FDA") for commercial sale in the United States and by a
Notified Body in Europe. Heartport's core platforms are an endovascular
cardiopulmonary bypass ("EndoCPB") system and a direct cannulation
cardiopulmonary bypass ("EndoDirect") system. Each platform allows surgeons to
place the patient on CPB and stop and protect the patient's heart without the
need for a sternotomy. Using the Company's EndoCPB or EndoDirect platform and
procedure-specific systems, the surgeon is able to perform cardiac surgery by
accessing the heart through small incisions, or "ports," placed between the
patient's ribs. Our systems include reusable and disposable devices for
Port-Access CABG, Port-Access mitral valve repair and mitral valve replacement
(collectively, "MVR"), and Port-Access aortic valve replacement ("AVR")
surgeries. While fundamentally changing access to the heart, Port-Access
surgical procedures closely parallel the conventional procedures that have been
used in heart surgery since the mid-1950s. Clinical studies indicate that
Port-Access products offer efficacy equal to that of conventional open-chest
surgery, but with the benefits of reduced trauma and complications, reduced pain
and suffering, shorter hospital stays, reduced convalescence time, and lower
overall cost. See "Risk Factors -- If our products do not achieve market
acceptance" and "-- If our products are not approved by regulatory agencies, we
will be unable to commercialize them."

Beating Heart Surgery

Heartport has also developed the Precision-OP system, a proprietary system
for performing coronary artery bypass grafting procedures on a beating heart.
The Company's Precision-OP system is a Class I device that is exempt from FDA
premarket notification requirements. In March 2000, the Company obtained
Conformite Europeene ("CE") Mark approval for the Precision-OP system, enabling
the Company to market the system in Europe. With the Precision-OP platform,
surgeons can perform multi-vessel CABG without stopping the heart and placing
the patient on a CPB machine. See "Risk Factors -- If our products do not
achieve market acceptance our business will fail" and "-- If our products are
not approved by regulatory agencies, we will be unable to commercialize them."

MARKETS AND APPLICATIONS

Cardiovascular disease is the leading cause of death in the United States
and other developed countries. In the United States, it causes approximately one
million deaths per year, which represents over 40% of all deaths. CAD is one of
the most common forms of cardiovascular disease, affecting approximately 12
million people in the United States. If untreated, CAD can cause a myocardial
infarction or "heart attack." Each year, approximately 1.0 million people
experience heart attacks in the United States, and each year approximately
500,000 deaths result from CAD. Each year on a worldwide basis, approximately
600,000 CAD patients undergo conventional open-chest CABG surgery, over 800,000
CAD patients undergo PTCA or other non-surgical interventions, and approximately
200,000 VHD patients undergo open-chest valve repair or replacement procedures.
MVRs represent approximately 40% and AVRs represent approximately 60% of valve
surgery procedures. Per-patient charges of these heart surgery procedures in the
United States average approximately $20,000 for PTCA, $45,000 for conventional
CABG, and $55,000 for conventional valve surgery. Heartport has demonstrated
that its products provide less invasive surgical alternatives for CABG, MVR, AVR
and other procedures.

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Coronary Artery Bypass Grafting -- CABG

Currently, the most efficacious treatment for CAD is conventional
open-chest CABG surgery. In a conventional open-chest CABG, an incision of
approximately 12 inches is made in the patient's chest, the patient's sternum is
cut in half with a bone saw, and the rib cage is spread open with a steel
retractor. Blood is re-routed past a narrowing in one or more coronary arteries
by either grafting an artery from the chest wall to the coronary artery below
the narrowing, or grafting a section of artery or vein from another part of the
body both to the aorta (which serves as a source of oxygenated blood) and to a
point below the narrowed segment on the affected coronary artery, or both. Using
the internal mammary artery from the chest wall is the most efficacious
procedure given its long term patency in such open-chest procedures. The IMA is
dissected free from the chest wall and prepared for grafting to the coronary
artery. Large tubes, or cannulae, are inserted directly through the walls of the
heart and the aorta in order to place the patient on CPB, the aorta is
compressed closed with an external cross-clamp, and a catheter is used to
administer the cardioplegic solution that stops the heart. The IMA is then
sutured in place on the affected coronary artery, which sits motionless atop the
stopped heart. The patient's chest is closed and the sternum is held together
with steel wire. Afterward, the patient has a long and painful recovery. In the
United States, open-chest CABG patients spend an average of eight days in the
hospital, and we estimate that up to two or more days are spent in the intensive
care unit ("ICU"). For some period following surgery, a ventilator breathes for
the patient because the trauma to the rib cage and sternum makes unassisted
breathing extremely painful.

Each step in the Company's Port-Access CABG procedure parallels a
corresponding step in conventional CABG. Instead of accessing the heart through
a large opening in the chest, however, the procedure is accomplished through
small incisions, or "ports" between the patient's ribs. During the procedure,
our EndoCPB system or EndoDirect system, a series of proprietary catheters
inserted via certain of the patient's vessels, circulates oxygenated blood
throughout the body and stops and protects the heart. Our Port-Access CABG
system is designed to enable the surgeon to access the heart and its associated
vessels, visualize the interior of the thoracic cavity, access and prepare the
arterial or venous grafts, attach the grafts to the diseased coronary arteries
resting motionless atop the stopped heart, and do various other supporting
activities. Upon completion of the surgical procedure, the heart is allowed to
spontaneously resume normal activity and CPB is discontinued. The patient leaves
the operating room with the heart revascularized in the same manner as in a
conventional open-chest CABG procedure, but with the port incisions sutured
closed rather than with the chest held together with steel wire.

In an OPCABG procedure using the Precision-OP system, a sternotomy or
mini-sternotomy is performed to create access to the heart, and the OPTrac
Retractor is used to spread the ribs apart and assist the surgical team in
performing other activities. The StillSite Stabilizer is connected to the
retractor and positioned over the diseased coronary artery to render it
motionless while the heart remains beating. The surgeon then attaches the graft
vessel beyond the blockage in the coronary artery using standard techniques. The
surgeon can manipulate the heart to reach coronary arteries on the back and
sides of the heart, and thus perform multi-vessel bypass grafting on all
coronary vascular beds. After grafting is complete, the chest incision is closed
in the same manner as in a conventional cardiac procedure.

Valve Repair and Replacement

A leading treatment for VHD is the surgical replacement or repair of the
diseased heart valve. In conventional open-chest MVR surgery, the heart is
accessed via a sternotomy, the patient is placed on CPB, the patient's heart is
stopped, and the heart is drained of blood. The diseased valve is then accessed
through an incision in the left atrium, one of the upper xxxxxxxx of the heart,
and the valve is either repaired, most commonly with the implantation of a
prosthetic annuloplasty ring, or is removed and replaced with a mechanical or
tissue prosthetic valve.

Similar to Port-Access CABG, each step in a Port-Access MVR procedure
closely parallels the corresponding step in a conventional MVR procedure, but no
sternotomy is required. The EndoCPB system or the EndoDirect system is used to
place the patient on CPB, to stop and protect the heart, and to empty the heart
of blood. The Port-Access MVR system is designed to permit the surgeon to
visualize the interior of the

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thoracic cavity, open the left atrium of the heart to gain access to the mitral
valve, visualize the interior of the heart, assess valve function, repair or
remove the diseased valve, size the prosthesis (either a prosthetic heart valve
or annuloplasty ring), deliver and attach the prosthesis, close the heart, allow
the heart to spontaneously resume normal activity, and then discontinue CPB. The
patient leaves the operating room with the heart valve repaired or replaced in
the same manner as in a conventional, open-chest MVR procedure, but with the
port incisions sutured closed rather than the chest held together with steel
wire.

An aortic valve replacement procedure is performed with the Company's
InSite AVR system in much the same way as a Port-Access MVR surgery, except that
the aortic valve is accessed through the aorta rather than through the left
atrium. A variety of incisions can be used with the InSite AVR system to gain
access to the heart, allowing significant flexibility in surgical technique. The
InSite AVR system is used along with a conventional surgical cross-clamp to
place the patient on CPB. The diseased aortic valve is replaced with a
prosthesis using standard techniques, and the chest is closed once the procedure
is complete.

STRATEGY

Since inception, Heartport's objective has been to become the global leader
in research, development and commercialization of systems for less invasive and
minimally invasive cardiac surgery. Key elements of our strategy include:

Provide Cardiac Surgeons with a Wide Range of Products for Both Stopped
Heart and Beating Heart Surgery. In 2000 we expanded our product offering
substantially, introducing several new cardiac surgery products and systems
including systems for aortic valve replacement and beating heart coronary artery
bypass grafting. Additional new products are under development, with market
launches planned in 2001. We believe that our expanded product line will
increase sales force efficiency and will result in a growing customer base. See
"Risk Factors -- If our products do not achieve market acceptance our business
will fail."

Establish Port-Access Minimally Invasive Cardiac Surgery as a Standard Of
Care For CAD and VHD. We believe that the Company is the first to design,
develop and receive FDA clearance of products for the minimally invasive
surgical treatment of CAD and VHD. We are currently marketing our products to
prominent cardiac surgery centers in the United States and Europe. In addition,
the Company intends to support clinically driven research efforts to prove the
efficacy and benefits of Port-Access minimally invasive cardiac surgery. In this
regard, in 1997 we established the Port-Access International Registry, a
multi-center registry designed to improve patient outcomes data and advance
Port-Access minimally invasive cardiac surgery by sharing aggregate knowledge
maintained in the registry database.

Market to High Volume Cardiac Surgery Centers with the Company's Direct
Sales Force. The cardiac surgery market in the United States and Europe is
highly concentrated, with 300 centers responsible for over 50% of the more than
500,000 open-chest surgeries performed annually in the two regions. The Company
has targeted many of these centers with its direct sales force. As of January
31, 2001 the Company had ten field sales specialists in the United States and
four field sales specialists in Europe with extensive experience selling cardiac
surgery and cardiology products. As of January 31, 2001 we also had one clinical
education specialist in the United States who works closely with the field sales
specialists. See "Sales, Marketing, Training and Distribution." Also see "Risk
Factors -- We may fail to train physicians in numbers sufficient to generate
demand for our products."

Protect and Enhance Proprietary Position. Heartport currently holds issued
or allowed patents covering a number of fundamental aspects of our EndoCPB
system, EndoDirect system, procedure-specific Port-Access products and beating
heart products. As of December 31, 2000, we owned 123 issued or allowed United
States patents and 18 issued foreign patents. In addition, as of December 31,
2000, the Company had 54 pending United States patent applications and had filed
40 patent applications that are currently pending in Europe, Japan, Australia
and Canada. The Company intends to continue to pursue its patent filing strategy
and to vigorously defend its intellectual property position against
infringement. See "Risk Factors -- We may not be able to adequately protect our
intellectual property and we are vulnerable to claims that our products infringe
third-party intellectual property rights."

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Target International Markets. Heartport intends to continue to devote
resources to penetrate international markets. We have received the necessary
regulatory approvals in Europe and are pursuing approvals in Canada, Australia
and Asia to market our EndoCPB, EndoDirect, Port-Access and Precision-OP
systems. In addition, we have trained surgical teams from centers in several
countries, including England, Scotland, Germany, France, Spain, Belgium, Italy,
Canada, Australia, India, Japan and Israel. In December 1997 Heartport entered
into a distribution, training and supply agreement with Xxxx Bros. Co., Ltd.
("Xxxx") under which Xxxx is the Company's exclusive distributor of Port-Access
minimally invasive cardiac surgery systems in Japan. In April 2000, Heartport
entered into an exclusive worldwide distribution agreement (excluding Japan) for
its beating heart product line with United States Surgical. See "Strategic
Relationships." Also see "Risk Factors -- If our products are not approved by
regulatory agencies, we will be unable to commercialize them."

TECHNOLOGY

Stopped Heart Surgery

Heartport's systems for stopped heart minimally invasive cardiac surgical
procedures consist of a common platform, either the EndoCPB system or the
EndoDirect system, and procedure-specific systems comprising proprietary
reusable and disposable devices.

Endovascular and Direct Cannulation Cardiopulmonary Bypass. The EndoCPB
system and the EndoDirect system are a series of proprietary catheters used to
place the patient on CPB and to stop and protect the heart during cardiac
surgery without performing a sternotomy. There are five key components:

- the EndoClamp aortic occlusion catheter, a fluid-filled balloon catheter,
occludes the ascending aorta, stops and cools the heart via delivery of
cardioplegic solution, monitors aortic root pressures, and drains excess
blood from the heart;

- the QuickDraw venous drainage cannula removes deoxygenated blood from the
body;

- the EndoReturn arterial return cannula and the DirectFlow arterial return
cannula return oxygenated blood to the body;

- the EndoVent pulmonary venting catheter drains blood from the heart via
the pulmonary artery; and

- the EndoPlege sinus catheter provides an alternative route for delivery
of cardioplegic solution.

Each component of the EndoCPB system is positioned within the vascular
system via peripheral vascular access. Each component of the EndoDirect system
also is positioned within the vascular system via peripheral vascular access
except the arterial return cannula and the aortic occlusion catheter, which
access the aorta directly through a port in the chest.

Port-Access Coronary Artery Bypass Grafting. The Port-Access CABG system
currently consists of 25 - 30 reusable and disposable devices designed for
performing the entire CABG procedure in a minimally invasive manner. The system
includes devices for accessing the heart and its associated vessels, visualizing
the interior of the thoracic cavity, accessing and preparing the arterial and
venous grafts, attaching the grafts to the diseased coronary artery and various
other supporting activities. The devices are designed to permit the surgeon to
operate through ports with the same surgical precision and accuracy as is
possible using conventional cardiac surgical instruments through a sternotomy.

Port-Access Mitral Valve Repair and Mitral Valve Replacement. The
Port-Access MVR system currently consists of 25 - 30 reusable and disposable
devices. This system is designed to be compatible with existing implantable
prosthetic heart valves and prosthetic annuloplasty rings. The system is
designed to permit the surgeon to perform mitral valve surgery in a minimally
invasive manner, and offers the surgeon the ability to visualize the interior of
the thoracic cavity, open the left atrium of the heart to gain access to the
mitral valve, visualize the interior of the heart, assess valve function, repair
or remove the diseased valve, size the prosthesis (either a prosthetic heart
valve or annuloplasty ring), deliver and attach the prosthesis and close the
heart. The Port-Access MVR system is designed to permit precise and accurate
surgery to be performed through small ports.

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Aortic Valve Replacement. The InSite AVR system includes the following four
proprietary catheters, which are used to place the patient on CPB and to stop
and protect the heart during cardiac surgery:

- the QuickDraw venous drainage cannula;

- the StraightShot arterial return cannula with Incising Introducer for
single-step aortotomy;

- the EndoVent pulmonary venting catheter; and

- the EndoPlege sinus catheter.

Disposable and reusable products included in the Port-Access MVR system are
also used for performing AVR surgery along with the Company's InSite AVR system.

Beating Heart Surgery

The Precision-OP system for performing coronary artery bypass grafting on a
beating heart is used to stabilize the diseased coronary artery so that grafting
can be performed with accuracy and precision. It comprises the following
components:

- the OPTrac Retractor separates the ribs and maximizes access to the chest
cavity through a sternotomy or mini-sternotomy;

- the StillSite Stabilizer attaches to the OPTrac Retractor and applies
light pressure to the blocked coronary artery to minimize motion at the
grafting site; and

- the SutureStays secure pericardial sutures to optimally position the
heart for the procedure and to provide an unobstructed surgical field.

The OPTrac Retractor is a fully reusable device that can be used for
conventional open-chest cardiac surgeries as well as beating heart procedures.

In January 2000, the Company introduced the StillSite II, which is designed
for improved access to coronary arteries on the back and sides of the heart that
are more difficult to reach than those on the front of the heart. The Company
began shipping this system in the second quarter of 2000.

REGULATORY STATUS

United States

In October 1996, the Company received 510(k) clearance from the FDA to
market its EndoCPB system and several proprietary Class II disposable surgical
devices for its Port-Access surgery systems. In addition, the Company received
premarket notification exemptions clearing its core reusable and disposable
surgical devices to be labeled and used for minimally invasive cardiovascular
surgery. These clearances and exemptions allowed the Company to commercially
launch its EndoCPB, Port-Access CABG and Port-Access MVR systems in early 1997.
Since that time the Company has received additional clearances and exemptions
from the FDA for other devices and enhancements to its systems. In July 1998,
the Company received 510(k) clearance to market its EndoDirect system. The
Company's Precision-OP system is a Class I device that is exempt from FDA
premarket notification requirements. See "Risk Factors -- If our products are
not approved by regulatory agencies, we will be unable to commercialize them."

The Company continues to submit 510(k) notifications for enhancements to
its EndoCPB and EndoDirect systems and for additional specialty disposable
devices to enhance performance of Port-Access CABG and MVR procedures. There can
be no assurance that the FDA will act favorably or quickly on the Company's
510(k) submissions, and significant difficulties and costs may be encountered by
the Company in its efforts to obtain these additional FDA clearances that could
delay or preclude the Company from marketing and selling products for additional
procedures. See "Risk Factors -- If our products are not approved by regulatory
agencies, we will be unable to commercialize them," and "Government Regulation."

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International

In January 1997, the Company received CE Mark clearance for its EndoCPB
system, which allows the sale of its Port-Access CABG and MVR systems in all
countries of the European Union. The Company has also submitted amendments to
its Product Dossiers for enhancements to its EndoCPB system to further enhance
performance of Port-Access CABG and MVR procedures. In March 1999, the Company
received CE Mark clearance for its EndoDirect System. In March 2000, the Company
received CE Mark clearance for its Precision-OP system. In 2001, further product
development activities will necessitate obtaining appropriate clearances. See
"Risk Factors -- If our products are not approved by regulatory agencies, we
will be unable to commercialize them," and "Government Regulation."

STRATEGIC RELATIONSHIPS

The Company intends to pursue strategic relationships with corporations and
research institutions with respect to the research, development, regulatory
approval, manufacturing and marketing of certain of its products. In December
1997, the Company entered into a distribution, training and supply agreement
with Xxxx Bros. Co., Ltd. ("Xxxx") under which Xxxx is the Company's exclusive
distributor of Port-Access minimally invasive cardiac surgery systems in Japan.
Pursuant to the agreement, Xxxx is responsible for obtaining regulatory
approvals and government reimbursement in Japan for the Company's products. Xxxx
is also responsible for marketing and sales, which will be overseen by a
committee of Heartport and Xxxx representatives. In April 2000, Heartport
entered into an exclusive worldwide distribution agreement (excluding Japan) for
its beating heart product line with United States Surgical.

RESEARCH AND DEVELOPMENT

The Company believes that its future success will depend in large part on
its ability to develop and introduce clinically advanced Port-Access and
Precision-OP products that are effective, easy to use, safe and reliable. The
Company's research and development department focuses on the continued
development and refinement of its existing products as well as on the
development of new products for treating cardiac diseases. Research and
development expenses were $4.5 million, $7.0 million and $11.0 million in 2000,
1999 and 1998, respectively. There can be no assurance that the Company will be
successful in developing such products or that such products will be granted
required regulatory clearances or approvals, or achieve any significant level of
market acceptance. See "Risk Factors -- If our products do not achieve market
acceptance our business will fail" and "-- We may not be able to compete in our
rapidly changing market."

MANUFACTURING

Heartport manufactures the majority of its products at its Redwood City,
California, facility. The Company believes that its facility has sufficient
capacity to meet the Company's anticipated manufacturing needs through at least
the end of 2001. See "Properties."

To date, the Company's manufacturing activities have primarily consisted of
manufacturing low volume quantities for early commercial sales. The Company has
no experience in manufacturing its products in the higher volumes that would be
necessary to achieve profitability. Medical device manufacturers often encounter
difficulties in scaling up manufacturing, including problems involving product
yields, quality control and assurance, component and service availability,
adequacy of control policies and procedures, lack of qualified personnel,
compliance with FDA regulations, and the need for further FDA approval of new
manufacturing processes and facilities. Difficulties in increasing manufacturing
volumes could have a material adverse effect on the Company's business,
financial condition, and results of operations. See "Risk Factors -- We may not
have the manufacturing capabilities to timely meet demand for our products."

The Company has received ISO 9001 certification, and in 1998 the Company
passed an FDA inspection of its compliance with Quality System Regulation
("QSR") requirements, which include testing, control and documentation
requirements. There can be no assurance that the Company will continue to meet
ISO 9001 requirements or that FDA QSR requirements will continue to be met. See
"Risk Factors -- If our products are not approved by regulatory agencies, we
will be unable to commercialize them."
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Currently, the Company contracts with independent suppliers for the
manufacture of certain products and product components. Any significant supply
interruption could have a material adverse effect on the Company's business,
financial condition, and results of operations. The Company has considered and
will continue to consider the internal manufacture of products and product
components provided by third parties. There can be no assurance that
manufacturing yields or costs would not be adversely affected by the transition
to in-house production, if undertaken, and that such transition would not
materially and adversely affect the Company's business, financial condition, and
results of operations. See "Risk Factors -- We may not have the manufacturing
capabilities to timely meet demand for our products."

SALES, MARKETING, TRAINING AND DISTRIBUTION

In the United States and Europe the Company's products are marketed both to
cardiac surgeons and to cardiac surgery centers. In the United States, there are
approximately 900 cardiac surgery centers and approximately 2,500 cardiac
surgeons. Outside the United States, there are approximately 2,500 cardiac
surgeons. The Company believes it can market its stopped heart products in the
United States and Europe with a moderately sized direct sales organization.
Worldwide, apart from Japan, Heartport intends to distribute its beating heart
products line through its exclusive distribution agreement with United States
Surgical. In Japan, the Company intends to market and sell its products through
its exclusive distribution, training and supply agreement with Xxxx.

The Company has established a field-based training program designed to
educate surgical teams in the use of Heartport's systems at their own hospitals.
The Company also plans to work with selected cardiac surgery centers to enhance
the Company's technology and broaden its applicability to treat CAD, VHD and
other cardiovascular diseases. In addition, the Company intends to support
rigorous, clinically driven research efforts to support the benefits of its
systems and products. In this regard, in 1997 the Company established the
Port-Access International Registry, a multi-center registry designed to improve
patient outcomes data and advance Port-Access minimally invasive cardiac surgery
by sharing aggregate knowledge maintained in the registry database. In its
January 2000 Clinical Report, the registry reported that data for 3,210 patients
were submitted to the registry from 113 centers between June 1997 and August
1999. Clinical outcomes data, for events occurring postoperatively, were
collected for all patients. The January 2000 Clinical Report concluded that the
data demonstrate broad applicability of the Port-Access platform to patients
undergoing a variety of cardiac surgery procedures.

The Company's sales and marketing strategy includes developing and
maintaining a close working relationship with its customers in order to assess
and satisfy their needs for products and services. The Company meets with
clinicians periodically to share ideas regarding the marketplace, existing
products, products under development, and existing or proposed research
projects.

COMPETITION

The Company expects that the market for minimally invasive and less
invasive cardiac surgery, which is currently in the early stages of development,
will become intensely competitive. Competitors are likely to include a variety
of different companies that currently specialize in devices for conventional
cardiac surgery, as well as those that specialize in non-cardiac minimally
invasive surgery. New companies have been and are likely to continue to be
formed to pursue opportunities in this field, and the Company believes that a
number of large companies may be focusing on the development of minimally
invasive and less invasive cardiac surgery technology. These larger companies
include Xxxxxx International Inc., Genzyme Corporation, Guidant Corporation,
Medtronic, Inc., United States Surgical Corporation, and others with
significantly greater financial, manufacturing, marketing, distribution, and
technical resources and experience than the Company. In addition, should the
proposed merger with Xxxxxxx & Xxxxxxx fail to close, the Ethicon, Inc.
subsidiary of Xxxxxxx & Xxxxxxx may seek to enter the market and compete against
the Company.

Cardiovascular diseases that can be treated with the Company's products can
also be treated by pharmaceuticals or other medical devices and procedures,
including PTCA, intravascular stents, atherectomy catheters and lasers. Many of
these alternative treatments are widely accepted in the medical community and

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have a long history of use. In addition, technological advances with other
therapies for heart disease such as drugs or future innovations in cardiac
surgery techniques could make such other therapies more effective or lower in
cost than procedures using the Company's products and could render the Company's
technology obsolete. There can be no assurance that physicians will use the
Company's products to replace or supplement established treatments, such as
conventional open-chest heart surgery and PTCA, or that the Company's products
will be competitive with current or future technologies. Such competition could
have a material adverse effect on the Company's business, financial condition,
and results of operations.

The Company's current products and any future products developed by the
Company that gain 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 and
regulatory approval processes, train physicians in the use of its products, gain
reimbursement acceptance, and supply commercial quantities of the product to the
market are expected to be important competitive factors. In addition, the
Company believes that the primary competitive factors in the market for
minimally invasive and less invasive cardiac surgery products will be safety,
efficacy, ease of use, quality and reliability, cost-effectiveness, training
support, innovation, breadth of product line, and price. The Company also
believes that physician relationships and customer support are important
competitive factors. The Company has experienced delays in completing the
development and introduction of new products, product variations and product
features, and there can be no assurance that such delays will not continue or
recur in the future. Such delays could result in a loss of market acceptance and
market share. There can be no assurance that the Company will be able to compete
successfully against current and future competitors. Failure to do so would have
a material adverse effect on the Company's business, financial condition, and
results of operations. See "Risk Factors -- We may not be able to compete in our
rapidly changing market."

GOVERNMENT REGULATION

United States

The Company's products are regulated in the United States as medical
devices. As such, the Company is subject to extensive regulation by the FDA.
Pursuant to the Federal Food, Drug, and Cosmetic Act of 1938, as amended, and
the regulations promulgated thereunder (the "FDC Act"), the FDA regulates the
clinical testing, manufacture, labeling, distribution and promotion of medical
devices. Noncompliance with applicable requirements can result in, among other
things, fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, failure of the government to grant
premarket clearance or premarket approval for devices, withdrawal of marketing
approvals, a recommendation by the FDA that the Company not be permitted to
enter into government contracts, and criminal prosecution. The FDA also has the
authority to request repair, replacement or refund of the cost of any device
manufactured or distributed by the Company.

In the United States, medical devices are classified into one of three
classes, Class I, II or III, on the basis of the controls deemed by the FDA to
be necessary to reasonably ensure their safety and effectiveness. Class I
devices are subject to general controls (e.g., labeling, adherence to QSRs, and
premarket notification for non-exempt devices). Class II devices are subject to
general controls and to special controls (e.g., performance standards,
postmarket surveillance, patient registries and FDA guidelines). Generally,
Class III devices are those that must receive premarket approval by the FDA to
ensure their safety and effectiveness (e.g., life-sustaining, life-supporting
and implantable devices, or new devices which have not been found substantially
equivalent to legally marketed devices), and require clinical testing to ensure
safety and effectiveness and FDA approval prior to marketing and distribution. A
premarket approval ("PMA") application usually must be filed if the proposed
device is not substantially equivalent to a legally marketed predicate device or
if it is a Class III device (or a pre-1976 Class III device for which the FDA
has called for such applications).

Before a new device can be introduced into the market, the manufacturer
must generally obtain marketing clearance through a premarket notification under
Section 510(k) of the FDC Act or a PMA

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application under Section 515 of the FDC Act. A 510(k) clearance typically will
be granted if the submitted information establishes that the device is
"substantially equivalent" to a legally marketed Class I or II medical device or
to a Class III medical device for which the FDA has not called for PMAs. A
510(k) notification must contain information to support a claim of substantial
equivalence, which may include laboratory test results or the results of
clinical studies of the device in humans. Commercial distribution of a device
for which a 510(k) notification is required can begin only after the FDA issues
an order finding the device to be "substantially equivalent" to a predicate
device. Generally, devices will be considered "substantially equivalent" if they
have the same intended use, and they have either the same technological
characteristics or different technological characteristics but the new device
does not present different questions of safety or effectiveness. The FDA has
recently been requiring a more rigorous demonstration of substantial equivalence
than in the past and is more likely to require the submission of human clinical
trial data. It generally takes from four to twelve months from the date of
submission to obtain FDA clearance of a 510(k) notification, but it may take
longer. The FDA may determine that a proposed device is not substantially
equivalent to a legally marketed device, or that additional information is
needed before a substantial equivalence determination can be made. A PMA
application usually must be filed for new Class III devices, or if a proposed
device is not substantially equivalent to a legally marketed Class I or Class II
device. A PMA application must be supported by valid scientific evidence that
typically includes extensive data, including preclinical and human clinical
trial data to demonstrate the safety and efficacy of the device. Under recent
amendments to the FDC Act, a person who obtains a "not substantially equivalent"
determination after submitting a 510(k) notification has the option of
requesting a review of that automatic Class III classification, and must provide
data and information to the FDA to support the requested classification of the
device into Class I or Class II. If the FDA determines the device should remain
in Class III, a PMA will be required. A "not substantially equivalent"
determination, or a request for additional information, could delay the market
introduction of new products that fall into this category. See "Risk
Factors -- If our products are not approved by regulatory agencies, we will be
unable to commercialize them."

If human clinical trials of a device are required in support of either a
510(k) notification or a PMA application, and the device presents a "significant
risk," the sponsor of the trial (usually the manufacturer or the distributor of
the device) is required to file an investigational device exemption ("IDE")
application with the FDA prior to commencing human clinical trials. A
"significant risk" device is defined to include a device that is an implant, is
life-supporting or life-sustaining, or is of substantial importance in
diagnosing or treating disease or preventing impairment of human health, and
that presents a potential for serious risk to the health, safety, or welfare of
the patient. The IDE application must be supported by data, typically including
the results of animal and laboratory testing. If the IDE application is approved
by the FDA and one or more appropriate institutional review boards ("IRBs"),
human clinical trials may begin at a specific number of investigational sites
with a specific number of patients, as approved by the FDA. If the device
presents a "nonsignificant risk" to the patient, a sponsor may begin the
clinical trial after obtaining approval for the study by one or more appropriate
IRBs, but not the FDA. Sponsors of clinical trials are permitted to charge for
those devices distributed in the course of the study provided such compensation
does not exceed recovery of the costs of manufacture, research, development and
handling. An IDE supplement must be submitted to and approved by the FDA before
a sponsor or an investigator may make a change to the investigational plan that
may affect its scientific soundness or the rights, safety or welfare of human
subjects.

A PMA application must also contain the results of all relevant bench
tests, laboratory and animal studies, a complete description of the device and
its components, and a detailed description of the methods, facilities and
controls used to manufacture the device. In addition, the submission must
include the proposed labeling, advertising literature and training methods (if
required). Upon receipt of a PMA application, the FDA makes a threshold
determination as to whether the application is sufficiently complete to permit a
substantive review. If the FDA determines that the PMA application is
sufficiently complete to permit a substantive review, the FDA will accept the
application for filing. Once the submission is accepted for filing, the FDA
begins an in-depth review of the PMA application. An FDA review of a PMA
application generally takes one to three years from the date the PMA application
is accepted for filing, but may take significantly longer. The review time is
often significantly extended by the FDA asking for more information or
clarification of information already provided in the submission. During the
review period, an advisory committee, typically
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a panel of clinicians, will likely be convened to review and evaluate the
application and provide recommendations to the FDA as to whether the device
should be approved. The FDA is not bound by the recommendations of the advisory
panel. Toward the end of the PMA application review process, the FDA generally
will conduct an inspection of the manufacturer's facilities to ensure that the
facilities are in compliance with the applicable QSR requirements.

If the FDA's evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA will either issue an approval letter or an
"approvable letter" containing a number of conditions which must be met in order
to secure final approval of the PMA application. When and if those conditions
have been fulfilled to the satisfaction of the FDA, the agency will issue an
approval of the PMA application, authorizing commercial marketing of the device
for certain indications. If the FDA's evaluation of the PMA application or
manufacturing facilities is not favorable, the FDA will deny approval of the PMA
application or issue a "not approvable letter." The FDA may also determine that
additional clinical trials are necessary, in which case the PMA could be delayed
for several years while additional clinical trials are conducted and submitted
in an amendment to the PMA application. The PMA process can be expensive,
uncertain and lengthy, and a number of devices for which FDA approval has been
sought by other companies have never been approved for marketing.

Use of a medical device for applications not covered in a 510(k)
notification or a PMA, or modifications to a device that has been cleared to
market through a 510(k) notification or an approved PMA, its labeling, or its
manufacturing process, may require submission of a new 510(k) notification, a
new PMA application or a PMA application supplement. New 510(k) notifications,
PMA applications or PMA supplements often require the submission of the same
type of information required for the original submission except that it is
generally limited to that information needed to support the proposed change from
the product covered by the original submission.

Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA, including record-keeping requirements and reporting of adverse
experiences with the use of the device. Device manufacturers are required to
register their establishments and list their devices with the FDA and certain
state agencies, and are subject to periodic inspections by the FDA and certain
state agencies. The FDC Act requires devices to be manufactured in accordance
with QSRs that impose certain procedural and documentation requirements upon the
Company with respect to manufacturing and quality assurance activities. Toward
the end of the clearance or approval process, the FDA generally will conduct an
inspection of the manufacturer's facilities to ensure that the facilities are in
compliance with the applicable QSR requirements.

Labeling and promotion activities are subject to scrutiny by the FDA and in
certain instances, by the Federal Trade Commission. The FDA actively enforces
regulations prohibiting marketing of products for unapproved uses. The Company
and its products are also subject to a variety of state laws and regulations in
those states or localities where its products are or will be marketed. Any
applicable state or local regulations may hinder the Company's ability to market
its products in those states or localities. The Company is also subject to
numerous federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control, and disposal of hazardous or potentially hazardous substances. There
can be no assurance that the Company will not be required to incur significant
costs to comply with such laws and regulations now or in the future.

In addition, changes in existing requirements or adoption of new
requirements or policies could adversely affect the ability of the Company to
comply with regulatory requirements. Failure to comply with regulatory
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requirements could 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 not be required to incur significant costs to comply with laws
and regulations in the future. See "Risk Factors -- If our products are not
approved by regulatory agencies, we will be unable to commercialize them."

International

In order for the Company to market its systems and products in Europe,
Japan and certain other foreign jurisdictions, the Company must obtain required
regulatory approvals and clearances and otherwise comply with extensive
regulations regarding safety and manufacturing processes and quality. These
regulations, including the requirements for approvals or clearance to market and
the time required for regulatory review, 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. Delays in receipt of
approvals to market the Company's products, failure to receive these approvals
or future loss of previously received approvals could have a material adverse
effect on the Company's business, financial condition, and results of
operations.

The time required to obtain approval for sale in foreign countries may be
longer or shorter than that required for FDA approval, and the requirements may
differ. In addition, there may be foreign regulatory barriers other than
premarket approval, and the FDA generally must approve exports of devices that
require a PMA but are not yet approved domestically. To obtain FDA export
approval, the Company must provide the FDA with documentation from the medical
device regulatory authority of the importing country stating that the import of
the device is not a violation of that country's medical device laws.

The European Community requires that a medical product receive the right to
affix the CE Mark, an international symbol of adherence to quality assurance
standards and compliance with applicable European medical device directives, as
a condition to selling such product in member countries of the European Union.
In January 1997, the Company received the CE Mark for its EndoCPB system,
Port-Access CABG system and Port-Access MVR system. The Company received the CE
Mark in March 1999 and March 2000 for its EndoDirect system and Precision-OP
system, respectively. Although the European directives are intended to insure
free movement within the European Union of medical devices that bear the CE
Mark, some European countries have imposed additional requirements for approvals
or premarket notifications. In addition, regulatory authorities in European
countries can demand evidence on which conformity assessments for CE-Marked
devices are based and in certain circumstances can prohibit the marketing of
products that bear the CE Mark. Many European countries maintain systems to
control the purchase and reimbursement of medical equipment under national
health care programs, and the CE Mark does not affect these systems.

The Company's products have not received regulatory approval in Japan, nor
have they been approved for government reimbursement in Japan.

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

The Company believes that its competitive position will be dependent in
significant part on its ability to protect its intellectual property. The
Company's policy is to seek to protect its proprietary position by, among other
methods, filing United States and foreign patent applications related to its
technology, inventions and improvements that are important to the development of
its business. As of December 31, 2000, we owned 123 issued or allowed United
States patents and 18 issued foreign patents. In addition, as of December 31,
2000, the Company had 54 pending United States patent applications and had filed
40 patent applications that are currently pending in Europe, Japan, Australia
and Canada. There can be no assurance that the Company's issued patents, or any
patents that may be issued in the future, will effectively protect the Company's
technology or provide a competitive advantage. There can be no assurance that
any of the Company's patents or patent applications will not be challenged,
invalidated or circumvented in the future. In addition, there can be no
assurance that competitors, many of which have substantially more resources than
the Company and have made substantial investments in competing technologies,
will not seek to apply for and obtain patents

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that will prevent, limit or interfere with the Company's ability to make, use or
sell its products either in the United States or internationally.

The Company also relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants and advisors
to execute confidentiality and assignment of inventions agreements in connection
with their employment, consulting or advisory relationships with the Company.
There can be no assurance, however, that these agreements will not be breached
or that the Company will have adequate remedies for any breach. Furthermore, no
assurance can be given that competitors will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's proprietary technology, or that the Company can
meaningfully protect its rights in unpatented proprietary technology.

Patent applications in the United States are maintained in secrecy until
patents issue, and patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Patents issued and patent applications filed
relating to medical devices are numerous and there can be no assurance that
current and potential competitors and other third parties have not filed or in
the future will not file applications for, or have not received or in the future
will not receive, patents or obtain additional proprietary rights relating to
products or processes used or proposed to be used by the Company. The Company is
aware of patents issued to third parties that contain subject matter related to
the Company's technology. Based, in part, on advice of its patent counsel, the
Company believes that the technologies employed by the Company in its devices
and systems do not infringe the claims of any such patents. There can be no
assurance, however, that third parties will not seek to assert that the
Company's devices and systems infringe their patents or seek to expand their
patent claims to cover aspects of the Company's technology.

The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular, has
been characterized by substantial competition and litigation regarding patent
and other intellectual property rights. Any such claims, whether with or without
merit, could be time-consuming and expensive to respond to and could divert the
Company's technical and management personnel. The Company may be involved in
litigation to defend against claims of infringement by other patent holders, to
enforce patents issued to the Company, or to protect trade secrets of the
Company. If any relevant claims of third-party patents are upheld as valid and
enforceable in any litigation or administrative proceeding, the Company could be
prevented from practicing the subject matter claimed in such patents, or would
be required to obtain licenses from the patent owners of each such patent, or to
redesign its products or processes to avoid infringement. There can be no
assurance that such licenses would be available or, if available, would be
available on terms acceptable to the Company or that the Company would be
successful in any attempt to redesign its products or processes to avoid
infringement. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
the Company from manufacturing and selling its products, which would have a
material adverse effect on the Company's business, financial condition, and
results of operations. The Company intends to vigorously protect and defend its
intellectual property. Costly and time-consuming litigation brought by the
Company may be necessary to enforce patents issued to the Company, to protect
trade secrets or know-how owned by the Company or to determine the
enforceability, scope and validity of the proprietary rights of others. See
"Risk Factors -- We may not be able to adequately protect our intellectual
property and we are vulnerable to claims that our products infringe third-party
intellectual property rights."

THIRD-PARTY REIMBURSEMENT

The Company expects that sales volumes and prices of the Company's products
will be heavily dependent on the availability of reimbursement from third-party
payors and that individuals seldom, if ever, will be willing or able to pay
directly for the costs associated with the use of the Company's products. The
Company's products typically are purchased by clinics, hospitals and other
users, which bill various third-party payors, such as governmental programs and
private insurance plans, for the healthcare services provided to their patients.
Third-party payors carefully review and increasingly challenge the prices
charged for medical products and services. Reimbursement rates from private
companies vary depending on the procedure
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performed, the third-party payor, the insurance plan, and other factors.
Medicare reimburses hospitals a prospectively-determined fixed amount for the
costs associated with an in-patient hospitalization based on the patient's
discharge diagnosis, and reimburses physicians a prospectively-determined fixed
amount based on the procedure performed, regardless of the actual costs incurred
by the hospital or physician in furnishing the care and unrelated to the
specific devices used in that procedure. Medicare and other third-party payors
are increasingly scrutinizing whether to cover new products and the level of
reimbursement for covered products.

In foreign markets, reimbursement is obtained from a variety of sources,
including governmental authorities, private health insurance plans and labor
unions. In most foreign countries, there are also private insurance systems that
may offer payments for alternative therapies. Although not as prevalent as in
the United States, health maintenance organizations are emerging in certain
European countries. The Company may need to seek international reimbursement
approvals, although there can be no assurance that any such approvals will be
obtained in a timely manner or at all. Failure to receive international
reimbursement approvals could have an adverse effect on market acceptance of the
Company's products in the international markets in which such approvals are
sought.

The Company believes that reimbursement in the future will be subject to
increased restrictions such as those described above, both in the United States
and in foreign markets. The Company believes that the overall escalating cost of
medical products and services has led to and will continue to lead to increased
pressures on the health care industry, both foreign and domestic, to reduce the
cost of products and services, including products offered by the Company. The
Company is aware that certain third-party payors have challenged or refused to
provide reimbursement for Port-Access procedures. There can be no assurance as
to either United States or foreign markets that third-party reimbursement and
coverage will be available or adequate, that current reimbursement amounts will
not be decreased in the future or that future legislation, regulation or
reimbursement policies of third-party payors will not otherwise adversely affect
the demand for the Company's products or its ability to sell its products on a
profitable basis, particularly if the Company's systems are more expensive than
competing cardiac surgery procedures. If third-party payor coverage or
reimbursement is unavailable or inadequate, the Company's business, financial
condition, and results of operations could be materially adversely affected. See
"Risk Factors -- Healthcare reform and restrictions on reimbursements may limit
our returns on our products."

EMPLOYEES

As of December 31, 2000, Heartport had approximately 85 employees. We
maintain compensation, benefit, equity participation and work environment
policies intended to assist in attracting and retaining qualified personnel. We
believe that the success of our business will depend, in significant part, on
our ability to attract and retain such personnel. None of our employees are
represented by a collective bargaining agreement, nor have we experienced any
work stoppage. We consider our relations with our employees to be good.

RISK FACTORS

This Annual Report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. Our actual results may differ materially from
those discussed in the forward-looking statements. Factors that might cause such
a difference include, but are not limited to, the following:

THE PROPOSED MERGER INVOLVES RISKS AND UNCERTAINTIES AND MAY NOT BE
COMPLETED.

The Company recently entered into an Amended and Restated Agreement and
Plan of Merger, dated as of January 26, 2001, with Xxxxxxx & Xxxxxxx under which
HP Merger Sub, Inc., a newly-formed, wholly-owned subsidiary of Xxxxxxx &
Xxxxxxx, xxxx be merged with and into Heartport, with Heartport continuing as
the surviving corporation in the merger and becoming a wholly-owned subsidiary
of Xxxxxxx & Xxxxxxx. Details of the merger and the related risks and
uncertainties will be described in a proxy statement/prospectus that will be
mailed in the future to all Heartport stockholders. The merger is subject to a
number of conditions that must be satisfied or waived before the merger can take
place, including approval by Heartport

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stockholders. Heartport cannot assure you that the merger will occur or that the
performance of the combined company will result in the Company achieving its
strategic objectives, and that the pendency of the merger will not have an
adverse effect on Heartport in the interim, particularly since the merger
agreement imposes certain restrictions on Heartport's ability to run its
operations unless the consent of Xxxxxxx & Xxxxxxx is obtained.

OUR RESTRUCTURING OF OPERATIONS MAY NOT RESULT IN A REDUCTION IN COSTS OR
NET LOSSES AND MAY HARM OUR BUSINESS.

In April 2000 we began implementing a restructuring plan to reduce expenses
and improve operating efficiency, resulting in a charge of $1.4 million, all of
which related to severance and other employee-related costs associated with 43
terminated employees primarily in sales and manufacturing. If we cannot reduce
or manage our costs through such actions, our net losses may increase. In
addition, our restructuring plan may yield unanticipated consequences, such as
attrition beyond our planned reduction in workforce. Such consequences may
impair our business beyond any benefits gained by the restructuring and we may
encounter difficulty in managing the restructuring.

OUR PRODUCTS ARE IN AN EARLY STAGE OF UTILIZATION AND IF THEY DO NOT PROVE
SAFE OR EFFECTIVE, OUR BUSINESS WILL FAIL.

Our EndoCPB system, EndoDirect system and other products and related
devices are at an early stage of clinical utilization and their clinical safety
and efficacy have not been proven. Port-Access minimally invasive cardiac
surgery has many of the risks of open-chest heart surgery, including:

- bleeding from the wound or internal organs;

- irregular heartbeat;

- formation of blood clots and related complications;

- infection;

- heart attack;

- heart failure;

- stroke and death.

Port-Access minimally invasive cardiac surgery also has additional risks
compared to open-chest surgery, including tearing or splitting of major blood
vessels. We have little or no clinical experience with our recently introduced
products designed for less invasive open-chest surgery, aortic valve replacement
and stopped- and beating-heart minimally invasive cardiac surgery. Accordingly,
we cannot be sure of their clinical safety and efficacy. If, with further
experience, any of our products do not prove to be safe and effective or if we
are otherwise unable to commercialize them successfully, our business will fail.

IF OUR PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE OUR BUSINESS WILL FAIL.

Our products may not gain acceptance among physicians, patients, and health
care payors as a modality of treatment. Most patients with cardiovascular
disease first consult with a cardiologist, who may treat the patient with
pharmaceuticals or non-surgical interventions such as percutaneous transluminal
coronary angioplasty ("PTCA") and intravascular stents, or may refer the patient
to a cardiac surgeon for open-chest surgery. Cardiologists may not recommend
minimally invasive or less invasive surgical procedures for safety, cost and
efficacy reasons or for other reasons beyond our control. If physicians do not
recommend surgical procedures that utilize our products, then our products may
not gain general market acceptance and health care payors may not provide
adequate reimbursement, if any. We believe that our Port-Access procedure volume
by trained cardiac surgery teams has been negatively impacted by ease of use
issues, the significant physician learning curve, and longer procedure times
associated with Port-Access surgery. In addition, broad use of our Port-Access
products will require extensive training of numerous physicians, and the time
required

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to begin and complete such training could adversely affect market acceptance. We
may not be able to train physicians quickly enough or in numbers sufficient to
generate adequate demand for our products. If our products fail to achieve
significant market acceptance our business will fail.

OUR QUARTERLY RESULTS OF OPERATIONS FLUCTUATE SIGNIFICANTLY, MAKING OUR
FUTURE PERFORMANCE DIFFICULT TO FORECAST.

Our results of operations may vary significantly from quarter to quarter
and year to year depending upon numerous factors, including:

- demand for our products;

- shifts in the technologies used in general heart surgery;

- the number of cardiac surgery teams trained in the use of our systems and
the number of procedures performed by those teams;

- the number of hospitals that begin using our products;

- our ability to manufacture, test and deliver our products in commercial
volumes;

- health care reform and reimbursement policies;

- delays associated with the FDA and other regulatory approval processes;

- changes in our pricing policies and those of our competitors;

- the number, timing, and significance of product enhancements and new
product announcements by us and by our competitors;

- our ability to develop, introduce, and market new products and enhanced
versions of our existing products on a timely basis;

- customer order deferrals in anticipation of enhancements or new products
offered by us or our competitors;

- product quality problems;

- personnel changes; and

- the level of international sales.

In addition, our operating results are affected by seasonality, principally
during the third and fourth quarters due to summer vacation, reduced surgical
activity during the summer months particularly in Europe, fewer operating days
during the holidays and fewer elective cardiovascular surgeries scheduled over
the holidays.

Operating results have been and will continue to be difficult to forecast.
Future revenue is also difficult to forecast because the market for minimally
invasive and less invasive cardiac surgery systems is rapidly evolving, because
of the inherent risks associated with new medical device technology, and due to
the uncertainty as to whether our efforts to increase Port-Access procedure
volume by trained cardiac surgery teams will be successful. Accordingly, we
believe that period-to-period comparisons of our operating results are not
necessarily meaningful and should not be relied upon as indications of future
performance. In addition, it is likely that in some future quarter our operating
results will be below the expectations of public market analysts and investors.
In such event, the price of our common stock would likely decline.

IF WE FAIL TO MAINTAIN OUR RELATIONSHIP WITH ANY ONE OR MORE OF OUR
PRINCIPAL CUSTOMERS, OUR REVENUES WILL DECLINE.

Approximately 60% of our net product sales in 2000, were derived from sales
to twenty customers. We do not enter into long-term or firm commitment contracts
with our customers. As a result, our principal

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customers may not continue to purchase products from us at current levels, if at
all. The loss of, or a significant adverse change in, the relationship between
us and any major customer would cause our revenues to decline.

WE MAY FAIL TO TRAIN PHYSICIANS IN NUMBERS SUFFICIENT TO GENERATE DEMAND
FOR OUR PRODUCTS.

Use of the Company's Port-Access products to date has shown that, as with
any novel surgical procedure, there is a substantial learning process involved
for surgeons and other members of the cardiac surgery team. Typically, a
significant amount of time and effort spent in training as well as completion of
a number of Port-Access procedures is required before a cardiac surgery team
becomes proficient with the Company's Port-Access products. In addition, certain
patients requiring heart surgery cannot be treated with the present Port-Access
products, depending upon their anatomy, what kind of condition they have and how
severe it is. These patients include people with a poorly functioning aortic
valve or certain types of chest scarring. Broad use of the Company's Port-Access
products will require extensive training of numerous physicians, and the time
required to begin and complete such training could adversely affect market
acceptance. As part of the restructuring plan implemented in 1998, the Company
has closed its training facility in Utah and has implemented a field-based
training program. In addition, the Company has limited training experience with
its recently introduced products designed for less invasive open-chest surgery,
aortic valve replacement and stopped heart and beating heart minimally invasive
cardiac surgery. There can be no assurance that the Company will be able to
train physicians in numbers sufficient to generate adequate demand for the
Company's products. Delays in training or delays in trained surgical teams'
ability to become proficient with any of the Company's products would have a
material adverse effect on the demand for the Company's products and systems
and, therefore, a material adverse effect on its business, financial condition,
and results of operations.

WE MAY NOT HAVE THE MANUFACTURING CAPABILITIES TO TIMELY MEET DEMAND FOR
OUR PRODUCTS.

We have limited manufacturing experience. Our manufacturing activities have
consisted primarily of manufacturing low volume quantities for initial
commercial sales. The manufacture of our products is complex, involving a number
of separate processes and components. We have very little experience
manufacturing our recently introduced products designed for less invasive
open-chest surgery, aortic valve replacement and stopped- and beating-heart
minimally invasive cardiac surgery. We have contracted with third parties to
manufacture certain of our products and product components. These suppliers may
not be able to successfully scale-up production to meet commercial demand for
our products in a timely manner. In addition, we believe that cost reductions in
their manufacturing operations will be required for us to commercialize our
systems on a profitable basis. Some manufacturing processes are labor-intensive,
and achieving significant cost reductions will depend, in part, upon reducing
the time required to complete these processes. In general, medical device
manufacturers may 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;

- lack of qualified personnel;

- compliance with FDA regulations; and

- the need for further FDA approval of new manufacturing processes and
facilities.

We have experienced variable yields in manufacturing some of our product
components. These yields may retard efficient manufacturing of our products and
interrupt our business. If we cannot efficiently manufacture products for
commercial sale, our revenues may suffer and decline.

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Our manufacturing capacity is also subject to government regulations. The
Company has received ISO 9001 certification and in 1998 the Company passed an
FDA inspection of its compliance with Quality System Regulations, which include
testing, control, and documentation requirements. There can be no assurance that
the Company will continue to meet ISO 9001 requirements or FDA QSR requirements.

OUR INABILITY TO OBTAIN OR MANAGE PRODUCT COMPONENTS OR OTHER RESOURCES MAY
CAUSE US TO INCUR ADDITIONAL COSTS THAT WILL AFFECT PROFITABILITY.

We use or rely on a number of components and services used in our devices
that are provided by sole source suppliers. The qualification of additional or
replacement vendors for certain components or services is a lengthy process. Any
significant supply interruption would have a material adverse effect on our
ability to manufacture our products and, therefore, a material adverse effect on
our business, financial condition, and results of operations.

We manufacture our products based on forecasted product orders, and
purchase subassemblies and components prior to receipt of purchase orders from
customers. Lead times for materials and components ordered by us vary
significantly, and depend on factors such as the business practices of the
specific supplier, contract terms, and general demand for a component at a given
time. Some components used in our products have long lead times or must be
ordered on non-cancelable terms. As a result, there is a risk of excess or
inadequate inventory if orders do not match forecasts, as well as potential
costs from non-cancelable orders.

WE MAY NOT BE ABLE TO COMPETE IN OUR RAPIDLY CHANGING MARKET.

We expect that the market for minimally invasive and less invasive cardiac
surgery, which is currently in the early stages of development, will become
intensely competitive. Competitors are likely to include a variety of different
companies that currently specialize in devices for conventional cardiac surgery,
as well as those that specialize in non-cardiac minimally invasive surgery. New
companies have been and are likely to continue to be formed to pursue
opportunities in this field, and we believe that a number of large companies may
be focusing on the development of minimally invasive and less invasive cardiac
surgery technology. These larger companies include Xxxxxx International Inc.,
Genzyme Corporation, Guidant Corporation, Medtronic, Inc., United States
Surgical Corporation, and others with significantly greater financial,
manufacturing, marketing, distribution, and technical resources and experience
than we have. In addition, should the proposed merger with Xxxxxxx & Xxxxxxx
fail to close, the Ethicon Endosurgery division of Xxxxxxx & Xxxxxxx may seek to
enter the market and compete against us.

Cardiovascular diseases that can be treated with our products can also be
treated by pharmaceuticals or other medical devices and procedures including
PTCA, intravascular stents, atherectomy catheters and lasers. Many of these
alternative treatments are widely accepted in the medical community and have a
long history of use. In addition, technological advances with other therapies
for heart disease such as drugs or future innovations in cardiac surgery
techniques could make such other therapies more effective or lower in cost than
our products and could render our technology obsolete. Physicians may not use
our products to replace or supplement established treatments, such as
conventional open-chest heart surgery, PTCA, or intravascular stents, and our
products may not be competitive with current or future technologies.

Our current products and any future products developed by us that gain
regulatory clearance or 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 speeds
with which we can develop products, complete clinical testing and regulatory
approval processes, train physicians in the use of its products, gain
reimbursement acceptance, and supply commercial quantities of the product to the
market are expected to be important competitive factors. We have experienced
delays in completing the development and introduction of new products, product
variations and product features, and there can be no assurance that such delays
will not continue or recur in the future. Such delays could result in a loss of
market acceptance and market share. If we are unable to compete successfully
against current and future competitors, our business, financial condition, and
results of operations will suffer.

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WE EXPECT TO INCUR SUBSTANTIAL FUTURE LOSSES AND REQUIRE ADDITIONAL CAPITAL
IN THE FUTURE.

We have never had a profit from operations on an annual basis. For the
period from inception to December 31, 2000, we have incurred cumulative net
losses of approximately $170.3 million. For at least the next six months, we
expect to continue to incur losses. We may never achieve or sustain
profitability.

We believe our current capital will be sufficient to meet our anticipated
cash needs for at least the next twelve months. If the merger with Xxxxxxx &
Xxxxxxx does not close, we may need to raise additional funds after this period
or, if we expand more rapidly than expected, during this period. Our future
liquidity and capital requirements will depend upon numerous factors, including
but not limited to the following:

- the consumation of the Xxxxxxx & Xxxxxxx merger;

- the extent to which our products gain market acceptance;

- the timing and costs of future product introductions;

- the extent of our ongoing research and development programs;

- the costs of training physicians to become proficient in the use of our
products and procedures;

- the costs of expanding manufacturing capacity;

- the costs of developing marketing and distribution capabilities;

- the progress and scope of clinical trials required for any future
products;

- the timing and costs of filing future regulatory submissions;

- the timing and costs required to receive both domestic and international
governmental approvals for any future products; and

- the costs of protecting and defending our intellectual property.

Should we need to raise additional funds in the future, the issuance of
additional equity or convertible debt securities could result in substantial
dilution to stockholders. Additional financing may not be available on terms
acceptable to us, if at all. Our inability to fund our capital requirements
would have a material adverse effect on our business, financial condition, and
results of operations.

WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY AND WE
ARE VULNERABLE TO CLAIMS THAT OUR PRODUCTS INFRINGE THIRD-PARTY
INTELLECTUAL PROPERTY RIGHTS.

We believe that our competitive position depends in significant part on our
ability to protect our intellectual property. We have sought to protect our
proprietary position by filing United States and foreign patent applications
related to our technology, inventions, and improvements that are important to
our products and business. As of December 31, 2000, we own 123 issued or allowed
United States patents and 18 issued foreign patents. In addition, as of December
31, 2000, the Company has 54 pending United States patent applications and has
filed 40 patent applications that are currently pending in Europe, Japan,
Australia and Canada. Our issued patents, or any patents that may be issued in
the future, may not effectively protect our technology or provide us a
competitive advantage. Our patents or patent applications may be challenged,
invalidated, or circumvented in the future. In addition, our competitors, many
of which have substantially more resources than we do and have made substantial
investments in competing technologies, may seek to apply for and obtain patents
that will prevent, limit, or interfere with our ability to make, use, or sell
our products either in the United States or internationally.

We also rely upon trade secrets, technical know-how, and continuing
technological innovation to develop and maintain our competitive position. We
typically require our employees, consultants, and advisors to execute
confidentiality and assignment of inventions agreements in connection with their
employment, consulting, or advisory relationships with us. These agreements may
be breached and we may not have adequate remedies for any such breach.
Furthermore, our competitors may independently develop substan-

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tially equivalent proprietary information and techniques or otherwise gain
access to our proprietary technology, and we may not be able to meaningfully
protect our rights in unpatented proprietary technology.

Patent applications in the United States are maintained in secrecy until
patents issue, and patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Patents issued and patent applications filed
relating to medical devices are numerous and current and potential competitors
and other third parties may have filed or received or in the future may file
applications for, or receive, patents or obtain additional proprietary rights
relating to products or processes used or proposed to be used by us. We are
aware of patents issued to third parties that contain subject matter related to
our technology. Based, in part, on advice of our patent counsel, we believe that
the technologies employed by us in our devices and systems do not infringe the
claims of any such patents. Third parties may, however, seek to assert that our
devices and systems infringe their patents or seek to expand their patent claims
to cover aspects of our technology.

The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular, has
been characterized by substantial competition and litigation regarding patent
and other intellectual property rights. Any such claims, whether with or without
merit, could be time-consuming and expensive to respond to and could divert our
technical and management personnel. We may be involved in litigation to defend
against claims of infringement by other patent holders, to enforce patents
issued to us, or to protect our trade secrets. If any relevant claims of
third-party patents are upheld as valid and enforceable in any litigation or
administrative proceeding, we could be prevented from practicing the subject
matter claimed in such patents, or would be required to obtain licenses from the
patent owners of each such patent, or to redesign our products or processes to
avoid infringement. Such licenses may not be available or, if available, may not
be available on terms acceptable to us or at all. We may not be successful in
any attempt to redesign our products or processes to avoid infringement.
Accordingly, an adverse determination in a judicial or administrative proceeding
or failure to obtain necessary licenses could prevent us from manufacturing and
selling our products. We intend to vigorously protect and defend our
intellectual property. Costly and time-consuming litigation brought by us may be
necessary to enforce patents issued to us, to protect trade secrets or know-how
owned by us, or to determine the enforceability, scope, and validity of the
proprietary rights of others. Any such litigation, if commenced by us, may not
be successful.

PRODUCT LIABILITY LAWSUITS COULD DIVERT OUR RESOURCES, RESULT IN
SUBSTANTIAL LIABILITIES AND REDUCE THE COMMERCIAL POTENTIAL OF OUR
PRODUCTS.

As a developer and manufacturer of devices for use by consumers, we may be
exposed to product liability claims in the event that the use of our products
results in personal injury or death. Claims related to product liability are a
regular and ongoing aspect of the medical device industry, and at any one time
we may be subject to claims asserted against us and are involved in product
liability litigation. We maintain limited insurance against certain product
liability claims, and such coverage may not continue to be available on terms
acceptable to us or such coverage may not be adequate for any liabilities
actually incurred. Also, in the event that any of our products prove to be
defective, we may be required to recall or redesign such products. A successful
claim brought against us in excess of available insurance coverage, or any claim
or product recall that results in significant adverse publicity against us, may
impair our ability to sell products or become profitable.

IF OUR PRODUCTS ARE NOT APPROVED BY REGULATORY AGENCIES, WE WILL BE UNABLE
TO COMMERCIALIZE THEM.

Our products are subject to regulatory clearances or approvals by the FDA.
We believe that most of our individual devices and systems will be subject to
United States regulatory clearance through the 510(k) premarket notification
process rather than a more extensive PMA submission. Although we have received
clearance from the FDA to market the EndoCPB system, the EndoDirect system and
several proprietary Class II disposable surgical devices for our Port-Access
CABG and MVR surgery systems in the United States, securing FDA approvals and
clearances for additional Port-Access devices and other products under
development will require submission to the FDA of extensive technical
information and may require
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submission of extensive clinical data. The FDA may not act favorably or quickly
on our 510(k) or other submissions, and we may encounter significant
difficulties and costs in our efforts to obtain FDA clearance that could delay
or preclude us from marketing and selling our products in the United States.
Furthermore, the FDA may request additional data, require that we conduct
further clinical studies, or require a more extensive PMA submission, causing us
to incur substantial costs and delays. Our business, financial condition, and
results of operations are critically dependent upon FDA clearance or approval of
our systems. Failure to obtain such clearances or approvals, or to obtain such
clearances or approvals on a timely basis, would have a material adverse effect
on our business, financial condition, and results of operations, and could
result in postponement of the commercialization of our products or even
cessation of our business in the United States.

Sales of medical devices outside of the United States are subject to
foreign regulatory requirements that vary widely from country to country. The
time required to obtain approval for sale in foreign countries may be longer or
shorter than that required for FDA clearance or approval, and the requirements
may differ. Although our EndoCPB system, EndoDirect system and Port-Access CABG
and MVR systems bear the CE Mark under the European Community medical device
directive, some European countries may impose additional requirements for
commercialization of those products. Other products under development will
require additional approvals or assessments, and these approvals or assessments
may not be received on a timely basis, if at all. Most other countries either do
not currently regulate medical systems or have minimal regulatory requirements,
although these countries may adopt more extensive regulations in the future that
could adversely affect our ability to market our systems. In addition,
significant costs and requests for additional information may be encountered by
us in our efforts to obtain regulatory approvals. Any such events could
substantially delay or preclude us from marketing our systems internationally.

In addition, the FDA and certain foreign regulatory authorities impose
numerous other requirements with which medical device manufacturers must comply.
Product approvals can be withdrawn for failure to comply with regulatory
standards or because of the occurrence of unforeseen problems following initial
marketing. We will also be required to adhere to applicable FDA regulations
setting forth current QSR requirements, which include testing, control, and
documentation requirements. Ongoing compliance with QSR and other applicable
regulatory requirements is monitored through periodic inspections by state and
federal agencies, including the FDA, and by comparable agencies in other
countries. Failure to comply with applicable regulatory requirements can result
in fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, denial or withdrawal of premarket clearance or
premarket approval for devices, and criminal prosecution. Furthermore, changes
in existing regulations or adoption of new regulations or policies could delay
or even prevent us from obtaining future regulatory approvals or clearances.
Such revisions could have a material adverse effect on our business, financial
condition, and results of operations.

HEALTHCARE REFORM AND RESTRICTIONS ON REIMBURSEMENTS MAY LIMIT OUR RETURNS
ON OUR PRODUCTS.

We expect that sales volumes and prices of our products will be heavily
dependent on the availability of reimbursement from third-party payors. In
addition, we believe individuals seldom, if ever, will be willing or able to pay
directly for the costs associated with the use of our products. Our products are
typically purchased by clinics, hospitals, and other users, which bill various
third-party payors, such as governmental programs and private insurance plans,
for the healthcare services provided to their patients. Third-party payors
carefully review and increasingly challenge the prices charged for medical
products and services. Reimbursement rates from private companies vary depending
on the procedure performed, the third-party payor, the insurance plan, and other
factors. Medicare reimburses hospitals a prospectively determined fixed amount
for the costs associated with an in-patient hospitalization based on the
patient's discharge diagnosis, and reimburses physicians a prospectively
determined fixed amount based on the procedure performed, regardless of the
actual costs incurred by the hospital or physician in furnishing the care and
unrelated to the specific devices used in that procedure. Medicare and other
third-party payors are increasingly scrutinizing whether to cover new products
and the level of reimbursement for covered products.

In foreign markets, reimbursement is obtained from a variety of sources,
including governmental authorities, private health insurance plans, and labor
unions. In most foreign countries, there are also private insurance systems that
may offer payments for alternative therapies. Although not as prevalent as in
the
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United States, health maintenance organizations are emerging in certain European
countries. We may need to seek international reimbursement approvals to secure
reimbursement for procedures using our products. Such approvals may not be
obtained in a timely manner or at all. Failure to receive international
reimbursement approvals could have an adverse effect on market acceptance of our
products in the international markets in which such approvals are sought.

We believe that reimbursement in the future will be subject to increased
restrictions such as those described above, both in the United States and in
foreign markets. We believe that the overall escalating costs of medical
products and services has led to and will continue to lead to increased
pressures on the health care industry, both foreign and domestic, to reduce the
costs of products and services, including products offered by us. We are aware
that certain third-party payors have challenged or refused to provide
reimbursement for Port-Access procedures. Third-party reimbursement and coverage
may not be adequate or available in either United States or foreign markets. If
third-party payor coverage or reimbursement is unavailable or inadequate, our
ability to compete and generate revenues could be impaired.

OUR STOCK PRICE HAS BEEN VOLATILE HISTORICALLY, WHICH MAY MAKE IT MORE
DIFFICULT FOR YOU TO RESELL SHARES WHEN YOU WANT AT PRICES YOU FIND
ATTRACTIVE.

Our stock price has been, and is likely to continue to be, highly volatile.
The market price of our common stock has fluctuated substantially in recent
periods, rising from $21.00 at our initial public offering on April 25, 1996 to
a high of $43.75 on May 15, 1996 and to a low of $1.56 on December 29, 2000. On
January 31, 2001 the price of our common stock was $2.63. The market price of
our common stock may be significantly affected by factors such as actual or
anticipated fluctuations in our operating results; announcements of
technological innovations, new products or new contracts by us or by our
competitors; developments with respect to patents or proprietary rights;
conditions and trends in the medical device and other technology industries;
adoption of new accounting standards affecting the medical device industry;
changes in financial estimates by securities analysts; general market
conditions; the failure to consummate the merger with Xxxxxxx & Xxxxxxx; and
other factors. In addition, the stock market has experienced extreme price and
volume fluctuations that have particularly affected the market price for many
high technology companies and that have often been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of our common stock, and there can be no assurance that
the market price of our common stock will not decline. In the past, following
periods of volatility in the market price of a particular company's securities,
securities class action litigation has often been brought against that company.
Such litigation, if brought against us, could result in substantial costs and a
diversion of management's attention and resources.

IF WE FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WITH
CORPORATIONS AND RESEARCH INSTITUTIONS, WE MAY NOT BE ABLE TO EFFECTIVELY
COMMERCIALIZE OUR PRODUCTS.

We intend to pursue strategic relationships with corporations and research
institutions with respect to the research, development, regulatory approval, and
marketing of certain of our potential products and procedures. Our future
success may depend, in part, on our relationships with third parties and their
success in marketing our products or willingness to purchase such products. We
anticipate that these third parties may have the unilateral right to terminate
any such relationship without significant penalty. We may not be successful in
establishing or maintaining any such strategic relationships in the future and
any such relationships may not be successful.

CONCENTRATION OF OWNERSHIP WILL LIMIT YOUR ABILITY TO INFLUENCE CORPORATE
MATTERS.

The present directors, executive officers, and principal stockholders of
Heartport and their affiliates beneficially own approximately 46.7% of the
outstanding common stock. As a result, these stockholders will be able to
continue to exert significant influence over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions.

24
27

OUR ANTI-TAKEOVER PROVISIONS COULD MAKE IT MORE DIFFICULT FOR A THIRD PARTY
TO ACQUIRE US.

The Board of Directors has the authority to issue up to 20,000,000 shares
of preferred stock and to determine the price, rights, preferences, privileges
and restrictions, including voting and conversion rights of such shares, without
any further vote or action by the Company's stockholders. The rights of the
holders of common stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be issued in the
future. The issuance of preferred stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. In addition, our Certificate of Incorporation provides for
a classified Board of Directors such that approximately only one-third of the
members of the Board are elected at each annual meeting of stockholders.
Classified Boards may have the effect of delaying, deferring or discouraging
changes in control of the Company. Further, we have adopted a stockholder rights
plan that, in conjunction with certain provisions of our Certificate of
Incorporation and Bylaws and of Delaware law, could delay or make more difficult
a merger, tender offer or proxy contest involving the Company. In connection
with the execution of the Amended and Restated Agreement and Plan of Merger with
Xxxxxxx & Xxxxxxx, the Company has amended the stockholder rights plan to exempt
the proposed merger with Xxxxxxx & Xxxxxxx from the provisions of the
stockholder rights plan; however, the plan will continue to apply to other
mergers, tender offers or proxy contests that the Company does not explicitly
exempt from it.

ITEM 2. PROPERTIES

Heartport's administrative, sales, manufacturing, and research and
development facility occupies approximately 133,000 square feet in Redwood City,
California, pursuant to a lease that expires in 2010. We have subleased
approximately 89,788 square feet of this space to other entities. We terminated
the lease of our former training facility in Salt Lake City, Utah, effective
April 30, 1999.

ITEM 3. LEGAL PROCEEDINGS

Claims related to product liability are a regular and ongoing aspect of the
medical device industry. At any one time, the Company is subject to claims
asserted against it and is involved in product liability litigation. Heartport
maintains limited insurance against certain product liability claims. This
insurance is subject to certain limits, exclusions and deductibles. See "Risk
Factors -- Product liability lawsuits could divert our resources, result in
substantial liabilities and reduce the commercial potential of our products."

In addition, in the ordinary course of our business we experience various
other types of claims which sometimes result in litigation or other legal
proceedings. We do not anticipate that any of these proceedings will have a
material adverse affect on our business, financial condition or results of
operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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28

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Heartport's common stock traded publicly on the Nasdaq National Market
under the symbol "HPRT" from April 26, 1996 to November 2000. Our stock is
currently traded on the Nasdaq SmallCap Market. The Company's initial public
offering price was $21.00 per share. The following table sets forth, for the
periods indicated, the high and low bid information for Heartport's common stock
as reported by the Nasdaq Stock Market.

HIGH LOW
----- -----

YEAR ENDED DECEMBER 31, 1999:
First Quarter............................................. $8.44 $4.44
Second Quarter............................................ 6.00 2.38
Third Quarter............................................. 4.56 1.88
Fourth Quarter............................................ 6.06 3.00
YEAR ENDED DECEMBER 31, 2000:
First Quarter............................................. $8.00 $4.44
Second Quarter............................................ 4.50 2.88
Third Quarter............................................. 3.88 2.13
Fourth Quarter............................................ 3.38 1.56

On February 16, 2001, the last sale price of Heartport's common stock as
reported by the Nasdaq Stock Market was $2.56 per share. There were 441 holders
of record of the Company's common stock as of February 16, 2001. See "Risk
Factors -- Our stock price has been volatile historically, which may make it
more difficult for you to resell shares when you want at prices you find
attractive."

Heartport has never declared or paid cash dividends on its common stock and
currently does not anticipate paying cash dividends in the foreseeable future.
In addition, the Company's credit facility restricts its ability to pay cash
dividends.

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29

ITEM 6. SELECTED FINANCIAL DATA

YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 1999 1998 1997 1996
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Product sales................................ $15,054 $ 17,090 $ 18,611 $ 23,421 $ 624
License and royalty revenue.................. 5,166 1,000 -- -- --
------- -------- -------- -------- --------
Total revenue................................ 20,220 18,090 18,611 23,421 624
------- -------- -------- -------- --------
Cost of product sales........................ 7,989 10,634 16,846 15,395 561
------- -------- -------- -------- --------
Gross profit................................. 12,231 7,456 1,765 8,026 63
Operating expenses:
Research and development................... 4,519 7,039 10,985 18,005 21,059
Selling, general and administrative........ 11,655 18,520 33,151 43,005 11,223
Patent acquisition......................... -- -- -- -- 5,216
Restructuring charges...................... 1,275 2,363 12,158 -- --
------- -------- -------- -------- --------
Loss from operations......................... (5,218) (20,466) (54,529) (52,984) (37,435)
Interest and other, net...................... (2,825) (933) (1,692) 1,653 3,381
------- -------- -------- -------- --------
Loss before extraordinary item............... (8,043) (21,399) (56,221) (51,331) (34,054)
Extraordinary item -- gain on extinguishment
of debt.................................... 1,750 -- 15,563 -- --
------- -------- -------- -------- --------
Net loss..................................... $(6,293) $(21,399) $(40,658) $(51,331) $(34,054)
======= ======== ======== ======== ========
Basic and diluted loss per share before
extraordinary item......................... $ (0.32) $ (0.88) $ (2.39) $ (2.29) $ (2.11)
======= ======== ======== ======== ========
Extraordinary item per share................. $ 0.07 $ 0.66
======= ========
Basic and diluted loss per share............. $ (0.25) $ (0.88) $ (1.73) $ (2.29) $ (2.11)
======= ======== ======== ======== ========

DECEMBER 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- --------
(IN THOUSANDS)

CONSOLIDATED BALANCE SHEET DATA:
Current assets.......................... $ 21,055 $ 48,683 $ 74,761 $ 124,848 $ 94,226
Working capital......................... 17,445 24,906 46,170 113,923 87,561
Total assets............................ 34,425 60,813 87,537 142,810 101,852
Long-term obligations, less current
portion............................... 51,283 55,433 56,098 89,868 4,717
Accumulated deficit..................... (170,280) (163,987) (142,588) (101,930) (50,599)
Total stockholders' equity (net capital
deficiency)........................... (20,468) (18,397) 2,848 42,017 90,470

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

OVERVIEW

Since our inception in May 1991, we have been engaged in the research and
development of Port-Access minimally invasive cardiac surgery systems and
related technology. In December 1996, we commercially introduced our EndoCPB
System and other Port-Access systems for minimally invasive cardiac surgery
performed on a stopped heart. During the third quarter of 1998 we began selling
our EndoDirect system, a direct aortic cannulation system for stopped heart
minimally invasive cardiac surgery. In 1999 we commercially introduced several
new cardiac surgery products, including our PrecisionOP system for surgery
performed on a beating heart. We are now engaged in extensive marketing and
selling activities as well as continued research and development.

The Company has entered into an Amended and Restated Agreement and Plan of
Merger, dated as of January 26, 2001, with Xxxxxxx & Xxxxxxx. Pursuant to the
terms of the merger agreement, HP Merger

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30

Sub, Inc., a newly-formed, wholly-owned subsidiary of Xxxxxxx & Xxxxxxx, xxxx be
merged with and into Heartport, with Heartport continuing as the surviving
corporation in the merger and becoming a wholly-owned subsidiary of Xxxxxxx &
Xxxxxxx. Upon consummation of the proposed merger, each holder of Company common
stock will receive a fraction of a share of Xxxxxxx & Xxxxxxx common stock based
on an exchange ratio for each share of Company common stock that he or she owns.
The exchange ratio will be calculated by dividing $2.72 by the average per share
closing price of Xxxxxxx & Xxxxxxx common stock as reported on the New York
Stock Exchange Composite Transactions Tape during a period of 20 trading days
ending on the second trading day immediately proceeding the date on which the
merger is completed. Heartport intends to consummate this merger once it
receives all necessary stockholder approvals and regulatory clearance and all
conditions to the consummation of the merger contained in the merger agreement
have been satisfied. Heartport can provide no assurance that all of these
conditions will be satisfied or waived by the party entitled to do so. Xxxxxxx &
Xxxxxxx filed a registration statement on Form S-4 with respect to this
transaction on February 22, 2001, which includes a proxy statement/prospectus
that will be mailed to Heartport's stockholders once the information contained
in that document is finalized.

We have never had a profit from our operations. For the period from
inception to December 31, 2000, we have incurred cumulative net losses of
approximately $170.3 million.

The foregoing and the discussion appearing elsewhere in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contain forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Risk Factors -- The proposed merger
involves risks and uncertainties and may not be completed"; "-- Our products are
in an early stage of utilization and if they do not prove safe or effective, our
business will fail"; "-- If our products do not achieve market acceptance our
business will fail"; "-- We may fail to train physicians in numbers sufficient
to generate demand for our products"; "-- If we fail to maintain our
relationship with any one or more of our principal customers, our revenues will
decline"; "-- Our quarterly results of operations fluctuate significantly,
making our future performance difficult to forecast;" "-- We may not have the
manufacturing capabilities to timely meet demand for our products"; and "-- Our
inability to obtain or manage product components or other resources may cause us
to incur additional costs that will affect profitability."

RESULTS OF OPERATIONS

Total Revenue. Total revenue consists of net sales of our EndoCPB,
EndoDirect, and Precision-OP systems, and of license revenue from the licensing
of some of our technology to third parties. Revenue from product sales is
recognized upon transfer of title, which is upon product shipment. Total revenue
was $20.2 million, $18.1 million and $18.6 million in 2000, 1999 and 1998,
respectively. The increase in total revenue is the result of the sale of
intellectual property rights in 2000. Licensing revenues were $5.2 million for
the year ended December 31, 2000. The licensing revenues were primarily
associated with the sale of a perpetual license to Intuitive Surgical to certain
patents restricted to surgical procedures in which a robot is utilized in the
patient's body, and a license to Percutaneous Valve Technologies, Inc., for a
group of patents related to the treatment of valvular heart disease.

International product sales represented approximately 17%, 19%, and 13% of
product sales in 2000, 1999, and 1998, respectively. In 2000, approximately 23%
of the Company's total product sales were to United States Surgical. In 1999 and
1998, no one customer comprised more than 10% of total product sales.

For 1998, 1999, and 2000, inflation had no material impact on the Company's
net sales and revenues and on income from continuing operations.

Cost of Sales. Cost of sales was $8.0 million, $10.6 million, and $16.8
million in 2000, 1999, and 1998, respectively. Cost of sales consists primarily
of material, labor and overhead costs associated with manufacturing the
Company's EndoCPB, EndoDirect, and Precision-OP systems and related disposable
and reusable devices.

28
31

Gross margin on product sales (total revenue less license and royalty
revenue) was 47%, 38%, and 9% in 2000, 1999, and 1998, respectively. The 2000
gross margin increase resulted from a decrease in manufacturing overhead and an
increase in production efficiency following the April 2000 and June 1999
restructuring activities. The gross margin in 1998 was adversely impacted by
excess manufacturing capacity from decreased net sales, the effect of inventory
and asset write-downs as a result of product design changes, revised production
forecasts, and increased reserves related to product expiration risks.

Research and Development Expenses. Research and development expenses were
$4.5 million, $7.0 million, and $11.0 million in 2000, 1999, and 1998,
respectively. The decreases in expenses between 2000 and 1999, and between 1999
and 1998 were primarily due to a reduction in headcount. The Company has
maintained a significant level of research and development spending to
facilitate product improvements and new product development, and anticipates
that it will continue to devote substantial resources to research and
development activities.

Research and development expenses consist primarily of personnel and other
costs in support of product development, clinical evaluations, and regulatory
submissions, as well as costs incurred in producing products for research and
development activities.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $11.7 million, $18.5 million, and $33.2 million in
2000, 1999, and 1998, respectively. The decreases between 2000 and 1999 and
between 1999 from 1998 were a result of the implementation of the restructuring
plans that were initiated in April 2000, June 1999 and May 1998, respectively,
as well as the Company's continued focus on reducing general operating expenses.

Selling, general and administrative expenses consist primarily of sales,
marketing and administrative personnel costs, as well as physician training
costs and professional fees.

Restructuring Charges. The restructuring plan adopted in April 2000
resulted in a charge of $1.4 million for the year ended December 31, 2000, all
of which related to severance and employee-related costs. Under this plan,
Heartport's workforce was reduced by 32%, which corresponds to approximately 43
employees being terminated. Liabilities relating to this restructuring plan were
paid as of December 31, 2000.

The restructuring plan adopted in June 1999 resulted in a charge of $2.5
million for the year ended December 31, 1999. The restructuring charge included
approximately $1.9 million in severance and employee-related costs and
approximately $0.6 million related to excess facilities and the disposal of
assets. Approximately 55 employees in the United States were terminated as a
result of the plan. The Company also completed the majority of the restructuring
activities begun in 1998.

The restructuring plan implemented beginning in May 1998 resulted in a
charge of $12.2 million for the year ended December 31, 1998. The restructuring
charge included approximately $6.6 million for the write-off of capital assets
and leasehold improvements, and approximately $3.0 million in facility expenses
and other costs related primarily to the closure of the Company's Utah facility.
The charge also included approximately $2.6 million in severance costs
associated with approximately 140 terminated employees.

Interest Income and Other, Net. Interest income and other, net was $1.5
million, $4.1 million, and $4.9 million in 2000, 1999, and 1998, respectively.
The decrease in each year was primarily attributable to the Company's lower
average investment balances.

Interest Expense. Interest expense was $4.4 million in 2000, $5.1 million
in 1999, and $6.6 million in 1998. The decrease in 2000 was primarily due to the
exchange of $5.0 million in principal amount of the Company's outstanding
convertible subordinated notes and the repayment of $16.9 million in short term
debt, both in the second quarter of 2000. The decrease in 1999 was primarily due
to the purchase of $33.4 million in principal amount of the Company's
outstanding convertible subordinated notes in the fourth quarter of 1998.

Income Taxes. Due to operating losses and the inability to recognize the
benefits therefrom, there are no provisions for income taxes in 2000, 1999, or
1998.

29
32

Realization of deferred tax assets is dependent upon future earnings, the
amount and timing of which are uncertain. Accordingly, a valuation allowance in
an amount equal to the net deferred tax assets as of December 31, 2000, 1999,
and 1998 has been established to reflect these uncertainties.

Extraordinary Item. In the second quarter of 2000, we exchanged $5.0
million of principal of our convertible subordinated long term notes for 754,018
shares of our common stock, worth $3.25 million on the date of the exchange, and
payment of $0.1 million in cash for previously accrued interest. We realized a
gain of $1.75 million, which is recorded as an extraordinary item.

In the fourth quarter of 1998, the Company purchased $33.4 million in
principal amount of its outstanding subordinated notes at a discount from face
value. The transaction resulted in a net gain of $15.6 million, consisting of a
gain of $16.6 million due to the discount, offset by the write-off of $1.0
million in issue costs associated with the original issuance of the notes in
April 1997. The Company financed this purchase through $16.9 million in
short-term borrowings.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2000, the Company had approximately $12.6 million in cash
and investments and approximately $17.4 million in working capital. The Company
also has a $10.0 million credit facility with a commercial bank. No amount was
outstanding under this facility at December 31, 2000. Approximately $3.7 million
of the Company's cash and investments secures a letter of credit related to its
credit facility, and is therefore not available for operations. We repaid $16.9
million of short-term debt in May 2000. In addition, in April 2000 we exchanged
$5.0 million of long term debt principal and rights to any accrued interests for
754,018 shares of our common stock, with a value on the date of exchange of
approximately $3.25 million, and payment of $0.1 million in cash. As of December
31, 2000, the Company had a net capital deficiency of $20.5 million.

The outstanding principal balance of the Company's convertible subordinated
notes was $47.9 million as of December 31, 2000. The notes were issued in April
1997 in an aggregate principal amount of $86.3 million. The notes are due in
2004, bear annual interest at 7.25%, and are convertible at the option of the
holder into the Company's common stock at a price of $28.958 per share. The
decrease in the outstanding principal balance of notes resulted from the
Company's purchase in 1998 of $33.4 million in principal amount of the notes at
a discount from face value and from the Company's exchange during 2000 of $5.0
million in principal of the notes for 754,018 shares of the Company's common
stock, worth $3.25 million on the date of the exchange, and payment of $0.1
million in cash for previously accrued interest. The notes will be assumed by
Xxxxxxx & Xxxxxxx upon consummation of the proposed merger.

Net cash used in operating activities was approximately $11.8 million,
$25.7 million, and $34.6 million in 2000, 1999, and 1998, respectively, and
resulted primarily from net losses in each period. For the year ended December
31, 2000, net cash used in operating activities was also attributable to an
increase in accounts receivable resulting from an increase in days sales
outstanding, and a reduction in liabilities due primarily to the Company's
reduced expenses. In 1999, net cash used in operating activities was also
attributable to an increase in accounts receivable resulting primarily from
higher net sales in December 1999 compared to December 1998, and a reduction in
liabilities due primarily to the Company's reduced expenses. In 1998, net
losses, adjusted for depreciation and amortization, were partly offset by a
non-cash extraordinary gain on the purchase of a portion of the Company's
convertible subordinated notes of $15.6 million, non-cash restructuring expenses
of approximately $7.5 million, net accounts receivable collections of $4.0
million, and a reduction of inventories of $3.2 million.

Net cash provided by investing activities was approximately $33.3 million,
$20.4 million, and $9.3 million for the years ended December 31, 2000, 1999, and
1998, respectively. The net cash provided in 2000, 1999, and 1998 was primarily
the result of net maturities and sales of short-term investments of $34.8
million, $22.5 million and $17.6 million, respectively, offset partially by
capital expenditures in each year.

Capital expenditures for equipment and leasehold improvements to support
the Company's operations were $1.5 million, $2.1 million, and $8.3 million in
2000, 1999, and 1998, respectively. The expenditures in

30
33

2000 and 1999 were primarily related to leasehold improvements to the Company's
facility to accommodate subleasing of excess space. In 1998, the expenditures
were primarily related to leasehold improvements associated with the Company's
corporate headquarters, which was occupied in the fourth quarter of 1998.

Net cash used by financing activities in 2000 was $16.1 million compared to
net cash provided of $114,000 in 1999, and net cash used of $18,000 in 1998. In
2000 the net cash used was primarily due to the repayment of short term
borrowings of $16.9 million. In 1999, the net cash provided resulted primarily
from the issuance of $429,000 of common stock, offset by the repayment of
$435,000 of long term borrowings. The net cash used in financing activities in
1998 included payments of $16.9 million to repurchase the Company's convertible
subordinated notes, offset by $16.9 million in proceeds from borrowings under a
reverse repurchase agreement.

The Company believes that it has the financial resources through its
current level of liquid assets and credit facilities to meet business
requirements through at least the year 2001.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Heartport is exposed to financial market risks, including changes in
interest rates. The fair value of our convertible subordinated notes and
available-for-sale investments can be adversely affected by changes in market
interest rates. The convertible subordinated notes are due in 2004 and bear
interest at a fixed rate of 7.25%. The market interest rate exposure of our
convertible subordinated notes is partially offset by the market interest rate
exposure of our available-for-sale investments. The primary objective of our
investment activities is to preserve principal while at the same time maximizing
yields without incurring significant risk. To achieve this objective, we
primarily invest in U.S. government or high-grade corporate debt securities. The
weighted-average maturity of our available-for-sale investments was
approximately 3 months at December 31, 2000. We have estimated the impact of
potential interest rate risk exposures using a sensitivity analysis. For 2000, a
hypothetical 10% decrease in interest rates would result in an approximate $0.3
million net adverse change in the net present value of all interest rate
sensitive financial instruments outstanding at December 31, 2000.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

HEARTPORT, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

Report of Ernst & Young LLP, Independent Auditors........... 32
Consolidated Balance Sheets................................. 33
Consolidated Statements of Operations....................... 34
Consolidated Statements of Cash Flows....................... 35
Consolidated Statements of Stockholders' Equity (Net Capital
Deficiency)............................................... 36
Notes to Consolidated Financial Statements.................. 37

31
34

REPORT OF XXXXX AND YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Heartport, Inc.

We have audited the accompanying consolidated balance sheets of Heartport,
Inc. as of December 31, 2000 and 1999, and the related consolidated statements
of operations, stockholders' equity (net capital deficiency), and cash flows for
each of the three years in the period ended December 31, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Heartport, Inc. at December 31, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

Palo Alto, California
January 19, 2001

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35

HEARTPORT, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

ASSETS

DECEMBER 31,
---------------------
2000 1999
--------- ---------

Current assets:
Cash and cash equivalents................................. $ 10,686 $ 5,288
Short-term investments.................................... 1,928 36,611
Accounts receivable, net of allowances of $217 in 2000 and
$507 in 1999........................................... 5,189 3,881
Inventories............................................... 2,502 1,644
Other current assets...................................... 750 1,259
--------- ---------
Total current assets........................................ 21,055 48,683
--------- ---------
Property and equipment:
Equipment................................................. 6,284 5,409
Furniture and fixtures.................................... 1,176 1,788
Leasehold improvements.................................... 10,208 9,171
--------- ---------
17,668 16,368
Accumulated depreciation and amortization................. (7,843) (6,105)
--------- ---------
Property and equipment, net............................... 9,825 10,263
Securities held to maturity................................. 1,780 --
Other assets................................................ 1,765 1,867
--------- ---------
Total assets................................................ $ 34,425 $ 60,813
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable.......................................... $ 1,128 $ 1,757
Accrued compensation and related benefits................. 1,664 2,960
Accrued interest.......................................... 578 639
Short-term borrowings..................................... -- 16,900
Current portion of long-term debt......................... 35 134
Other current liabilities................................. 205 1,387
--------- ---------
Total current liabilities................................... 3,610 23,777
--------- ---------
Noncurrent liabilities:
Long-term debt, less current portion...................... 47,985 52,891
Other long-term liabilities............................... 200 620
Deferred royalty and license income....................... 3,098 1,922
--------- ---------
Total noncurrent liabilities................................ 51,283 55,433
--------- ---------
Commitments
Stockholders' equity (net capital deficiency):
Preferred stock, $0.001 par value; 20,000 shares
authorized,
none issued and outstanding............................ -- --
Common stock, $0.001 par value:
Authorized shares -- 100,000, issued and outstanding
shares -- 26,347 in 2000 and 25,492 in 1999........... 26 25
Additional paid-in capital................................ 150,142 146,460
Notes receivable from stockholders........................ (378) (781)
Accumulated deficit....................................... (170,280) (163,987)
Accumulated other comprehensive income (loss)............. 22 (114)
--------- ---------
Total stockholders' equity (net capital deficiency)......... (20,468) (18,397)
--------- ---------
Total liabilities and stockholders' equity.................. $ 34,425 $ 60,813
========= =========

See accompanying notes.
33
36

HEARTPORT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

YEARS ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
------- -------- --------

Product sales............................................... $15,054 $ 17,090 $ 18,611
License and royalty revenue................................. 5,166 1,000 --
------- -------- --------
Total revenue............................................... 20,220 18,090 18,611
Cost of product sales....................................... 7,989 10,634 16,846
------- -------- --------
Gross profit................................................ 12,231 7,456 1,765
Operating expenses:
Research and development.................................. 4,519 7,039 10,985
Selling, general and administrative....................... 11,655 18,520 33,151
Restructuring charges..................................... 1,275 2,363 12,158
------- -------- --------
Loss from operations........................................ (5,218) (20,466) (54,529)
Interest income and other, net.............................. 1,528 4,126 4,865
Interest expense............................................ (4,353) (5,059) (6,557)
------- -------- --------
Loss before extraordinary item.............................. (8,043) (21,399) (56,221)
Extraordinary item -- gain on extinguishment of debt........ 1,750 -- 15,563
------- -------- --------
Net loss.................................................... $(6,293) $(21,399) $(40,658)
======= ======== ========
Basic and diluted loss per share before extraordinary
item...................................................... $ (0.32) $ (0.88) $ (2.39)
Extraordinary item per share................................ 0.07 -- 0.66
------- -------- --------
Basic and diluted net loss per share........................ $ (0.25) $ (0.88) $ (1.73)
======= ======== ========

See accompanying notes.
34
37

HEARTPORT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------

OPERATING ACTIVITIES
Net loss................................................... $ (6,293) $(21,399) $(40,658)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................ 2,248 2,507 4,433
Extraordinary gain from extinguishment of debt........... (1,750) -- (15,563)
Compensation related to stock options.................... -- 102 368
Loss (gain) on sales and disposals of property and
equipment............................................. 72 (24) 443
Accrued restructuring expenses........................... (466) 225 7,540
Changes in operating assets and liabilities:
Accounts receivable (net)............................. (1,308) (1,948) 3,992
Inventories........................................... (858) (192) 3,216
Other assets.......................................... (1,509) 56 336
Accounts payable, accrued expenses, and other
liabilities......................................... (1,946) (5,043) 1,318
-------- -------- --------
Net cash used in operating activities...................... (11,810) (25,716) (34,575)
-------- -------- --------
INVESTING ACTIVITIES
Purchases of short-term investments........................ (26,607) (23,116) (85,758)
Maturities of short-term investments....................... 15,593 14,515 48,062
Sales of short-term investments............................ 45,833 31,084 55,268
Purchases of property and equipment........................ (1,542) (2,072) (8,305)
-------- -------- --------
Net cash provided by investing activities.................. 33,277 20,411 9,267
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from issuances of common stock.................... 449 429 737
Proceeds from short-term borrowings........................ 112 -- 16,900
Repurchase of long-term borrowings......................... -- -- (16,867)
Proceeds from payments of stockholders' notes receivable... 403 120 1
Repurchase of treasury stock............................... (16) -- --
Repayment of short term borrowings......................... (16,900) -- --
Repayment of long-term borrowings.......................... (117) (435) (789)
-------- -------- --------
Net cash (used in) provided by financing activities........ (16,069) 114 (18)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... 5,398 (5,191) (25,326)
Cash and cash equivalents at beginning of year............. 5,288 10,479 35,805
-------- -------- --------
Cash and cash equivalents at end of year................... $ 10,686 $ 5,288 $ 10,479
-------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH INFORMATION
Cash paid for interest..................................... $ 4,057 $ 4,711 $ 6,418
NONCASH FINANCING ACTIVITIES
Assets acquired under capital lease........................ $ 129 $ -- $ --
Stock issued in exchange of debt........................... $ 3,250 $ -- $ --

See accompanying notes.
35
38

HEARTPORT, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
(IN THOUSANDS)

TOTAL
STOCKHOLDERS'
OTHER EQUITY
COMMON STOCK ADDITIONAL COMPREHENSIVE (NET
--------------- PAID-IN NOTES ACCUMULATED INCOME CAPITAL
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT (LOSS) DEFICIENCY)
------ ------ ---------- ---------- ----------- ------------- -------------

Balance at December 31, 1997.......... 24,902 $25 $144,824 $(902) $(101,930) $ -- $ 42,017
Net loss............................ -- -- -- -- (40,658) -- (40,658)
Change in unrealized gain on
investments...................... -- 383 383
--------
Comprehensive loss............. (40,275)
Repurchases of common stock......... (54) -- (20) -- -- -- (20)
Payments of stockholders' notes
receivable....................... -- -- -- 1 -- -- 1
Exercises of common stock options... 293 -- 178 -- -- -- 178
Issuances of common stock........... 91 -- 579 -- -- -- 579
Compensation related to stock
options.......................... -- -- 368 -- -- -- 368
------ --- -------- ----- --------- ----- --------
Balance at December 31, 1998.......... 25,232 25 145,929 (901) (142,588) 383 2,848
Net loss............................ -- -- -- -- (21,399) -- (21,399)
Change in unrealized loss on
investments...................... -- (497) (497)
--------
Comprehensive loss............. (21,896)
Repurchase of common stock.......... (10) -- (3) -- -- -- (3)
Payments of stockholders' notes
receivable....................... -- -- -- 120 -- -- 120
Exercises of common stock options... 205 -- 210 -- -- -- 210
Issuances of common stock........... 65 -- 222 -- -- -- 222
Compensation related to stock
options.......................... -- -- 102 -- -- -- 102
------ --- -------- ----- --------- ----- --------
Balance at December 31, 1999.......... 25,492 25 146,460 (781) (163,987) (114) (18,397)
Net loss............................ -- -- -- -- (6,293) -- (6,293)
Change in unrealized gain on
investments...................... -- 136 136
--------
Comprehensive loss............. (6,157)
Repurchase of common stock.......... (42) -- (16) -- -- -- (16)
Payments of stockholders' notes
receivable....................... -- -- -- 403 -- -- 403
Exercises of common stock options... 122 -- 379 -- -- -- 379
Issuances of common stock........... 775 1 3,319 -- -- -- 3,320
------ --- -------- ----- --------- ----- --------
Balance at December 31, 2000.......... 26,347 $26 $150,142 $(378) $(170,280) $ 22 $(20,468)
====== === ======== ===== ========= ===== ========

See accompanying notes.
36
39

HEARTPORT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Heartport, Inc. (the Company) operates in one business segment which is
engaged principally in the research, development, manufacturing and sale of
minimally invasive and less invasive cardiac surgery systems and related
technology. The Company's customers are primarily cardiac surgery centers in the
United States and Europe. The consolidated accounts include the accounts of
Heartport, Inc. and its wholly owned subsidiary. Significant intercompany
accounts and transactions have been eliminated. Certain prior year balances have
been reclassified for comparative purposes.

Use of Estimates

The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.

Revenue Recognition

The Company recognizes product revenue upon transfer of title, which is
upon shipment. Our product revenue is primarily derived from sales of
Port-Access products necessary to perform Port-Access cardiac surgery. The
Company provides a reserve for returns based historical history of product
returns. Payment terms for product sales do not exceed 30 days.

The Company recognizes revenue from licenses upon transfer of the license,
unless the fee is not fixed or determinable or collectibility is not probable.
The Company considers all arrangements with payment terms extending beyond
twelve months and other arrangements with payment terms longer than normal not
to be fixed or determinable. If the fee is not fixed or determinable, revenue is
recognized as payments become due from the customer. Arrangements that include
acceptance terms beyond the Company's standard terms are not recognized until
acceptance has occurred. If collectibility is not considered probable, revenue
is recognized when the fee is collected. The revenue from license agreements
including other services such as consulting is deferred and recognized as
services are rendered on a percentage of completion basis. License revenue in
2000 was principally derived from agreements with Intuitive Surgical, Inc. and
Percutaneous Valve Technologies, Inc.

During 2000, 1999 and 1998, sales to international customers were
approximately 17%, 19% and 13% of product sales, respectively. All sales are
denominated in U.S. dollars. No international country represented more than 10%
of the Company's net sales in 2000, 1999 or 1998. In 2000, approximately 23% of
the Company's total product sales were to United States Surgical.

Concentrations of Credit Risk

Financial instruments that subject Heartport to credit risk consist
principally of investments and accounts receivable. By policy, the Company
places its investments only with high credit quality financial institutions and
corporations and, other than its investments in U.S. Government Treasury
instruments, limits the amounts invested in any one institution or type of
investment vehicle. In addition, we perform credit evaluations of our customers'
financial condition and generally requires no collateral. At December 31, 2000,

37
40
HEARTPORT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

one customer represented 27% of the total accounts receivable balance. No other
individual customer represented more than 10% of the total accounts receivable
balance.

Fair Value of Financial Instruments

The fair value of investments and long-term debt is based on quoted market
prices or pricing models using current market rates. The fair value of short
term borrowings approximates cost due to the short term to maturity. The fair
value of the held-to-maturity investments was estimated by discounting the
future cash flows using the current rates at which similar instruments would be
made with similar credit ratings and maturities.

Investments

Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. All short term investments are designated as available-for-sale.
Available-for-sale securities are carried at fair value with unrealized gains
and losses reported in a separate component of stockholders' equity. The
amortized cost of available-for-sale debt securities is adjusted for the
amortization of premiums and the accretion of discounts to maturity. Such
amortization is included in interest income. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in investment income. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in interest income. All
long term investments, which consist primarily of corporate debt securities, are
classified as held-to-maturity. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at amortized
cost, adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in investment income. Interest on
securities classified as held-to-maturity is included in investment income.

Other Comprehensive Income (Loss)

Comprehensive income (loss) consists of net loss and other comprehensive
income (loss). Accumulated other comprehensive income (loss) presented in the
accompanying consolidated balance sheets consists solely of the accumulated net
unrealized gain (loss) on available-for-sale investments. There is no related
tax effect for the unrealized gain (loss) on available-for-sale investments.

Inventories

Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Inventories at December 31 were as follows (in
thousands):

2000 1999
------ ------

Materials and purchased parts.............................. $1,898 $1,240
Work in process............................................ 9 68
Finished goods............................................. 595 336
------ ------
Total inventories.......................................... $2,502 $1,644
====== ======

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets, ranging from
three to twelve years or over the term of the lease, if shorter. Amortization of
assets recorded under capital leases is included in depreciation expense.

38
41
HEARTPORT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Stock-Based Compensation

The Company accounts for employee stock options using the intrinsic value
method in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Under APB 25, when the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. In accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company has adopted the pro forma
disclosure of accounting for employee options under the fair value method. For
options or other stock based compensation issued to non-employees, the Company
recognizes compensation expense under the fair value method.

New Accounting Standard

In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 2000. The Company will
adopt the new Statement effective January 1, 2001. The Statement requires the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not xxxxxx must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings.

Based on the Company's derivative positions at December 31, 2000, which
consist primarily of warrants to purchase common stock of a public company, the
Company estimates that upon adoption it will record a gain from the cumulative
effect of an accounting change of approximately $1,046,000, which will be
recognized in the statement of operations.

2. COMMITMENTS

The Company leases its facility under a noncancelable operating lease that
expires in the year 2010. The rent is subject to an escalation clause. Rental
expense net of sublease income was $149,000, $1,825,000 and $2,068,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.

The future minimum lease payments as of December 31, 2000 were as follows
(in thousands):

MINIMUM NET
LEASE SUBLEASE LEASE
PAYMENTS INCOME PAYMENTS
-------- -------- --------

2001.......................................... $ 3,355 $ 4,038 $ (683)
2002.......................................... 3,442 2,678 764
2003.......................................... 3,544 1,904 1,640
2004.......................................... 3,655 1,923 1,732
2005.......................................... 3,768 1,976 1,792
Thereafter.................................... 20,575 166 20,409
------- ------- -------
$38,339 $12,685 $25,654
======= ======= =======

39
42
HEARTPORT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. INVESTMENTS

Investments, including cash equivalents, short-term and long term
investments, as of December 31 were as follows (in thousands):

2000 1999
-------------------------------------- --------------------------------------
AMORTIZED GROSS ESTIMATED AMORTIZED GROSS ESTIMATED
COST UNREALIZED FAIR COST UNREALIZED FAIR
BASIS GAINS (LOSSES) VALUE BASIS GAINS (LOSSES) VALUE
--------- -------------- --------- --------- -------------- ---------

Money market funds............. $ 184 $ -- $ 184 $ 1,018 $ -- $ 1,018
U.S. government securities..... 4,498 7 4,505 22,441 (123) 22,318
Corporate notes................ -- -- -- 10,021 (14) 10,007
Mortgage backed securities..... 707 14 721 4,263 23 4,286
------- ----- ------- ------- ----- -------
Total available-for-sale
investments.................. 5,389 21 5,410 37,743 (114) 37,629
Amounts classified as cash
equivalents.................. (3,484) 2 (3,482) (1,018) -- (1,018)
------- ----- ------- ------- ----- -------
Short-term investments......... $ 1,905 $ 23 $ 1,928 $36,725 $(114) $36,611
======= ===== ======= ======= ===== =======
Securities held to maturity.... $ 1,780 $(130) $ 1,650 $ -- $ -- $ --
======= ===== ======= ======= ===== =======

There were no material gross realized gains or losses on sales of
available-for-sale investments in 2000, 1999 or 1998.

The estimated fair value of investments in debt securities at December 31,
2000, by contractual maturity, were as follows (in thousands):

Due in 1 year or less....................................... $4,689
Due in 1 - 2 years.......................................... 1,780
------
6,469
Mortgage-backed securities.................................. 721
------
Total investments in debt securities........................ $7,190
======

Approximately $3.65 million of our cash and investments secures a letter of
credit related to our facility, and is therefore not available for operations.

4. DEBT

Long-term debt at December 31 was as follows (in thousands):

2000 1999
------- -------

Convertible subordinated notes, due in 2004 at 7.25%..... $47,850 $52,850
Equipment financing and other debt....................... 170 175
------- -------
Total long-term debt..................................... 48,020 53,025
Current portion of long-term debt........................ (35) (134)
------- -------
Long-term debt, less current portion..................... $47,985 $52,891
======= =======

In April 1997, the Company issued an aggregate principal amount of $86.3
million of convertible subordinated notes. The notes are due in 2004, bear
annual interest at 7.25%, and are convertible at the option of the holder into
the Company's common stock at a price of $28.958 per share. Original issuance
costs were approximately $3.4 million and are being amortized to interest
expense over the life of the notes. At December 31, 2000, unamortized issue
costs included in other assets were approximately $0.8 million. At December 31,
2000, the fair value of the Company's long-term debt was approximately 29.5% of
its carrying value.

40
43
HEARTPORT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

During the second quarter of 2000 we exchanged $5.0 million of principal of
our convertible subordinated long term notes for 754,018 shares of our common
stock, worth $3.25 million on the date of the exchange, and payment of $0.1
million in cash for all previously accrued interest. We realized a gain of $1.75
million, which is recorded as an extraordinary item. In the fourth quarter of
1998, the Company purchased $33.4 million in principal amount of its outstanding
subordinated notes at a discount from face value. The transaction resulted in a
gain of $15.6 million, consisting of a gain of $16.6 million due to the
discount, offset by the write-off of $1.0 million in issue costs associated with
the original issuance of the notes in April 1997.

As of December 31, 2000, aggregate maturities of long-term debt were as
follows (in thousands):

2001....................................................... $ 35
2002....................................................... 39
2003....................................................... 44
2004....................................................... 47,897
2005....................................................... 5
-------
$48,020
=======

As of December 31, 2000, the Company has an unused credit facility with a
commercial bank of $10.0 million available until March 2001. The credit facility
allows the Company to renew this line of credit. The annual commitment fee is
0.25% for the unused portion of the line of credit.

5. NET LOSS PER SHARE

Basic and diluted net loss per share is computed using the weighted average
number of common shares outstanding during the period, less outstanding
nonvested shares. Outstanding nonvested shares are not included in the
computation of basic and diluted net loss per share until the time-based vesting
restriction has lapsed. However, for the purposes of computing diluted earnings
per share in periods with a profit, the dilutive effect of outstanding nonvested
shares would be included using the treasury stock method. The Company has other
securities outstanding that could dilute basic earnings per share in the future
that were not included in the computation of diluted net loss per share in the
periods presented as their effect is antidilutive. For additional disclosures
regarding potentially dilutive stock options, warrants, nonvested shares and
convertible debentures, see Notes 4 and 7.

The following table sets forth the computation of basic and diluted net
loss per share (in thousands, except per share amounts):

2000 1999 1998
------- -------- --------

Numerator for basic and diluted net loss per share:
Net loss.......................................... $(6,293) $(21,399) $(40,658)
======= ======== ========
Denominator:
Weighted-average common shares.................... 26,046 25,403 25,082
Weighted-average nonvested shares subject to
repurchase..................................... (680) (1,142) (1,585)
------- -------- --------
Denominator for basic and diluted net loss per
share............................................. 25,366 24,261 23,497
======= ======== ========
Basic and diluted net loss per share................ $ (0.25) $ (0.88) $ (1.73)
======= ======== ========

41
44
HEARTPORT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. STOCKHOLDERS' EQUITY

Nonvested Shares

At December 31, 2000, 515,500 shares of outstanding common stock owned by
employees of and consultants to the Company were subject to repurchase, at the
option of Heartport, at the original purchase price in the event of the
termination of their employment or consulting relationship.

Stock Option Plans

Under the 1993 Stock Option Plan (the 1993 Plan), Heartport may grant
incentive and nonstatutory stock options to purchase up to 6,720,000 shares of
common stock to directors, employees and consultants. Options may be granted at
an exercise price of not less than 85% of the fair value of the stock at the
date of grant for nonstatutory stock options and 100% of the fair value of the
stock at the date of grant for incentive stock options as determined by the
Board of Directors. Generally, options vest under such conditions as determined
by the Board of Directors, typically over a two or four year period, and expire
after ten years. During 1996, we adopted the 1996 Stock Option Plan (the 1996
Plan), under which we reserved 2,110,000 shares of common stock for issuance to
employees, consultants and directors in addition to the 3,390,000 shares
incorporated from the 1993 Plan. In 1999, we adopted the 1999 Supplemental Stock
Option Plan, under which the Company may grant nonstatutory stock options to
purchase up to 1,500,000 shares of common stock to directors, consultants and
employees who are not officers. We had 725,000 shares available for grant under
the plans as of December 31, 2000.

In the second quarter of 1998, our Board of Directors approved the
cancellation and reissuance of outstanding options. Generally, under the
program, employees with outstanding options at exercise prices in excess of
$5.25 per share were given the choice of retaining these options or of obtaining
in substitution new options for the same number of shares. The new options are
exercisable at a price of $5.25 per share, the fair market value of the stock on
the reissue date. The new options have a four year vesting schedule, subject to
a one-year blackout period on exercise which expired on June 23, 1999. If an
employee voluntarily terminated his or her employment prior to the end of the
blackout period, the replacement options were forfeited. The number of options
shown as granted and canceled in the table below includes the reissuance of
options.

42
45
HEARTPORT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A summary of stock option transactions is as follows:

OUTSTANDING OPTIONS
------------------------------------
NUMBER OF SHARES WEIGHTED AVERAGE
(IN THOUSANDS) EXERCISE PRICE
---------------- ----------------

December 31, 1997............................ 5,268 $16.08
Options granted............................ 4,646 5.99
Options exercised.......................... (293) 0.61
Options canceled........................... (3,823) 19.40
------
December 31, 1998............................ 5,798 6.56
Options granted............................ 3,086 2.44
Options exercised.......................... (205) 1.03
Options canceled........................... (2,298) 7.01
------
December 31, 1999............................ 6,381 4.58
Options granted............................ 2,332 2.43
Options exercised.......................... (122) 3.10
Options canceled........................... (1,092) 3.62
------
December 31, 2000............................ 7,499 4.08
======

NUMBER OF SHARES WEIGHTED AVERAGE
(IN THOUSANDS) EXERCISE PRICE
---------------- ----------------

Options exercisable at:
December 31, 1998.......................... 1,286 $7.87
December 31, 1999.......................... 2,215 5.11
December 31, 2000.......................... 4,234 4.12

The following table summarizes information concerning outstanding and
exercisable options as of December 31, 2000:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
NUMBER OF CONTRACTUAL AVERAGE NUMBER OF AVERAGE
RANGE OF SHARES LIFE EXERCISE SHARES EXERCISE
EXERCISE PRICES (IN THOUSANDS) (IN YEARS) PRICE (IN THOUSANDS) PRICE
--------------- -------------- ----------- -------- -------------- --------

$ 0.06 - $ 1.88........................ 3,099 8.9 $ 1.66 1,649 $ 1.71
$ 2.06 - $ 5.00........................ 2,122 8.8 3.70 1,032 3.84
$ 5.13 - $ 5.63........................ 1,774 7.5 5.25 1,312 5.25
$ 5.69 - $12.50........................ 89 6.7 9.73 54 9.71
$16.81 - $24.00........................ 415 6.5 17.84 187 17.34
----- -----
7,499 8.4 $ 4.08 4,234 $ 4.12
===== =====

Stock Based Compensation

Pro forma information regarding net loss and net loss per share is required
by SFAS 123, which also requires that the information be determined as if the
Company had accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions:

43
46
HEARTPORT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2000 1999 1998
------- ------- -------

Expected dividend yield......................... 0% 0% 0%
Expected stock price volatility................. 65% 65% 65%
Risk-free interest rate......................... 5.00% 6.00% 5.00%
Expected life of options........................ 3 years 3 years 3 years

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had the
Company elected to recognize compensation expense based on the fair value of the
options granted at grant dates as prescribed by SFAS No. 123, net loss and net
loss per share would have been increased to the pro forma amounts indicated in
the table below (in thousands except per share amounts):

2000 1999 1998
-------- -------- --------

Net loss -- as reported.................... $ (6,293) $(21,399) $(40,658)
Net loss -- pro forma...................... $(10,244) $(25,677) $(51,559)
Net loss per share -- as reported.......... $ (0.25) $ (0.88) $ (1.73)
Net loss per share -- pro forma............ $ (0.40) $ (1.06) $ (2.19)

The weighted average fair value of options granted in 2000, 1999 and 1998
was $1.14, $1.16 and $2.81 per share, respectively.

The effects on pro forma disclosures of applying SFAS No. 123 are not
likely to be representative of the effects on pro forma disclosures of future
years.

Stock Purchase Plan

Under the 1996 Employee Stock Purchase Plan (the Purchase Plan), employees
may purchase common stock at the lower of 85% of the fair market value of the
common stock at the beginning or end of each offering period of up to an
aggregate total of 366,000 shares of Heartport's common stock as of December 31,
2000. In 1999, the Purchase Plan was amended to provide for an automatic
increase in the number of shares authorized for purchase under the plan on
January 1st of each year equal to the lesser of (i) 0.5% of the outstanding
shares of the Company's common stock or (ii) 150,000 shares. During the years
ended December 31, 2000, 1999 and 1998, shares issued under the Purchase Plan
were 21,000, 65,000 and 92,000, respectively.

Shareholder Rights Plan

On March 26, 1996, the Board of Directors declared a dividend of one
preferred share purchase right ("Right") for each outstanding share of common
stock outstanding on the effective date of the Offering. Each Right will entitle
stockholders to purchase 1/1000 of a share of Series A Junior participating
preferred stock of the Company, a designated series of preferred stock for which
each 1/1000 of a share has economic attributes and voting rights equivalent to
one share of Heartport's common stock, at an exercise price of $0.001 per share.
The Rights only become exercisable in certain limited circumstances involving
acquisitions of or tender offers for 20% or more of the Company's capital stock.
At any time prior to the announcement of any such acquisition or offer, the
Rights are redeemable by the Company at a price of $0.001 per Right. For a
limited

44
47
HEARTPORT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

period of time after the announcement of any such acquisition or offer, each
Right becomes exercisable or, at the discretion of the Board, may be exchanged
for one share of common stock per Right. The Rights expire in the year 2006.

Common Stock Reserved

At December 31, 2000, Heartport has reserved shares of common stock for
future issuances as follows (in thousands):

Stock options............................................... 725
Stock purchase plan......................................... 246
Stock warrants.............................................. 18
---
Total............................................. 989
===

7. INCOME TAXES

Due to operating losses and the inability to recognize the benefits
therefrom, there is no provision for income taxes for 2000, 1999 or 1998.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets at December 31, are as follows (in thousands):

2000 1999
-------- --------

Deferred Tax Assets:
Net operating loss................................... $ 58,900 $ 53,000
Research Credits..................................... 2,330 2,300
Capitalized research and development................. 1,860 1,100
Other................................................ 4,630 9,900
-------- --------
Total Deferred Tax Assets.............................. 67,720 66,300
Valuation Allowance.................................... (67,720) (66,300)
-------- --------
Net Deferred Tax Assets................................ $ -- $ --
======== ========

Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net deferred
tax assets have been fully offset by a valuation allowance.

The valuation allowance decreased by $1,420,000 and increased by $9,030,000
during 2000 and 1999, respectively.

As of December 31, 2000, the Company had net operating loss carry-forwards
for federal income tax purposes of approximately $163,000,000 which expire in
the years 2008 through 2020 and federal research and development tax credits of
approximately $1,400,000 which expire in the years 2012 through 2020.

Utilization of the Company's net operating loss may be subject to
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code and similar state provisions. Such an annual
limitation could result in the expiration of the net operating loss before
utilization.

8. RESTRUCTURING CHARGES

2000

In April 2000, the company adopted a restructuring plan to reduce expenses
and improve operating efficiency. Under the restructuring plan, we reduced our
United States workforce by approximately 32%. The

45
48
HEARTPORT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

planned restructuring activities resulted in a charge of $1.4 million, all of
which related to severance and other employee related costs associated with
approximately 43 terminated employees primarily in sales and manufacturing.
Liabilities relating to this restructuring plan were paid as of December 31,
2000.

1999

In June 1999, the Company adopted a restructuring plan to reduce expenses
and improve operating efficiency. Under the restructuring plan, the Company
reduced its United States workforce by approximately 55 employees primarily in
manufacturing and administration. The restructuring activities resulted in an
original charge of $2.9 million which was reduced by $0.4 million in the fourth
quarter of 1999 and $0.1 million in the year ended December 31, 2000 due
primarily to a reduction in certain employee-related expenses.

The following table summarizes the Company's restructuring activity for the
1999 restructuring charge (in thousands):

NON-CASH ACCRUED
RESTRUCTURING WRITE OFFS RESTRUCTURING
CHARGE AND CASH CHANGE IN CHARGE AT
JUNE 1999 WRITE DOWNS PAYMENTS RESERVE ESTIMATE DECEMBER 31, 1999
------------- ----------- -------- ---------------- -----------------

Severance and benefits.......... $2,416 $ -- $(1,576) $(484) $356
Write off of assets............. 225 (225) -- -- --
Sublease excess facilities...... 266 -- (187) 50 129
------ ----- ------- ----- ----
Total restructuring
charge.............. $2,907 $(225) $(1,763) $(434) $485
====== ===== ======= ===== ====

ACCRUED ACCRUED
RESTRUCTURING RESTRUCTURING
CHARGE AT CASH CHANGE IN CHARGE AT
DECEMBER 31, 1999 PAYMENTS RESERVE ESTIMATE DECEMBER 31, 2000
----------------- -------- ---------------- -----------------

Severance and benefits................. $356 $(253) $(103) $--
Sublease excess facilities............. 129 (54) (15) 60
---- ----- ----- ---
Total........................ $485 $(307) $(118) $60
==== ===== ===== ===

The remaining liability relates primarily to estimated cash expenditures in
connection with excess facilities.

1998

In May 1998, the Company adopted a restructuring plan whereby the Company
reduced its United States workforce by 140 employees (primarily in manufacturing
and in its Utah training facility) and closed its training facility in Utah. The
restructuring plan resulted in a net charge of $12.1 million.

46
49
HEARTPORT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following tables summarize the Company's restructuring activity for the
1998 restructuring charge (in thousands):

NON-CASH ACCRUED
RESTRUCTURING WRITE OFFS RESTRUCTURING
CHARGE AND CASH CHANGE IN CHARGE AT
JUNE 1998 WRITE DOWNS PAYMENTS RESERVE ESTIMATE DECEMBER 31, 1998
------------- ----------- -------- ---------------- -----------------

Severance and benefits.......... $ 2,842 $ -- $2,428 $ (262) $ 152
Write off of assets............. 6,151 6,682 (65) 466 --
Exit facility leases............ 4,705 646 595 (2,466) 998
Other........................... 676 212 510 46 --
------- ------ ------ ------- ------
Total restructuring
charge.............. $14,374 $7,540 $3,468 $(2,216) $1,150
======= ====== ====== ======= ======

ACCRUED ACCRUED
RESTRUCTURING RESTRUCTURING
CHARGE AT CASH CHANGE IN CHARGE AT
DECEMBER 31, 1998 PAYMENTS RESERVE ESTIMATE DECEMBER 31, 1999
----------------- -------- ---------------- -----------------

Severance and benefits................. $ 152 $(137) $ (15) $ --
Exit facility leases................... 998 (785) (95) 118
------ ----- ----- ----
Total restructuring charge... $1,150 $(922) $(110) $118
====== ===== ===== ====

Exit facility leases................... $118 $(27) $(13) $78
---- ---- ---- ---
Total........................ $118 $(27) $(13) $78
==== ==== ==== ===

The remaining liability relates primarily to estimated cash expenditures in
connection with excess facilities.

9. EMPLOYEE BENEFIT PLAN

Heartport has a savings plan which qualifies under Section 401(k) of the
Internal Revenue Code. Under the plan, participating employees may defer up to
20% of their pre-tax salary, up to statutory limits. All regular U.S. employees
are eligible to participate. In 1999 we began matching employee contributions
made to the savings plan up to $125 per quarter per employee. The total matching
contributions were not significant.

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50
HEARTPORT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. QUARTERLY FINANCIAL DATA (UNAUDITED)

FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER* QUARTER QUARTER YEAR
------- -------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

2000
Net sales....................... $ 4,302 $ 6,992 $ 4,121 $ 4,805 $ 20,220
Operating (loss) income......... (3,201) (1,402) (816) 201 (5,218)
Loss before extraordinary
item.......................... (3,784) (2,131) (1,609) (519) (8,043)
Extraordinary item.............. -- 1,750 -- -- 1,750
Net loss........................ (3,784) (381) (1,609) (519) (6,293)
Basic and diluted loss per share
Loss before extraordinary
item....................... (0.15) (0.08) (0.06) (0.03) (0.32)
Extraordinary item............ -- 0.07 -- -- 0.07
Net loss...................... (0.15) (0.01) (0.06) (0.03) (0.25)
Common stock trading range(a):
High.......................... 8.00 4.50 3.88 3.38 8.00
Low........................... 4.44 2.88 2.13 1.56 1.56
1999
Net sales....................... $ 5,593 $ 4,121 $ 3,818 $ 4,558 $ 18,090
Operating (loss) income......... (5,013) (9,433) (3,810) (2,190) (20,446)
Net loss........................ (5,184) (9,416) (4,171) (2,628) (21,399)
Basic and diluted loss per share
Net loss...................... (0.22) (0.39) (0.17) (0.10) (0.88)
Common stock trading range(a):
High.......................... 8.44 6.00 4.56 6.06 8.44
Low........................... 4.44 2.38 1.88 3.00 1.68

---------------

* Second Quarter 2000 net loss includes extraordinary gain of $1.75 million
($0.07 per share) for the extinguishment of debt for common shares.

(a) Trading ranges are based on the Nasdaq National market until the third
quarter of 2000. Then on the Nasdaq SmallCap market.

11. SUBSEQUENT EVENT (UNAUDITED)

The Company has entered into an Amended and Restated Agreement and Plan of
Merger, dated as of January 26, 2001, with Xxxxxxx & Xxxxxxx. Pursuant to the
terms of the merger agreement, HP Merger Sub, Inc., a newly-formed, wholly-owned
subsidiary of Xxxxxxx & Xxxxxxx, xxxx be merged with and into Heartport, with
Heartport continuing as the surviving corporation in the merger and becoming a
wholly-owned subsidiary of Xxxxxxx & Xxxxxxx. Upon consummation of the proposed
merger, each holder of Company common stock will receive a fraction of a share
of Xxxxxxx & Xxxxxxx common stock based on an exchange ratio for each share of
Company common stock that he or she owns. The exchange ratio will be calculated
by dividing $2.72 by the average per share closing price of Xxxxxxx & Xxxxxxx
common stock as reported on the New York Stock Exchange Composite Transactions
Tape during a period of 20 trading days ending on the second trading day
immediately proceeding the date on which the merger is completed. Heartport
intends to consummate this merger once it receives all necessary stockholder
approvals and regulatory clearance and all conditions to the consummation of the
merger contained in the merger agreement have been satisfied. Xxxxxxx & Xxxxxxx
filed a registration statement on Form S-4 with respect to this transaction on
February 22, 2001, which includes a preliminary prospectus/proxy statement that
will be mailed to Heartport's stockholders once the information contained in
that document is finalized.

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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers and directors of the Company, and their ages as of
December 31, 2000, are as follows:

NAME AGE POSITION
---- --- --------

Xxxxx X. Xxxxxx............................ 43 President, Chief Executive Officer and
Director
Xxxxxxxxxxx X. Xxxxxxx..................... 42 Vice President, Sales
Xxxxxx X. Xxxxxxx.......................... 42 Senior Vice President, Operations
Xxxxxxxx X. Xxxxxx, M.D. .................. 43 Chief Technical Officer
Xxxxx X. Xxxxxxx........................... 59 Chairman of the Board of Directors
Xxxxxx X. Xxxxx(1)(2)...................... 45 Director
Xxxxxx X. Xxxxxxx, M.D. ................... 41 Director and Co-Founder
Xxxx X. Xxxxxxx, M.D.(1)................... 41 Director and Co-Founder

---------------
(1) Member of Compensation Committee

(2) Member of Audit Committee

Xxxxx X. Xxxxxx has been President and Chief Executive Officer and a
director of the Company since September 1999. Prior to that, he was the
Company's President and Chief Operating Officer from June 1999 to September
1999; Senior Vice President, Sales and Marketing from January 1998 to June 1999;
and Vice President, Sales and Marketing from December 1995 to January 1998. From
1988 until joining the Company in 1995, Xx. Xxxxxx served in various capacities
with the Xxxxxxx C.V.S. Division of Baxter. Xx. Xxxxxx'x most recent position at
Baxter/Xxxxxxx was Vice President, North American Sales. Xx. Xxxxxx earned a
B.S. in Business Administration and an M.B.A. from the College of Notre Dame.

Xxxxxxxxxxx X. Xxxxxxx has been Vice President, Sales of the Company since
June 1999. Prior to that, he was the Company's Senior Director, U.S. Sales from
September 1997 to June 1999; Director, U.S. Sales from January 1997 to September
1997; and Regional Sales Manager from March 1996 to January 1997. Before joining
the Company, Xx. Xxxxxxx was Regional Sales Manager at Devices for Vascular
Intervention, formerly a subsidiary of Guidant Corporation from 1990 to 1996.
Xx. Xxxxxxx holds a B.S. in Marketing from the University of Illinois.

Xxxxxx X. Xxxxxxx has been Senior Vice President, Operations of the Company
since June 1999 and was the Company's Senior Vice President, Manufacturing from
January 1998 to June 1999. Prior to that, he was Vice President, Manufacturing
of the Company since August 1994. Before joining the Company, Xx. Xxxxxxx served
in various capacities with Advanced Cardiovascular Systems, Inc., a medical
device company, from 1983 to 1994, most recently as Vice President,
Manufacturing. Xx. Xxxxxxx earned a B.S. in Industrial Engineering from
Kettering University.

Xxxxxxxx X. Xxxxxx, M.D. has been Chief Technical Officer of the Company
since November 1999. Prior to that, Xx. Xxxxxx was the Company's Senior Vice
President, Research and Development and Clinical and Regulatory Affairs from
June 1999 to November 1999 and Vice President, Clinical Affairs from November
1996 to June 1999. Prior to joining the Company, Xx. Xxxxxx served in various
capacities with the Stanford University School of Medicine from 1986 to 1996,
most recently as Associate Professor of Anesthesia and Chief of Cardiovascular
Anesthesiology. Xx. Xxxxxx earned a B.S. in Electrical Engineering from
Massachusetts Institute of Technology and a M.D. from Harvard Medical School.
Xx. Xxxxxx is a board certified anesthesiologist.

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52

Xxxxx X. Xxxxxxx has been Chairman of the Board of Directors of the Company
since June 1999 and a director since May 1998. He was the Company's Chief
Executive Officer from June 1999 to September 1999 and was President and Chief
Executive Officer of the Company from May 1998 to June 1999. Xx. Xxxxxxx was
also a director of the Company from October 1992 until May 1997. Xx. Xxxxxxx was
the President and Chief Executive Officer and a director of Ventritex, Inc., a
manufacturer of implantable cardiac defibrillators from 1987 until 1997. From
May 1977 until joining Ventritex, Xx. Xxxxxxx held various positions with Cordis
Corporation, a manufacturer of medical products, serving most recently as
President of the Implantable Products Division. Xx. Xxxxxxx holds an M.S. in
Management from Rensselaer Polytechnic Institute.

Xxxxxx X. Xxxxx has been a director of the Company since April 1992. Xx.
Xxxxx is a general partner of Xxxxxxx Xxxxxxx Xxxxxxxx & Xxxxx ("Xxxxxxx
Xxxxxxx"), a venture capital firm he joined in 1987. Prior to joining Xxxxxxx
Xxxxxxx, he was Marketing Manager for Cetus Corporation, a biotechnology
company. Xx. Xxxxx is a director of Corixa Corporation, Pharmacyclics, Inc.;
Sportsline USA, Inc.; and several privately held companies. Xx. Xxxxx holds a
B.S. in Biochemistry from the University of California at Irvine, a Masters in
Public Health from the University of California at Los Angeles, and an M.B.A.
from the Graduate School of Business at Stanford University.

Xxxxxx X. Xxxxxxx, M.D. founded the Company with Xx. Xxxxxxx in May 1991,
and has served as a director since that time. Xx. Xxxxxxx was Chairman of the
Board of Directors from May 1998 to June 1999 and was the Company's President
and Chief Executive Officer from May 1991 until May 1998. Prior to founding the
Company, Xx. Xxxxxxx was founder, President and Chief Executive Officer of
EndoVascular Technologies, Inc., a medical device manufacturer, from July 1989
to September 1991. Xx. Xxxxxxx has B.S. degrees both in Biology and in Chemistry
from Stanford University. Xx. Xxxxxxx received an M.D. from the Stanford
University School of Medicine and an M.B.A. from the Graduate School of Business
at Stanford University, where he was an Xxxxx Xxxxxx Scholar.

Xxxx X. Xxxxxxx, M.D. founded the Company with Xx. Xxxxxxx in May 1991, and
has been a director of the Company since that time. Xx. Xxxxxxx was Heartport's
Chief Technology Officer from July 1997 to May 1998. From August 1996 until July
1997 Xx. Xxxxxxx was Assistant Professor of Cardiothoracic Surgery at Stanford
University School of Medicine and prior to that he served as Chief Resident of
the Department of Cardiothoracic Surgery at Stanford, and as Senior Registrar in
Cardiothoracic Surgery at the Great Ormond Street Hospital for Sick Children in
London, England from July 1995 to March 1996. Xx. Xxxxxxx earned B.U.S. and B.S.
degrees in Communications and Psychology from the University of Utah and an M.D.
from Stanford University.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, executive officers and persons who own more than ten
percent of a registered class of the Company's equity securities, to file with
the Securities and Exchange Commission (the "SEC") initial reports of ownership
and reports of changes in ownership of common stock and other equity securities
of the Company. Officers, directors and greater-than-ten-percent beneficial
owners are required by SEC regulations to furnish the Company with copies of all
Section 16(a) reports they file.

Based solely upon review of the copies of such reports furnished to the
Company and written representations that no other reports were required, the
Company believes that there was compliance for the fiscal year ended December
31, 2000, with all Section 16(a) filing requirements applicable to the Company's
officers, directors and greater-than-ten-percent beneficial owners.

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53

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth the compensation earned for services
rendered in all capacities to the Company and its subsidiaries for the three
fiscal years ended December 31, 1998, 1999, and 2000, by each of the individuals
who served as the Company's Chief Executive Officer and each of the Company's
three other highest-paid individuals who were serving as executive officers at
the end of 2000 and whose salary and bonus exceeded $100,000 for the year (the
"Named Officers").

SUMMARY COMPENSATION TABLE

LONG-TERM
COMPENSATION
AWARDS(2)
------------
ANNUAL COMPENSATION SECURITIES
FISCAL ------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) BONUSES($) OPTIONS COMPENSATION
--------------------------- ------ ------------ ---------- ------------ ------------

Xxxxx X. Xxxxxx.......................... 2000 279,994 692,000 125,000 0
President, Chief Executive 1999 237,224 115,000 600,000 0
Officer and Director 1998 198,013 60,000 0 0
Xxxxxxxxxxx X. Xxxxxxx................... 2000 224,978 168,000 175,000 0
Vice President, Sales 1999 264,421 58,000 350,000 0
1998 275,065 48,975 119,800(3) 0
Xxxxxx X. Xxxxxxx........................ 2000 229,996 227,000 200,000 0
Senior Vice President, 1999 219,200 48,000 140,000 0
Operations 1998 199,950 40,000 0 0
Xxxxxxxx X. Xxxxxx, M.D.................. 2000 249,990 168,000 175,000 0
Chief Technical Officer 1999 241,129 76,000 400,000 0
1998 213,832 40,000 300,000(4) 0

---------------
(1) Salary includes amounts deferred under the Company's 401(k) Plan.

(2) No restricted stock grants were made to the Named Officers during the fiscal
year.

(3) Amount includes options for 69,800 shares that were granted upon
cancellation of an identical number of options previously granted to the
employee in 1996 through February 1998.

(4) These options were granted upon cancellation of an identical number of
options previously granted to the employee.

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54

OPTION GRANTS IN LAST FISCAL YEAR

The following table contains information concerning the stock option grants
made to each of the Named Officers for the year ended December 31, 2000:

OPTION/SAR GRANTS IN LAST FISCAL YEAR

POTENTIAL
INDIVIDUAL GRANTS REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES % OF TOTAL STOCK PRICE
UNDERLYING OPTIONS EXERCISE APPRECIATION FOR
OPTIONS GRANTED TO OR BASE OPTION TERM(4)
GRANTED EMPLOYEES IN PRICE EXPIRATION ------------------
NAME (#)(1) FISCAL YEAR(2) ($/SH)(3) DATE 5%($) 10%($)
---- ---------- -------------- --------- ---------- ------- -------

Xxxxx X. Xxxxxx............. 125,000(5) 5.48% 1.5625 12/28/10 122,831 311,278
Xxxxxxxxxxx X. Xxxxxxx...... 125,000(6) 5.48% 1.5625 12/28/10 122,831 311,278
41,667(7) 1.83% 3.75 4/13/10 98,266 249,024
8,333(7) .37% 3.75 4/13/10 19,652 49,802
Xxxxxx X. Xxxxxxx........... 125,000(6) 5.48% 1.5625 12/28/10 122,831 311,278
15,219(7) .67% 3.75 4/13/10 35,892 90,957
9,781(7) .43% 3.75 4/13/10 23,067 58,456
35,417(8) 1.56% 2.6875 7/4/10 59,860 151,697
14,583(8) .64% 2.6875 7/4/10 24,648 62,462
Xxxxxxxx X. Xxxxxx, M.D..... 125,000(6) 5.48% 1.5625 12/28/10 122,831 311,278
50,000(7) 2.19% 3.75 4/13/10 117,918 298,827

---------------
(1) The option will become fully exercisable and any unvested option shares will
vest immediately upon an acquisition of the Company by merger or asset sale
unless assumed or replaced by the acquiring entity. Options which are
assumed or replaced in the transaction and do not otherwise accelerate at
that time shall automatically accelerate (and unvested option shares which
do not otherwise vest at that time shall automatically vest) in the event
the optionee's service terminates by reason of an involuntary or
constructive termination within 12 months following the transaction as if
the optionee's service continued for an additional twelve months. Each
option has a maximum term of ten years, subject to earlier termination in
the event of the optionee's cessation of providing services to the Company.

(2) This is based on the Company granting an aggregate of 2,281,022 in options
in 2000.

(3) The exercise price may be paid in cash, in shares of common stock valued at
fair market value on the exercise date, or through a cashless exercise
procedure involving a same-day sale of the purchased shares.

(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of the
Company's securities that the actual stock price appreciation over the ten
year option term will be at the assumed 5% and 10% levels or at any other
defined level. Unless the market price of the common stock appreciates over
the option term, no value will be realized from the option grants made to
the executive officers.

(5) This option to Xx. Xxxxxx is fully vested.

(6) 75,000 shares under this option vest immediately and the rest of the shares
vest over the next 6 months of service.

(7) One-half of the shares under this option vest upon six months of service
from the vesting commencement date and the remaining one-half of the shares
vest monthly over the next 18 months of service.

(8) One-quarter of the shares under this option vest upon six months of service
from the vesting commencement date and the remaining shares vest monthly
over the next 18 months of service.

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55

OPTION EXERCISES AND HOLDINGS

The following table sets forth information concerning option holdings for
the year ended December 31, 2000, with respect to each of the Named Officers. No
options were exercised by the Named Officers during the 2000 fiscal year. No
stock appreciation rights were exercised during such year or were outstanding at
the end of that year.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

NUMBER OF SECURITIES MARKET VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY-END AT FY-END(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------

Xxxxx X. Xxxxxx.................... 574,322 150,677 $0 $0
Xxxxxxxxxxx X. Xxxxxxx............. 413,060 231,739 $0 $0
Xxxxxx X. Xxxxxxx.................. 95,170 244,830 $0 $0
Xxxxxxxx X. Xxxxxx, MD............. 580,216 294,784 $0 $0

---------------
(1) Based on the fair market value of the common stock at year-end 31-Dec-2000
($1.5625 per share) less the exercise price payable for such shares.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Company's Board of Directors was formed
in February, 1996, and the members of the Compensation Committee are Xx. Xxxxxxx
and Xx. Xxxxxxxxxxx. None of these individuals was at any time during the year
ended December 31, 2000, an officer or employee of the Company. Xx. Xxxxxxx was
the Company's Chief Technology Officer from July 1997 until December 31, 1998.
No member of the Compensation Committee of the Company serves as a member of the
board of directors or compensation committee of any entity that has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee.

CHANGE IN CONTROL ARRANGEMENTS

The Company has adopted a Change in Control Severance Plan under which
eligible employees are entitled to income continuation and certain health
benefits if within 24 months following a change in control of the Company (1)
the employee's employment is terminated by the Company or any successor without
cause or (2) the employee terminates his or her employment following (a) a
change in his or her position with the Company that materially reduces his or
her job responsibility, (b) a reduction in his or her salary and target bonus
level or (c) a change in his or her place of employment to a location that is
more than 25 miles from his or her prior place of employment, in each case if
the change or reduction is effected without the employee's written consent. The
eligible participants who are executive officers of the Company include Xxxxx
Xxxxxx, Xxxxxxxxxxx Xxxxxxx, Xxxxxx Xxxxxxx and Xxxxxxxx Xxxxxx. The Change in
Control Severance Plan provides a severance benefit for director-level employees
equal to 12 months of base salary and 100% of the employee's target bonus for
the fiscal year in which the employee is terminated, as well as continuation of
health benefits. The Change in Control Severance Plan provides a severance
benefit for officers (vice president or more senior) equal to 24 months of base
salary and 200% of the officer's target bonus for the fiscal year in which the
officer is terminated, as well as continuation of health benefits. Payments
under the Change in Control Severance Plan will be reduced if necessary to
provide employees with the greatest after-tax benefit, after taking into account
any excise tax imposed under Section 4999 of the Internal Revenue Code. The
completion of the merger with Xxxxxxx & Xxxxxxx will constitute a change in
control of the Company under the Change in Control Severance Plan.

The Company has agreed to provide Xxxxx X. Xxxxxx, its President and Chief
Executive Officer, a severance payment equal to 2 years of salary plus 200% of
Xx. Xxxxxx'x target bonus should he be

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56

involuntarily terminated within 12 months following a change of control of the
Company. The failure to retain Xx. Xxxxxx as President and Chief Executive
Officer of the company surviving the change of control transaction will be
considered an involuntary termination under the agreement. Xx. Xxxxxx will also
be entitled to accelerated vesting of his stock options as if he had remained an
employee of the Company for an additional twelve months should he be
involuntarily terminated within 12 months following a change of control of the
Company.

The Company has agreed to provide Xx. Xxxxxxxx X. Xxxxxx, its Chief
Technical Officer, with severance payments of twelve months of salary, vesting
of his stock options as if his service continued for an additional twelve
months, and health insurance for six months or until he is insured by another
employer should there be an involuntary termination of his employment without
cause.

Each option outstanding under the Company's 1993 Stock Option Plan was
amended in 1997 to provide that the exercisability of each such option will
accelerate in the event of a merger or other designated transaction, unless the
option is assumed in connection with the transaction. If the option is assumed
and the optionee's service is subsequently terminated by reason of an
involuntary or constructive termination within twelve (12) months of the merger
or other transaction, then the option will accelerate as if the optionee
remained in service for an additional 12 months at the time of the optionee's
cessation of service and such option will remain exercisable for a twelve (12)
month period following cessation of service.

Under the terms of the 1996 Stock Option Plan, each outstanding option will
accelerate in the event of a merger or other certain change in control
situations unless the option is assumed in connection with the transaction. In
addition, upon an involuntary termination of the optionee's service within
twelve months following the transaction, the exercisability of the option and
the vesting of shares will accelerate with respect to that number of shares as
if the optionee's service continued for an additional twelve months following
the involuntary termination, unless otherwise provided in the individual's
employment agreement.

The Company has entered into incentive letter agreements with each of Xxxxx
Xxxxxx, Xxxxxxxxxxx Xxxxxxx, Xxxxxx Xxxxxxx and Xxxxxxxx Xxxxxx that provide for
the payment of cash bonuses immediately prior to the closing of the merger.

The Compensation Committee has the authority under the 1996 Stock Option
Plan to provide for the acceleration of vesting of the shares of common stock
subject to the outstanding options held by any executive officer or other
employee under that Plan at any time, including in connection with a merger,
other certain change in control situations, or a hostile take-over of the
Company, which may or may not be conditioned on his employment being terminated
(whether involuntarily or through a forced resignation).

OTHER ARRANGEMENTS

On May 7, 1998 the Company entered into an agreement with Xxxxxx X.
Xxxxxxx, M.D., its then President and Chief Executive Officer, pursuant to which
Xx. Xxxxxxx resigned as President and Chief Executive Officer and became
Chairman of the Board of Directors. Under the agreement and while Xx. Xxxxxxx'x
service as a director continues, the Company will provide Xx. Xxxxxxx with the
benefits of the Company's Change in Control Severance Plan as if he were still
President and Chief Executive Officer. In addition, if the Company agrees to any
severance, change in control or similar package with any other executive officer
that is more beneficial to such officer than that provided to Xx. Xxxxxxx, he
will be entitled to a comparable arrangement in lieu of that provided under the
Change in Control Severance Plan.

The Company has agreed to provide Xxxxxx Xxxxxxx and Xxxxxxxxxxx Xxxxxxx
with xxxxxxxxx benefits of six months of salary plus an additional month for
each year of service plus health insurance for the duration of the salary
continuation or until they are insured by another employer if there should be an
involuntary termination of their employment without cause.

COMPENSATION COMMITTEE REPORT

The Compensation Committee of the Company's Board of Directors (the
"Committee") is responsible for establishing policies and programs for
compensating Heartport's executive officers. Each year, the
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57

Committee determines the base salary payable to the Chief Executive Officer
("CEO") and all other executive officers, and approves the incentive bonus
program for the CEO and other executive officers. In addition, the Committee
administers the Company's 1996 Stock Option Plan and Employee Stock Purchase
Plan. The Committee has the exclusive authority to grant stock options to the
Company's officers. For fiscal 2000, the Committee considered both qualitative
and quantitative factors in determining executive officer compensation levels,
including commercially-prepared surveys of comparable companies.

COMPENSATION POLICY AND PHILOSOPHY

The Committee's policy is to develop executive compensation packages that
attract, retain and motivate highly effective executives. Compensation programs
are designed to reward the achievement of both short-term and long-term
objectives of the Company and to align the executives' interests with those of
the Company's stockholders. It is the Committee's objective to have a
substantial portion of each officer's compensation contingent upon the Company's
performance, as well as upon his or her own level of performance. Accordingly,
each executive officer's compensation package consists of three major
components: (i) base salary, (ii) annual cash incentive compensation, and (iii)
long-term stock-based incentive awards.

BASE SALARY

The base salary for each executive officer is set by reviewing the pay
practices of companies that compete with the Company for executive talent, and
by evaluating each individual's performance and contribution. The Committee
believes that the Company's most direct competitors for executive talent are not
necessarily all of the companies that the Company would use in a comparison of
stockholder returns. Therefore, the compensation comparison group is not the
same as the industry group in the index used in the Stock Performance Graph,
below.

ANNUAL CASH INCENTIVE COMPENSATION

Each executive officer has an annual bonus target. The total bonus pool for
executive officers is determined based on the Company's achievement of goals.
For fiscal 2000, the corporate-level goals were comprised primarily of the
following equally-weighted components: (i) revenue; (ii) gross margin
improvement; (iii) operating expense reduction; and (iv) completion of
development and commercial release of new products. The Company achieved the
majority of its performance targets in 2000. Actual bonuses paid reflect both
the achievement of corporate goals and the individual's specific functional
objectives, with greater weight being given to the achievement of corporate
goals. The weighting of corporate goals vs. individual objectives was consistent
among all executive officers. Actual bonuses for the Named Officers are listed
in the Summary Compensation Table.

LONG-TERM STOCK-BASED INCENTIVE AWARDS

Generally, a significant option grant is made in the year that an executive
officer commences employment or an employee is promoted to an executive officer
position. The size of each grant is set at a level that the Committee deems
appropriate to create a meaningful opportunity for stock ownership based upon
the individual's position and responsibilities with the Company. Each grant
allows the officer to acquire shares of common stock at a fixed price per share
(generally the market price on the grant date) over a specified period of time.
The vesting schedules are designed to encourage the executives to remain with
the Company and to focus on longer-term results.

CEO COMPENSATION

Xx. Xxxxxx'x annual base salary of $280,000 was established by the
Committee in September 1999 with consideration of base salaries paid to chief
executive officers of comparable companies and in recognition of the challenges
he faced with regard to leading the Company's business. During fiscal 2000, Xx.
Xxxxxx'x annual base salary remained at $280,000. The Committee approved the
bonus paid to the CEO as a retention device to reflect the extraordinary
circumstances of the Company over the past several years.

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The annual base salary for Xx. Xxxxxxx, the Company's President and Chief
Executive Officer until July 1999 and Chief Executive Officer until September
1999, was determined by the Committee based on Xx. Xxxxxxx'x performance in
1998, his substantial experience as chief executive of another public medical
device company in the cardiovascular field, and in recognition of the challenges
he faced with regard to leading the Company's business.

TAX LIMITATION

Under the Federal tax laws, a publicly-held company such as the Company is
not allowed a Federal income tax deduction for compensation paid to certain
executive officers to the extent that compensation exceeds $1 million per
officer in any year. In order to qualify option grants under the Company's 1996
Stock Option Plan ("1996 Plan") for an exemption available to performance-based
compensation, the stockholders have approved certain provisions of the 1996
Plan, including a limit on the maximum number of shares of common stock for
which any one participant may be granted stock options each calendar year over
the term of the 1996 Plan. Accordingly, any compensation deemed paid to an
executive officer when he exercises an outstanding option under the 1996 Plan
with an exercise price equal to the fair market value of the option shares on
the grant date will qualify as performance-based compensation that will not be
subject to the $1 million limitation. The Committee will not limit the dollar
amount of the cash compensation payable to the Company's executive officers to
the $1 million limit.

Compensation Committee:

Xxxx X. Xxxxxxx, M.D.
Xxxxxx Xxxxx

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STOCK PERFORMANCE GRAPH

The graph set forth below compares the cumulative total stockholder return
on the Company's common stock between April 25, 1996 (the date the Company's
initial public offering commenced) and December 31, 2000 with the cumulative
total return of (i) the CRSP Total Return Index for The Nasdaq Stock Market
(U.S. Companies) (the "Nasdaq Stock Market-U.S. Index") and (ii) the Xxxxxxxxx
and Xxxxx Healthcare Index (the "H&Q Healthcare Index"), over the same period.
This graph assumes the investment of $100.00 on April 25, 1996 in the Company's
common stock, the Nasdaq Stock Market-U.S. Index and the H&Q Healthcare Index,
and assumes the reinvestment of dividends, if any.

The comparisons shown in the graph below are based upon historical data.
The Company cautions that the stock price performance shown in the graph below
is not indicative of, nor intended to forecast, the potential future performance
of the Company's common stock. Information used in the graph was obtained from
Research Data Group, Inc., a source believed to be reliable, but the Company is
not responsible for any errors or omissions in such information.

COMPARISON OF 54 MONTH CUMULATIVE TOTAL RETURN
AMONG HEARTPORT, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE XX XXXXXX H & Q HEALTHCARE INDEX

[LINE GRAPH]

Notwithstanding anything to the contrary set forth in any of the Company's
previous or future filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, that might incorporate this Annual
Report on Form 10-K or future filings made by the Company under those statutes,
the Compensation Committee Report and Stock Performance Graph shall not be
deemed filed with the Securities and Exchange Commission and shall not be deemed
incorporated by reference into any of those prior filings or into any future
filings made by the Company under those statutes.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of February 16, 2001, certain
information with respect to shares beneficially owned by (i) each person who is
known by the Company to be the beneficial owner of more than five percent of the
Company's outstanding shares of common stock, (ii) each of the Company's
directors and the executive officers named in the Summary Compensation Table and
(iii) all current directors and executive officers as a group. Beneficial
ownership has been determined in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, as amended. Under this rule, certain shares may be deemed
to be beneficially owned by more than one person (if, for example, persons share
the power to vote or the power to dispose of the shares). In addition, shares
are deemed to be beneficially owned by a person if the person has the right to
acquire shares (for example, upon exercise of an option or warrant) within sixty
(60) days of the date as of which the information is provided; in computing the
percentage ownership of any person, the amount of shares is deemed to include
the amount of shares beneficially owned by such person (and only such person) by
reason of such acquisition rights. As a result, the percentage of outstanding
shares of any person as shown in the following table does not necessarily
reflect the person's actual voting power at any particular date.

APPROXIMATE
------------------------------------------
SHARES PERCENTAGE
NAME BENEFICIALLY OWNED BENEFICIALLY OWNED(1)
---- ------------------ ---------------------

Xxxxxxx Xxxxxxx Xxxxxxxx & Xxxxx(2)................ 1,820,000 5.78%
0000 Xxxx Xxxx Xxxx
Xxxxx Xxxx, XX 00000
Xxxxx X. Xxxxxxx(3)................................ 1,058,042 3.36%
Xxxxxx X. Xxxxx(2)(4).............................. 2,164,838 6.88%
Xxxxxx X. Xxxxxxx, M.D. ........................... 3,205,492 10.19%
Xxxx X. Xxxxxxx, M.D.(5)........................... 1,632,516 5.19%
Xxxxx X. Xxxxxx(6)................................. 898,532 2.86%
Xxxxxxxxxxx X. Xxxxxxx(7).......................... 510,003 1.62%
Xxxxxx X. Xxxxxxx(8)............................... 802,258 2.55%
Xxxxxxxx X. Xxxxxx, M.D.(9)........................ 786,273 2.50%
All current directors and executive officers as a
group (8 persons)(10)............................ 11,057,954 35.14%

---------------
(1) Percentage of ownership is based on 26,364,821 shares of common stock
outstanding on February 16, 2001, plus 5,104,849 shares of common stock
subject to options that are exercisable within 60 days of February 16,
2001. The number of shares of common stock beneficially owned by each
listed individual includes the shares issuable pursuant to stock options
that are exercisable within 60 days of February 16, 2001. Except as
indicated in the footnotes to this table and pursuant to applicable
community property laws, the persons named in the table have sole voting
and investment power with respect to all shares of common stock. To the
Company's knowledge, the entities named in the table have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them.

(2) Includes 1,693,510 shares of common stock owned by Xxxxxxx Xxxxxxx Xxxxxxxx
& Xxxxx VI, L.P. ("KPCB VI"), and 126,490 shares of common stock owned by
KPCB VI Founders' Fund. Xx. Xxxxx, a director of the Company, is a general
partner of Xxxxxxx Xxxxxxx Xxxxxxxx & Xxxxx VI Associates, L.P. ("KPCB VI
Associates"), which is a general partner of KPCB VI and KPCB VI Founders'
Fund. Xx. Xxxxx disclaims beneficial ownership of shares held by KPCB VI,
KPCB VI Founders' Fund, and KPCB VI Associates, except for his pecuniary
interest therein. KPCB VI and KPCB VI Founders' Fund are parties to a
Stockholder Agreement with Xxxxxxx & Xxxxxxx in which KPCB VI and KPCB VI
Founders' Fund have agreed to vote all of the shares of common stock held
by the entities as of January 26, 2001 and that they hold at the time of
the meeting of Heartport stockholders held to vote on the Company's merger
agreement with Xxxxxxx & Xxxxxxx, in favor of the merger and for approval
and adoption of the merger agreement and against any competing transaction.

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61

(3) Includes options immediately exercisable, or exercisable within 60 days of
February 16, 2001, for 796,875 shares of common stock. Xx. Xxxxxxx is a
party to a Stockholder Agreement with Xxxxxxx & Xxxxxxx in which he has
agreed to vote all of the shares of common stock that he owns as of January
26, 2001 and that he holds at the time of the meeting of Heartport
stockholders held to vote on the Company's merger agreement with Xxxxxxx &
Xxxxxxx, in favor of the merger and for approval and adoption of the merger
agreement and against any competing transaction.

(4) Includes options immediately exercisable for 80,000 shares of common stock.
Xx. Xxxxx is a party to a Stockholder Agreement with Xxxxxxx & Xxxxxxx in
which he has agreed to vote all of the shares of common stock that he owns
as of January 26, 2001 and that he holds at the time of the meeting of
Heartport stockholders held to vote on the Company's merger agreement with
Xxxxxxx & Xxxxxxx, in favor of the merger and for approval and adoption of
the merger agreement and against any competing transaction.

(5) Includes options immediately exercisable, or exercisable within 60 days of
February 16, 2001, for 121,280 shares of common stock. Xx. Xxxxxxx is a
party to a Stockholder Agreement with Xxxxxxx & Xxxxxxx in which he has
agreed to vote all of the shares of common stock that he owns as of January
26, 2001 and that he holds at the time of the meeting of Heartport
stockholders held to vote on the Company's merger agreement with Xxxxxxx &
Xxxxxxx, in favor of the merger and for approval and adoption of the merger
agreement and against any competing transaction

(6) Includes options immediately exercisable, or exercisable within 60 days of
February 16, 2001, for 725,000 shares of common stock. Xx. Xxxxxx is a
party to a Stockholder Agreement with Xxxxxxx & Xxxxxxx in which he has
agreed to vote all of the shares of common stock that he owns as of January
26, 2001 and that he holds at the time of the meeting of Heartport
stockholders held to vote on the Company's merger agreement with Xxxxxxx &
Xxxxxxx, in favor of the merger and for approval and adoption of the merger
agreement and against any competing transaction.

(7) Includes options immediately exercisable, or exercisable within 60 days of
February 16, 2001, for 508,779 shares of common stock. Xx. Xxxxxxx is a
party to a Stockholder Agreement with Xxxxxxx & Xxxxxxx in which he has
agreed to vote all of the shares of common stock that he owns as of January
26, 2001 and that he holds at the time of the meeting of Heartport
stockholders held to vote on the Company's merger agreement with Xxxxxxx &
Xxxxxxx, in favor of the merger and for approval and adoption of the merger
agreement and against any competing transaction.

(8) Includes options immediately exercisable, or exercisable within 60 days of
February 16, 2001, for 260,125 shares of common stock. Xx. Xxxxxxx is a
party to a Stockholder Agreement with Xxxxxxx & Xxxxxxx in which he has
agreed to vote all of the shares of common stock that he owns as of January
26, 2001 and that he holds at the time of the meeting of Heartport
stockholders held to vote on the Company's merger agreement with Xxxxxxx &
Xxxxxxx, in favor of the merger and for approval and adoption of the merger
agreement and against any competing transaction.

(9) Includes options immediately exercisable, or exercisable within 60 days of
February 16, 2001, for 681,227 shares of common stock. Xx. Xxxxxx is a
party to a Stockholder Agreement with Xxxxxxx & Xxxxxxx in which he has
agreed to vote all of the shares of common stock that he owns as of January
26, 2001 and that he holds at the time of the meeting of Heartport
stockholders held to vote on the Company's merger agreement with Xxxxxxx &
Xxxxxxx, in favor of the merger and for approval and adoption of the merger
agreement and against any competing transaction.

(10) Includes options immediately exercisable, or exercisable within 60 days of
February 16, for 3,173,286 shares of common stock.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CHANGE IN CONTROL ARRANGEMENTS

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62

or (2) the employee terminates his or her employment following (a) a change in
his or her position with the Company that materially reduces his or her job
responsibility, (b) a reduction in his or her salary and target bonus level or
(c) a change in his or her place of employment to a location that is more than
25 miles from his or her prior place of employment, in each case if the change
or reduction is effected without the employee's written consent. The eligible
participants who are executive officers of the Company include Xxxxx Xxxxxx,
Xxxxxxxxxxx Xxxxxxx, Xxxxxx Xxxxxxx and Xxxxxxxx Xxxxxx. The Change in Control
Severance Plan provides a severance benefit for director-level employees equal
to 12 months of base salary and 100% of the employee's target bonus for the
fiscal year in which the employee is terminated, as well as continuation of
health benefits. The Change in Control Severance Plan provides a severance
benefit for officers (vice president or more senior) equal to 24 months of base
salary and 200% of the officer's target bonus for the fiscal year in which the
officer is terminated, as well as continuation of health benefits. Payments
under the Change in Control Severance Plan will be reduced if necessary to
provide employees with the greatest after-tax benefit, after taking into account
any excise tax imposed under Section 4999 of the Internal Revenue Code. The
completion of the merger with Xxxxxxx & Xxxxxxx will constitute a change in
control of the Company under the Change in Control Severance Plan.

The Company has agreed to provide Xxxxx X. Xxxxxx, its President and Chief
Executive Officer, a severance payment equal to 2 years of salary plus 200% of
Xx. Xxxxxx'x target bonus should he be involuntarily terminated within 12 months
following a change of control of the Company. The failure to retain Xx. Xxxxxx
as President and Chief Executive Officer of the company surviving the change of
control transaction will be considered an involuntary termination under the
agreement. Xx. Xxxxxx will also be entitled to accelerated vesting of his stock
options as if he had remained an employee of the Company for an additional
twelve months should he be involuntarily terminated within 12 months following a
change of control of the Company.

The Company has agreed to provide Xx. Xxxxxxxx X. Xxxxxx, its Chief
Technical Officer, with severance payments of twelve months of salary, vesting
of his stock options as if his service continued for an additional twelve
months, and health insurance for six months or until he is insured by another
employer, should there be an involuntary termination of his employment without
cause.

Under the terms of the 1996 Stock Option Plan, each outstanding option will
accelerate upon a Corporate Transaction unless the option is assumed in
connection with certain change of control situations (a "Corporate
Transaction"). In addition, upon an involuntary termination of the optionee's
service within twelve months following a Corporate Transaction, the
exercisability of the option and the vesting of shares will accelerate with
respect to that number of shares as if the optionee's service continued for an
additional twelve months following the involuntary termination, unless otherwise
provided in the individual's employment agreement.

The Compensation Committee has the authority under the 1996 Stock Option
Plan to provide for the acceleration of vesting of the shares of common stock
subject to the outstanding options held by any executive officer or other
employee under that Plan at any time, including in connection with Corporate
Transactions or a hostile take-over of the Company, which may or may not be
conditioned on his employment being terminated (whether involuntarily or through
a forced resignation).

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63

OTHER ARRANGEMENTS

The Company has agreed to provide Xxxxx Xxxxxxx and Xxxxx Xxxxxxx with
xxxxxxxxx benefits of six months of salary plus an additional month for each
year of service plus health insurance for the duration of the salary
continuation or until they are insured by another employer if there should be an
involuntary termination of their employment without cause.

In June 2000, the Company has entered into a separation agreement with
Xxxxxx X. Xxxxxxxx, former Vice President, Legal Affairs and General Counsel to
the Company. The agreement provides for continued vesting of stock options
through July 1, 2001 in exchange for continued services by Xx. Xxxxxxx for up to
three days per month.

In 1995, the Company extended loans to Xxxxx Xxxxxx, the Company's current
President and Chief Executive Officer, and to Xxxxxx Xxxxxxx, the Company's
current Senior Vice President of Operations, to enable them to purchase shares
of Company common stock pursuant to the exercise of options previously granted
to each individual. The loans were full recourse and were secured by the shares
of common stock purchased with the proceeds of the loans. Each of the loans was
repaid in full in 2000. The following table sets forth information with respect
to the loans extended to Xx. Xxxxxx and Xx. Xxxxxxx that were outstanding during
2000:

NUMBER
OF SHARES PER SHARE
NAME PURCHASED PURCHASE PRICE PRINCIPAL INTEREST RATE MATURITY DATE
---- ---------- -------------- --------- ------------- -------------

Xxxxx X. Xxxxxx.............. 120,000 $0.781 $ 93,750 6.45% 12/11/05
208,000 $0.781 $162,500 6.02% 12/11/00
Xxxxxx X. Xxxxxxx............ 176,000 $0.375 $ 66,000 6.18% 8/23/04

PART IV

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

(a) Schedules and Exhibits.

(1) Financial Statements. The information required by this item is included
in Item 8 of Part II of this Form 10-K.

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64

(2) Financial Statement Schedule. The following financial statement
schedule required by Regulation S-X are filed herewith:

SCHEDULE II

HEARTPORT, INC.
VALUATION AND QUALIFYING ACCOUNTS

ADDITIONS
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
--------- ---------- ---------- ---------
(IN THOUSANDS)

Year Ended December 31, 2000
Allowance for doubtful accounts................ $ 317 $ -- $ 120 $ 197
Allowance for sales returns.................... 190 -- 170 20
Warranty reserves.............................. 784 14 730 68
Year Ended December 31, 1999
Allowance for doubtful accounts................ 267 50 -- 317
Allowance for sales returns.................... 442 -- 252 190
Warranty reserves.............................. 1,225 -- 441 784
Year Ended December 31, 1998
Allowance for doubtful accounts................ 314 53 100 267
Allowance for sales returns.................... 609 441 608 442
Warranty reserves.............................. 407 818 -- 1,225

All other schedules are not applicable.

(3) Exhibits.

EXHIBIT NO. DESCRIPTION
----------- -----------

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EXHIBIT NO. DESCRIPTION
----------- -----------

10.5+ Real Property Lease between the Registrant and Metropolitan
Insurance Company dated September 21, 1992, as amended.
10.6+ Equipment Financing Agreement between the Registrant and
Lease Management Services, Inc. dated February 23, 1995.
10.7+* Agreement between the Company and St. Jude Medical, Inc.
dated September 11, 1995.
10.8@ Third Amendment to Lease Agreement between Heartport
Research and Training Center, Inc. and University of Utah
Research Foundation dated as of October 25, 1996.
10.9@* Amendment to agreement between Registrant and St. Jude
Medical, Inc. dated January 31, 1997.
10.10# Amended and Restated Loan and Security Agreement dated
October 12, 1998 between the Registrant and Silicon Valley
Bank.
10.11X Industrial Build-To-Suit Lease dated September 19, 1997
between Registrant and Chestnut Bay LLC. (without exhibits)
10.12X First Amendment to Industrial Build-To-Suit Lease dated
February 10, 1998 between Registrant and Chestnut Bay LLC.
10.13% 1999 Supplemental Stock Option Plan.
10.14 Form of Incentive Letter Agreement between the Registrant
and certain of the Registrant's executive officers.
23.1 Consent of Ernst & Young, LLP.

---------------
* Confidential treatment has been requested for certain portions of this
exhibit. Omitted portions have been filed separately with the Securities and
Exchange Commission.

+ Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (File No. 333-1906).

% Incorporated by reference to the Registrant's Form 10-K for the year ended
December 31, 1999.

# Incorporated by reference to the Registrant's Form 10-K for the year ended
December 31, 1998.

X Incorporated by reference to the Registrant's Form 10-K for the year ended
December 31, 1997.

@ Incorporated by reference to the Registrant's Form 10-K for the year ended
December 31, 1996.

** Incorporated by reference to the exhibits filed with the Registrant's Form
8-K filed with the Securities and Exchange Commission on February 2, 2001.

(b) Reports On Form 8-K

No reports on Form 8-K were filed by the Registrant during the quarter
ended December 31, 2000.

See paragraph (a)(3).

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66

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, in Redwood City, California, on this 21st day of February,
2001.

HEARTPORT, INC.

By: /s/ XXXXX X. XXXXXX
------------------------------------
Xxxxx X. Xxxxxx
President and Chief Executive
Officer

By: /s/ XXXXXX XXXXXX
------------------------------------
Xxxxxx Xxxxxx
Director of Finance

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints, Xxxxx X. Xxxxxx and Xxxxxx Xxxxxx, and
each of them, his true and lawful attorneys-in-fact and agents with full power
of substitution, for him and in his name, place and xxxxx, 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 all documents in connection
therewith with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-K 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/ XXXXX X. XXXXXX President, Chief Executive February 21, 2001
--------------------------------------------------- Officer, Director and Acting
Xxxxx X. Xxxxxx Chief Financial Officer
(Principal Executive and
Financial Officer)

/s/ XXXXXX XXXXXX Director of Finance February 21, 2001
---------------------------------------------------
Xxxxxx Xxxxxx

/s/ XXXXX X. XXXXXXX Director February 21, 2001
---------------------------------------------------
Xxxxx X. Xxxxxxx

/s/ XXXXXX X. XXXXX Director February 21, 2001
---------------------------------------------------
Xxxxxx X. Xxxxx

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SIGNATURE TITLE DATE
--------- ----- ----

/s/ XXXXXX X. XXXXXXX, M.D. Director February 21, 2001
---------------------------------------------------
Xxxxxx X. Xxxxxxx, M.D.

/s/ XXXX X. XXXXXXX, M.D. Director February 21, 2001
---------------------------------------------------
Xxxx X. Xxxxxxx, M.D.

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EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
------- -----------

2.1+ Agreement and Plan of Merger dated April 3, 1995, for the
reincorporation merger of Stanford Surgical Technology,
Inc., a California corporation, into Heartport, Inc., a
Delaware corporation.
2.2** Agreement and Plan of Merger dated January 26 2001, by and
among Heartport, Inc., Xxxxxxx & Xxxxxxx, and HP Merger Sub,
Inc.
2.3** Stockholder Agreement dated January 26, 2001, by and among
Xxxxxxx & Xxxxxxx and the Heartport stockholders listed
therein.
3.1+ Restated Certificate of Incorporation.
3.2# Amended and Restated Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2+ Specimen Common Stock certificate.
4.3+ Third Amended and Restated Rights Agreement among Registrant
and the Founders and Investors specified therein dated April
17, 1995.
4.4@ Rights Agreement between the Registrant and the First
National Bank of Boston dated April 25, 1996.
4.5 Amendment to Rights Agreement Between Heartport, Inc. and
Fleet National Bank dated January 26, 2001.
10.1+ Form of Indemnification Agreement entered into by and
between Registrant and its officers and directors.
10.2+ 1993 Stock Option Plan and forms of agreements thereunder.
10.3% 1996 Stock Option Plan as amended and restated October 21,
1996 and May 7, 1999.
10.4% Employee Stock Purchase Plan, as amended and restated
October 21, 1996 and January 1, 1999.
10.5+ Real Property Lease between the Registrant and Metropolitan
Insurance Company dated September 21, 1992, as amended.
10.6+ Equipment Financing Agreement between the Registrant and
Lease Management Services, Inc. dated February 23, 1995.
10.7+* Agreement between the Company and St. Jude Medical, Inc.
dated September 11, 1995.
10.8@ Third Amendment to Lease Agreement between Heartport
Research and Training Center, Inc. and University of Utah
Research Foundation dated as of October 25, 1996.
10.9@* Amendment to agreement between Registrant and St. Jude
Medical, Inc. dated January 31, 1997.
10.10# Amended and Restated Loan and Security Agreement dated
October 12, 1998 between the Registrant and Silicon Valley
Bank.
10.11X Industrial Build-To-Suit Lease dated September 19, 1997
between Registrant and Chestnut Bay LLC. (without exhibits)
10.12X First Amendment to Industrial Build-To-Suit Lease dated
February 10, 1998 between Registrant and Chestnut Bay LLC.
10.13% 1999 Supplemental Stock Option Plan.
10.14 Form of Incentive Letter Agreement between the Registrant
and certain of the Registrant's executive officers.
23.1 Consent of Ernst & Young, LLP.

---------------
* Confidential treatment has been requested for certain portions of this
exhibit. Omitted portions have been filed separately with the Securities and
Exchange Commission.

+ Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (File No. 333-1906).

% Incorporated by reference to the Registrant's Form 10-K for the year ended
December 31, 1999.
69

# Incorporated by reference to the Registrant's Form 10-K for the year ended
December 31, 1998.

X Incorporated by reference to the Registrant's Form 10-K for the year ended
December 31, 1997.

@ Incorporated by reference to the Registrant's Form 10-K for the year ended
December 31, 1996.

** Incorporated by reference to the exhibits filed with the Registrant's Form
8-K filed with the Securities and Exchange Commission on February 2, 2001.
70
EXHIBIT 4.5

AMENDMENT TO RIGHTS AGREEMENT BETWEEN
HEARTPORT, INC. AND FLEET NATIONAL BANK

THIS AMENDMENT TO RIGHTS AGREEMENT (this "Amendment") is made as
of the 26th day of January, 2001, by and between Heartport, Inc., a Delaware
corporation (the "Company"), and Fleet National Bank (the "Rights Agent").

WHEREAS, the Company is entering into an Agreement and Plan of
Merger (as the same may be amended from time to time, the "Merger Agreement")
among Xxxxxxx & Xxxxxxx, a New Jersey corporation ("Parent"), HP Merger Sub,
Inc., a Delaware corporation and wholly owned subsidiary of Parent ("Merger
Sub"), and the Company, providing for transactions pursuant to which, among
other things, Merger Sub will merge with and into the Company (the "Merger"),
and the Company will become a wholly owned subsidiary of Parent and the former
stockholders of the Company will receive shares of Parent Common Stock;

WHEREAS, in connection with the Merger Agreement, certain
officers, directors and stockholders of the Company are entering into a
Stockholder Agreement (the "Stockholder Agreement") with Parent and are
delivering Affiliate Letters to Parent (the "Affiliate Letters");

WHEREAS, the Company and the Rights Agent are parties to a Rights
Agreement dated as of April 25, 1996, as amended (the "Rights Agreement"); and

WHEREAS, the parties desire to amend the Rights Agreement in
connection with the execution and delivery of the Merger Agreement and the
Stockholder Agreement.

NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements herein set forth, the parties hereby agree as follows:

1. The definition of "Acquiring Person" set forth in Section 1 of
the Rights Agreement is hereby amended by adding the following sentence to the
end of that definition:

"Notwithstanding the foregoing, no person shall be an
Acquiring Person solely by reason of the execution and delivery
of (1) the Agreement and Plan of Merger (as the same may be
amended from time to time, the "Merger Agreement") among Xxxxxxx
& Xxxxxxx, a New Jersey corporation ("Parent"), HP Merger Sub,
Inc., a Delaware corporation and wholly owned subsidiary of
Parent ("Merger Sub"), and the Company, (2) the Stockholder
Agreement between Parent and certain officers, directors and
stockholders of the Company (as the same may be amended from
time to time, the "Stockholder Agreement") executed in
connection with the Merger Agreement or (3) the execution of
Affiliate Letters by certain officers, directors and
stockholders of the Company, or by reason of the consummation of
the transactions contemplated by the Merger Agreement and the
Stockholder Agreement."

2. The definition of "Final Expiration Date" set forth in Section
1 of the Rights Agreement shall be amended to read in its entirety as follows:

"Final Expiration" shall mean the earlier of (1) the
Effective Time, as that term is defined in the Merger Agreement,
or (2) April 25, 2006."

3. The definition of "Shares Acquisition Date" included in
Section 1 of the Rights Agreement shall be amended by adding the following
sentence to the end of such definition:

71
"Notwithstanding anything else set forth in this Agreement,
a Shares Acquisition Date shall not be deemed to have occurred
solely by reason of the public announcement or public disclosure
of the execution and delivery of the Merger Agreement or the
Stockholder Agreement or the consummation of the transactions
contemplated thereby."

4. Section 3(a) of the Rights Agreement shall be amended by
adding the following sentence to the end thereof:

"Notwithstanding anything else set forth in this Agreement,
no Distribution Date shall be deemed to have occurred solely by
reason of the execution and delivery of the Merger Agreement or
the Stockholder Agreement or the consummation of the
transactions contemplated thereby."

5. The Rights Agreement, as amended by this Amendment, shall
remain in full force and effect in accordance with its terms.

6. This Amendment may be executed in one or more counterparts and
each of such counterparts shall for all purposes be deemed to be an original,
and all such counterparts shall together constitute one and the same instrument.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed and attested, all as of the date and years first above
written.

Attest: HEARTPORT, INC.

By: /s/ Xxxxxxxx X. Xxxxxx, M.D. By: /s/ Xxxxx X. Xxxxxx
------------------------------- --------------------------------------
Xxxxxxxx X. Xxxxxx Xxxxx Xxxxxx
Chief Technical Officer President and Chief Executive Officer

Attest: FLEET NATIONAL BANK

By: /s/ Xxxxx Xxxxxxxxxxx By: /s/ Xxxxxx X. XxXxxx
------------------------------- --------------------------------------
Xxxxx Xxxxxxxxxxx Name: Xxxxxx X. XxXxxx
Account Administrator Title: Senior Account Manager

72
EXHIBIT 10.14

Heartport, Inc.

January 24, 2001

Re: Letter Agreement for Change in Control Compensation

Dear [ ]:

In connection with any upcoming Change in Control (as defined below) of
Heartport, Inc. (the "Company"), the Compensation Committee of the Board of
Directors of the Company (the "Committee") desires to set forth a compensation
arrangement for the senior management team, in order to provide a continuing
incentive to pursue the most advantageous transaction for the Company.

Change in Control

A Change in Control means (i) the consummation of a merger or consolidation of
the Company with or into another entity or any other corporate reorganization,
or a tender offer for the Company's securities, if more than 50% of the combined
voting power of the continuing or surviving entity's securities outstanding
immediately after such merger, consolidation or other reorganization is owned by
persons who were not stockholders of the Company immediately prior to such
merger, consolidation or other reorganization; or (ii) the sale, transfer or
other disposition of all or substantially all of the Company's assets.

A transaction shall not constitute a Change in Control if its sole purpose is to
change the state of the Company's incorporation or to create a holding company
that will be owned in substantially the same proportions by the persons who held
the Company's securities immediately before such transaction.

Amount of Bonus Pool

Bonuses under this program will be paid in cash and will be subject to all
applicable withholding taxes. Bonuses will be paid in consideration of the key
employee's agreement to relinquish an option for the number of shares set forth
on Exhibit A; an employee may choose to relinquish an option in whole or in
part. The amount of bonuses to be paid under this Program (the "Bonus Pool")
will equal $1 per share for each $1 in excess of the key employee's exercise
price of the Merger Consideration (as defined below) multiplied by the number of
shares set forth beside the key employee's name on Exhibit A. The Committee may
choose to enhance the amount of the bonus as a reward for performance and such
enhancement may be measured by the Committee as a per share calculation or as a
percentage of the entire bonus or such other method that the Committee deems
appropriate. Examples of this calculation are shown on Exhibit A.

The Merger Consideration will be the aggregate gross consideration received in
connection with a Change in Control by (i) stockholders of the Company and/or
(ii) the Company plus the value of the assumption or retirement of any Company
indebtedness and the payment of any of the Company's transaction costs divided
by the number of shares outstanding at the closing of the Change in Control.
Merger Consideration shall include amounts paid into escrow. Merger
Consideration shall not include any variable amounts including, but not limited
to, "earn out" payments.

The fair market value of the Merger Consideration will be determined as follows:

i. Any portion of the Merger Consideration consisting of
cash or the assumption or retirement of debt will be
valued at face value of such cash or debt (regardless of
whether the debt was retired or assumed for less than
its face value);

ii. Any portion of the Merger Consideration consisting of
securities will be valued (a) if such securities are
publicly traded, at the closing sales price for such
securities (or closing bid, if no sales are reported) as
quoted on any established stock exchange or national
market system for the last market trading day prior to
the date of determination, as reported in the Wall
Street Journal or such other source as the Board deems
reliable, or (b) if such securities are not publicly
traded, at the fair market value as determined in good
faith by the Board.

iii. The Compensation Committee of the Board shall, based on
the above criteria, reasonably determine the amount of
Merger Consideration and such determination shall be
final and binding.

Determination of Participants

The individuals named on Exhibit A are the eligible participants. An individual
shall be eligible for a bonus only if he or she is a current employee of the
Company on the date of the closing of the Change in Control or his or her
employment is involuntarily terminated by the Company without cause within the
90-day period prior to the closing. Bonuses will be paid by the Company under
this Program

73
immediately prior to the closing of the Change in Control. No bonuses will be
paid under this Program if a Change in Control does not occur.

General Provisions

This Program became effective when adopted by the Committee. The Board may at
any time amend or terminate this Program, provided it must do so in a written
resolution and such action shall not adversely affect rights and interests of
participants to individual bonuses allocated prior to such amendment or
termination, and provided further that no amendment may be effected without the
consent of each of the eligible participants (A) while discussions relating to a
merger agreement are ongoing with Xxxxxxx & Xxxxxxx or relating to any
transaction related to or in response to the J&J transaction or (B) following
the date that the Company enters into a definitive agreement to effect a Change
in Control until such an agreement has been withdrawn and is no longer being
pursued. This is the full and complete embodiment of the terms of this Program
as described herein.

No amounts under this Program shall actually be funded, set aside or otherwise
segregated prior to payment. The obligation to pay the bonuses awarded hereunder
shall at all times be an unfunded and unsecured obligation of the Company.
Participants shall have the status of general unsecured creditors.

No participant shall have the right to alienate, pledge or encumber his/her
interest in this Program, and such interest shall not (to the extent permitted
by law) be subject in any way to the claims of the employee's creditors or to
attachment, execution or other process of law.

No action of the Company in establishing this Program, no action taken under
this Program by the Committee and no provision of this Program itself shall be
construed to grant any person the right to remain in the employ of the Company
for any period of specific duration. Rather, each employee will be employed "at
will," which means that either such employee or the Company may terminate the
employment relationship at any time for any reason, with or without cause.

The Committee appreciates your efforts to effect a Change in Control of the
Company, and intends this arrangement to be a reflection of your extraordinary
dedication in this uncertain time for the Company.

Sincerely,

The Compensation Committee

By: Xxxx Xxxxxxx, Chairman

By: Xxxxxx Xxxxx

Exhibit A

ELIGIBLE PARTICIPANTS

Xxxxx Xxxxxx
Xxxxxx Xxxxxxx
Xxxxxxxx Xxxxxx
Xxxxxxxxxxx Xxxxxxx

Example

-----------------------------------------------------------------------------------------------------------
SHARES $2.80 $3.00 $3.25 $4.00 $4.50
-----------------------------------------------------------------------------------------------------------

Xxxxxx 875,000 $1,082,375 $1,257,375 $1,476,125 $2,132,375 $2,569,875
Xxxxxxx 175,000 $ 216,475 $ 251,475 $ 295,225 $ 426,475 $ 513,975
Xxxxxx 175,000 $ 216,475 $ 251,475 $ 295,225 $ 426,475 $ 513,975
Xxxxxxx 175,000 $ 216,475 $ 251,475 $ 295,225 $ 426,475 $ 513,975

Total 1,400,000 $1,731,800 $2,011,800 $2,361,800 $3,411,800 $4,111,800
-----------------------------------------------------------------------------------------------------------

These cash payment calculations are based upon the option strike price of $1.563

75
EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-92699 and 333-4030 and Form S-3 No. 333-31161) pertaining to
the Heartport, Inc. 1999 Supplemental Stock Option Plan and Employee Stock
Purchase Plan, the Heartport, Inc. 1996 Stock Option Plan and Employee Stock
Purchase Plan, and the convertible subordinated notes, of our report dated
January 19, 2001, with respect to the consolidated financial statements and
schedule of Heartport, Inc. included in the Annual Report (Form 10-K) for the
year ended December 31, 2000.

Ernst & Young LLP

Palo Alto, California
February 15, 2001

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FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR

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