ABIOMED INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For fiscal year ended March 31, 2002

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number : 0-20584

ABIOMED, INC.
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE 04-2743260
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

22 CHERRY HILL DRIVE 01923
DANVERS, MASSACHUSETTS (Zip Code)
(Address of Principal Executive Offices)

(978) 777-5410
(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 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 Rule
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/

The aggregate market value of the voting stock held by non-affiliates of
the registrant as of July 10, 2002 was $103,475,112 based on the closing price
of $6.633 on that date as reported on the Nasdaq Stock Market's National Market.
As of July 10, 2002, 20,956,587 shares of the registrant's Common Stock, $.01
par value, were outstanding.

THIS FILING INCLUDES UNAUDITED FINANCIAL STATEMENTS IN LIEU OF AUDITED
FINANCIAL STATEMENTS BECAUSE THE REGISTRANT ON JUNE 6, 2002 REPLACED ARTHUR
ANDERSEN LLP AS ITS INDEPENDENT ACCOUNTANTS. IN ADDITION, THE COMPANY HAS
REQUIRED TIME TO MAKE CERTAIN RESTATEMENTS OF ITS PREVIOUSLY AUDITED FINANCIAL
STATEMENTS. THE COMPANY HAS ENGAGED INDEPENDENT PUBLIC ACCOUNTANTS AND IS
WORKING DILIGENTLY TO HAVE ITS FINANCIAL STATEMENTS AUDITED BY THAT FIRM. SEE
ITEM 7 - MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, RESTATEMENT OF PRIOR YEAR'S FINANCIAL STATEMENTS AND ITEM
14 - FINANCIAL STATEMENTS.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2002 Annual Meeting of
Stockholders, which is scheduled to be filed within 120 days after the end of
the registrant's fiscal year, are incorporated by reference in Part III (Items
10, 11, 12 and 13) of this Report.

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INTRODUCTORY NOTE

THIS REPORT, INCLUDING THE DOCUMENTS INCORPORATED BY REFERENCE IN THIS
REPORT, INCLUDES FORWARD-LOOKING STATEMENTS. WE HAVE BASED THESE FORWARD-LOOKING
STATEMENTS ON OUR CURRENT EXPECTATIONS AND PROJECTIONS ABOUT FUTURE EVENTS. OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN, OR IMPLIED BY,
THESE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS ARE IDENTIFIED BY
WORDS SUCH AS "BELIEVE," "ANTICIPATE," "EXPECT," "INTEND," "PLAN," "WILL," "MAY"
AND OTHER SIMILAR EXPRESSIONS. IN ADDITION, ANY STATEMENTS THAT REFER TO
EXPECTATIONS, PROJECTIONS OR OTHER CHARACTERIZATIONS OF FUTURE EVENTS OR
CIRCUMSTANCES ARE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS IN
THESE DOCUMENTS INCLUDE, BUT ARE NOT NECESSARILY LIMITED TO, THOSE RELATING TO:

- OUR PLANS REGARDING THE TIMING AND OUTCOME OF INITIAL CLINICAL TRIALS
FOR OUR ABIOCOR IMPLANTABLE REPLACEMENT HEART;

- OUR INTENTION TO EXPAND THE MARKET FOR OUR BVS PRODUCT LINE;

- OUR ABILITY TO OBTAIN AND MAINTAIN REGULATORY APPROVAL OF OUR PRODUCTS
IN THE U.S. AND INTERNATIONALLY;

- THE OTHER COMPETING THERAPIES THAT MAY IN THE FUTURE BE AVAILABLE TO
HEART FAILURE PATIENTS; AND

- OUR PLANS TO DEVELOP AND MARKET NEW PRODUCTS AND IMPROVE EXISTING
PRODUCTS.

FACTORS THAT COULD CAUSE ACTUAL RESULTS OR CONDITIONS TO DIFFER FROM THOSE
ANTICIPATED BY THESE AND OTHER FORWARD-LOOKING STATEMENTS INCLUDE THOSE MORE
FULLY DESCRIBED IN THE "RISK FACTORS" SECTION AND ELSEWHERE IN THIS REPORT. WE
ARE NOT OBLIGATED TO UPDATE OR REVISE THESE FORWARD-LOOKING STATEMENTS TO
REFLECT NEW EVENTS OR CIRCUMSTANCES.

PART I

ITEM 1. BUSINESS

OVERVIEW

ABIOMED is a leading developer, manufacturer and marketer of medical
products designed to safely and effectively assist or replace the pumping
function of the failing heart. In July, 2001, initial human clinical trials
commenced in the U.S. for our AbioCor Implantable Replacement Heart. The AbioCor
is the world's first battery-powered implantable replacement heart system. The
AbioCor, the development of which follows decades of fundamental and applied
research, development and testing, is intended to extend life and provide an
improved quality of life for end-stage heart failure patients. The initial
clinical trial of the AbioCor in the U.S. has commenced at four (4) among six
(6) initial medical teams approved by the U.S. Food and Drug Administration,
known as the FDA. Clinical testing of the AbioCor is anticipated to commence at
select medical centers in Europe during 2002, subject to applicable regulatory
approvals. We currently manufacture and sell the BVS, a FDA approved heart
assist device. The BVS is the most widely used advanced heart assist device for
the temporary treatment of all patients with failing but potentially recoverable
hearts in the U.S.. We are also engaged in research and development relating to
other devices to replace or support the pumping function of the heart. One such
focused effort is towards further developing replacement heart technology
acquired by us in 2000 from The Pennsylvania State University, the Penn State
Heart. The Penn State Heart has a drive mechanism that is different than the
AbioCor design. The Penn State Heart is, in addition to the AbioCor, the only

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other implantable heart system to survive the rigor of the replacement heart
development program funded by the U.S. National Heart Lung and Blood Institute,
the NHLBI. Development of the AbioCor and the Penn State Heart reinforces our
commitment to providing the best solutions for end-stage heart failure patients
in need of a replacement heart.

Our AbioCor is a heart replacement device that replaces the failing
ventricles of a patient's diseased heart and takes over the heart's blood
pumping function. It is designed for use in patients at risk of imminent death
due to irreparably damaged hearts, but whose other vital organs remain viable.
We believe the AbioCor will provide a much-needed treatment option for those
patients in the U.S. for whom there is currently no effective therapy available.
If and when approved by applicable U.S. and international regulatory
authorities, we anticipate that we should be able to sell the first generation
AbioCor systems for approximately $100,000 each, subject to the establishment of
reimbursement levels by third-party payers. To date, more than $80 million have
been invested in the development and testing of the AbioCor, including over $20
million in funding from the NHLBI. We have built a pilot-scale manufacturing
facility for the AbioCor. We have over 130 employees working on the AbioCor
program, including over 90 engineers, scientists and other technically educated
personnel. We are collaborating with leading medical centers and healthcare
professionals.

Our BVS is a "bridge-to-recovery" device that can temporarily assume the
full pumping function of the heart for patients with potentially reversible
heart failure. It is intended for use in patients whose hearts can recover
within a period of up to fourteen days. In 1992, the BVS became the first heart
assist device capable of providing full circulatory support to be approved by
the FDA. The BVS is the most widely used FDA-approved temporary heart assist
device, and to date has been used to support thousands of patients at over 600
medical centers worldwide. The BVS, which primarily consists of single-use
external blood pumps, cannulae and drive and control consoles, has been a
profitable product line since fiscal 1995. We believe our experience in
developing, manufacturing and selling the BVS will provide us with a competitive
advantage in commercializing the AbioCor, as well as other future products.

Our Penn State Heart is intended to serve end-stage heart failure patients
similar to those addressed by the AbioCor. We have designed the current version
of the Penn State Heart to be smaller than the current clinical version of the
AbioCor. The Penn State Heart is in a pre-clinical development and testing
stage.

Our focused research and development related to the AbioCor, BVS and the
Penn State Heart has provided us with the proprietary technology, know-how and
experience to develop additional products. We believe we are the only company in
the world with technical background and expertise in the full range of
technology to support the pumping function of the heart. We believe that there
are many opportunities to apply our expertise to address the needs of heart
failure patients. We seek to be first to market with high-quality and
cost-effective technologies for heart failure patients who currently lack
adequate therapies.

ABIOMED is a Delaware corporation. We commenced operation in 1981. As used
herein, ABIOMED includes ABIOMED, Inc. together with our subsidiaries. ABIOMED,
the ABIOMED logo and BVS are our registered trademarks. AbioCor and Angioflex
are our trademarks. This Report may also include trademarks of companies other
than ABIOMED.

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INDUSTRY OVERVIEW

THE HUMAN HEART

The human heart is the pump for the body's circulatory system. The heart
has four chambers: the left and the right atria and the left and the right
ventricles. The two atria serve as the inflow chambers of the heart, collecting
blood for delivery to the ventricles. The ventricles are the pumping chambers of
the heart, pumping blood to the lungs and the rest of the body.

The right ventricle of the heart pumps oxygen-depleted blood returning from
the body to the lungs where it is re-oxygenated. The left ventricle receives
oxygen-rich blood returning from the lungs and pumps it back to the rest of the
body. The chambers of the heart are formed of muscle tissue known as myocardium.
The coronary arteries, a specialized network of blood vessels within the heart,
provide oxygen and other nutrients to the heart itself.

The human heart has four valves that help ensure that blood flows in the
proper direction into and out of the ventricles as they are repeatedly filled
and then discharged with the pumping of blood. The timing and rate at which the
heart beats, referred to as its rhythm, is controlled by electrical impulses in
the conduction system of the heart.

HEART DISEASE

Heart disease has been responsible for more than 700,000 deaths per year in
the U.S. It is the number one cause of death in the U.S., responsible for more
deaths than all forms of cancer combined. Illnesses and deaths from heart
disease create an immense burden to many individuals and their families.
Patients frequently experience extended suffering, and the economic cost is
substantial. While a number of therapies exist for the treatment of patients in
early stages of heart disease, limited therapies exist today for most patients
with severe, end-stage, heart failure.

The majority of deaths from heart disease can be attributed to coronary
heart disease, or CHD, and congestive heart failure, or CHF. Other types of
heart disease include rhythm disorders and diseases of the valves.

CHD is a disease of the coronary arteries causing reduced blood flow and
insufficient oxygen delivery to the affected portion of the heart. CHD can lead
to a heart attack, also known as an acute myocardial infarction, resulting in
permanent damage to the heart muscle. In severe heart attacks, death can occur
suddenly or gradually over days and weeks.

CHF is a condition resulting from the progressive deterioration of the
heart over extended periods of time. The patient's heart cannot provide adequate
blood flow and oxygen to meet the needs of the body. CHF may be initiated and
aggravated by a variety of factors, including high blood pressure, defective
heart valves, CHD, infections of the heart muscle or the valves and heart
problems resulting from heart defects. Due to the progressive nature of CHF,
medical interventions often take place over periods of months or years.

In general, heart failure is progressive. While approximately half of all
heart failure patients experience sudden death as a result of cardiac arrest,
the remaining patients who die from heart failure typically do so in hospitals
or long-term care facilities.

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PREVALENCE AND MORTALITY

The number of patients both suffering and dying from heart disease has been
rising on an annual basis. Statistics indicate that there are over 12 million
people with CHD and over 4 million people with CHF in the U.S., with similar
incidence outside the U.S.

Approximately half of the approximate 700,000 deaths from heart disease in
the US were sudden deaths. Of the deaths that did not occur suddenly, most were
associated with CHD and approximately 10-20% with CHF. Current therapies to
support these patients are inadequate because they cannot stop the progression
of the disease. We believe that a significant number of such CHD and CHF
patients could benefit from our AbioCor and our Penn State Heart.

THERAPIES FOR HEART DISEASE

A broad spectrum of treatment is available for heart failure patients.
Treatments include drug therapies, cardiological interventions, including closed
chest procedures and rhythm management therapies, or surgical corrections, such
as coronary bypass surgery and valve replacement. For patients with end-stage
heart disease, however, these treatments are typically inadequate. Patients with
severe heart disease frequently are in need of heart replacement. Because the
supply of available donor hearts is limited, with fewer than 2,500 per year
available in the U.S., heart assist and replacement treatments have been and
continue to be developed with the goal of extending and improving the lives of
these patients.

DEVICES FOR CIRCULATORY SUPPORT TREATMENTS

Circulatory support treatments can be divided into two categories: (a)
destination therapies, including heart replacement and permanent heart assist
devices, and (b) temporary heart assist devices.

DESTINATION THERAPY. Devices intended to be within or attached to patients for
their remaining lives are classified as destination therapies. Destination
therapy devices consist of replacement hearts and permanent assist devices,
including quality-of-life support devices that provide partial support to the
heart on a permanent basis.

HEART REPLACEMENT. The goal of heart replacement, whether with a donor
heart or a mechanical device, is to replace the failing human heart with a
viable alternative. Patients with irreparably damaged hearts who are facing
imminent death due to CHD or severe CHF are potential candidates for heart
replacement provided that their other vital organs remain viable. The supply of
human donor hearts is currently inadequate to meet the needs of these patients
and no device is yet approved for use in these patients.

We believe that tens of thousands of patients per year, out of more than
100,000 potential patients, might eventually benefit from an implantable
replacement heart once it is proven safe, effective and reliable. The fewer than
2,500 patients saved by heart transplant in the U.S. annually represent a
fraction of those that might be returned to a normal life if a greater supply of
donor hearts or alternative therapy were available. In addition, a significant
portion of heart transplant patients must endure a long waiting period before a
suitable donor heart is identified, if at all. The development of an implantable
mechanical heart could help alleviate this long and difficult wait. No heart
replacement device has yet been approved for commercial use as a destination
device. The AbioCor is the first heart replacement device to commence clinical
trials for this purpose.

PERMANENT HEART ASSIST. Permanent assist devices are being developed to
supplement the function of the diseased heart or to stop or slow the progression
of the disease, while leaving the diseased

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heart in place. These devices contrast with replacement hearts, which are
intended to replace a severely and irreversibly damaged heart. A number of
companies are developing permanent heart assist devices, some of which are in
clinical trials in the U.S. and overseas. Certain of these assist devices are in
advanced stages of clinical testing and pursuing regulatory approval. One
implantable left ventricular assist device has received recommendation from a
FDA Advisory Panel as approvable, subject to certain conditions, but no assist
device has yet been approved in the U.S. for commercial use as a destination
device. Permanent assist devices under development can be grouped into two
categories: those that pump blood directly, known as ventricular assist devices
or VADs, and less invasive devices that are intended to help the heart without
the risk of directly contacting flowing blood. The less invasive devices include
those that wrap around the heart, either to help the heart pump blood or to
inhibit deterioration of the heart by preventing its further enlargement, and
those that attempt to synchronize the actions of the heart ventricles with
electrical impulses. We believe that all types of permanent heart assist devices
potentially may be used to treat certain heart failure patients who are near
death as well as those patients who are not at imminent risk of death but whose
daily activities are significantly restricted due to their weakened hearts.

VADs, the more invasive of the two categories, may prove the most
appropriate permanent heart assist devices for certain end-stage CHF patients.
Implantable VADs are intended primarily for patients with severe left
ventricular failure. We believe that VADs are being primarily developed for CHF
patients and that VADs would not be appropriate for long-term support of a very
large fraction of heart failure patients, including those with massive heart
damage, severe rhythm disorders, blood clots in the ventricles, severe lung
disease, ventricular rupture, chronic right ventricular failure or heart
transplant rejection.

TEMPORARY HEART ASSIST. Candidates for temporary heart assist devices
include patients with severe but potentially reversible heart failure and
patients whose hearts need help pumping blood while they await transplantation
or other therapies. Temporary heart assist devices typically consist of a
specialized pump that is attached to a patient's heart and driven by a console
or powered by an external battery pack. Such devices are intended to be removed
from a patient's body once the patient's heart has had the opportunity to
recover its normal function or the heart is replaced. Temporary heart assist
devices can be grouped into three categories:

BRIDGE-TO-RECOVERY. Bridge-to-recovery devices are used to support patients
with potentially reversible failing hearts. These devices are most frequently
used to support patients whose hearts do not fully restart following open-heart
surgery, and who cannot be weaned off the heart-lung machine. Of the patients
who experience such complications, many thousands die each year whose lives
could potentially be saved with a temporary assist device as a "bridge to
recovery". Bridge-to-recovery devices temporarily assume the pumping function of
the heart, while allowing the heart to rest, heal and recover its normal
function. These devices can also be used for patients who have not undergone
surgery but whose lives are threatened by viral infections that attack the heart
muscle. In addition, bridge-to-recovery devices may prove beneficial to certain
patients who have suffered from a recent heart attack.

BRIDGE-TO-TRANSPLANT. Bridge-to-transplant devices are used to support
patients who have experienced life-threatening heart disease and are awaiting
heart transplantation. We believe that the market for this category of device is
limited by the availability of qualified donor hearts.

STAGING. Staging devices are used to support patients before or during
application of other therapies and to support patients with failing hearts being
transported to other facilities. At present, for reasons of specialized care,
patients are transported between medical centers with the assistance of such
devices under hospital guidelines. In the future, staging devices may be used to
support heart failure patients prior to implantation of a permanent heart assist
device or a heart replacement. These devices

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could help stabilize the patient and provide the medical team with time to
better assess the patient's condition before selecting an appropriate therapy.
In addition, while bridge-to-recovery devices are approved and used today to
assist heart transplant patients when rejection occurs, in the future staging
devices may be used with transplant patients who have rejected their donor heart
and need life support before receiving an implantable replacement heart.

ABIOMED PRODUCTS AND PRODUCTS UNDER DEVELOPMENT

Our current commercial product line is the BVS. Our primary products under
development are the AbioCor system and the Penn State Heart. Each of these
products are systems, or product lines, that consist of various component
products. In addition, we are in the early stages of research and development of
other potential products for heart failure patients.

THE ABIOCOR IMPLANTABLE REPLACEMENT HEART

The AbioCor is a battery-powered totally implantable replacement heart
system. The AbioCor is referred to as totally implantable because it has been
designed to operate primarily on portable external battery power, without wires
or any other material penetrating the patient's skin. The AbioCor is referred to
as a replacement heart because it has been designed for implantation in the
space vacated by the removal of a patient's diseased ventricles, where it will
take over the full pumping function of the heart. The AbioCor is intended for
use as destination therapy by patients with irreparably damaged hearts who are
at risk of imminent death due to CHD or severe CHF but whose other vital organs
remain viable.

In 1988, we began to receive funding for AbioCor development from the
National Heart, Lung and Blood Institute, known as the NHLBI, to support our
development and testing of the AbioCor. We have maintained this support through
the research phase of our AbioCor development program by achieving various
designated milestones. The NHLBI has provided over $20 million of the more than
$80 million that has been invested to date for the development of the AbioCor.

DESIGN OF THE ABIOCOR. The following diagram illustrates the principal
components of the AbioCor.

[GRAPHIC]

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The AbioCor system consists of the following principal components:

- A thoracic unit, or "replacement heart," which includes two artificial
ventricles with their associated valves and a hydraulic pumping
system. The unit weighs approximately two pounds and provides complete
blood circulation to the lungs and the rest of the body. The
ventricles and their associated valves have seamless surfaces made
from our blood-contacting material, Angioflex, and special geometries
with flow patterns designed to reduce the risk of blood cell damage
and blood clots. Our current configuration of the thoracic unit is
sized for patients with relatively large chest cavities. If our
testing of this configuration is successful, we plan to develop
thoracic units of different sizes to fit a larger portion of the
patients who might benefit from a replacement heart.

- A rechargeable internal battery, that is implanted beneath the skin in
the abdomen of AbioCor recipients and allows the AbioCor to operate
without any external power supply for limited periods of time.

- A microprocessor-based internal electronic device, or "controller",
that is implanted beneath the skin in the abdomen of AbioCor
recipients and controls and monitors the thoracic unit and provides
radio communication with an external monitor affording patients and
caregivers the opportunity for real-time information on its operating
status.

- An across-the-skin, or transcutaneous, energy transmission system,
which eliminates the need for wires penetrating the patient's skin and
the inherent associated risks of infection. It transfers the power to
operate the AbioCor system and to recharge the implantable battery
without tethering the patient to an external drive console. This
system includes an internal energy coil that is implanted beneath the
skin and an external coil that is aligned in proximity to the internal
coil but resides outside the skin. The external coil emits power that
is received by the internal coil.

- An external rechargeable battery pack and monitor designed to be worn
by the patient. These components supply primary power to the system,
allow patient mobility, provide system diagnostic information, and
recharge the implanted back-up battery as needed.

The AbioCor design is intended to preserve life and to restore the quality
of a patient's life to an acceptable level. Restoration of the quality of a
patient's life means that the patient should be able to return to a comfortable
lifestyle, free from pain, with good mental acuity and an ability to carry out
everyday activities. Among the quality-of-life features of the AbioCor design
are quiet heart valves, no penetration of the skin, no tethering to a large
external drive console and no need for immuno-suppression therapies. The AbioCor
system is designed for both low maintenance and low patient involvement.
However, during our ongoing initial clinical trial of the first generation
AbioCor, patients have largely remained under sustained medical supervision in
the hospital and have more frequently used a portable monitoring device in lieu
of the patient-carried external battery pack and electronics until such time as
their health has recovered and a greater degree of independence has been
demonstrated. In addition, we are using a conservative anti-coagulation regimen
and imposing greater limits on patient activities until we gain more clinical
experience, especially in the home setting.

We have also created tools and methods intended to make the AbioCor system
easier to implant. These tools include quick-connectors for relatively easy
attachment of the AbioCor to the human anatomy and a virtual surgery software
tool to allow for the simulated implant of the AbioCor into a

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three-dimensional anatomical computerized model of a particular patient prior to
opening that patient's chest.

INITIAL CLINICAL TRIAL. In our initial clinical trial we are seeking to
determine whether the first generation AbioCor can effectively and safely extend
life with acceptable quality of life for patients who are otherwise likely to
die within thirty days and who have no other life-saving option. The results of
this initial fifteen patient trial will allow us to better assess our status
with regard to obtaining regulatory approval to commercially market and sell the
AbioCor for an initial subset of patients in the U.S.

In January 2001, we received FDA permission under an Investigational Device
Exemption (IDE) to begin the initial human clinical trial in five patients.
Under the terms of the IDE, our initial trial consists of a total of fifteen
patients divided into three groups of five each with expansion to each
successive group of five patients if the 60-day experience of patients with the
AbioCor is satisfactory to the FDA. Patients can be included in this initial
clinical trial only if they have bi-ventricular heart failure, are more than
eighteen years old, have a predictably high likelihood of dying within the next
30 days, are unresponsive to maximum existing therapies, are ineligible for
heart transplantation and are sufficiently large physiologically for the AbioCor
to fit and operate adequately. Patients are to be excluded from the clinical
trial if their heart failure has a significant potential of being reversible, if
they are pregnant, have serious psychiatric illness or an inadequate social
support system. Patients may also be excluded if they are suffering from other
serious non-cardiac medical ailments.

In July 2001, doctors at Jewish Hospital in Louisville, Kentucky performed
the world's first implantation of our AbioCor Implantable Replacement Heart. As
of July 15, 2002 seven implantations of the AbioCor had been attempted in
critically ill patients meeting the criteria for the clinical trial. Five of
these implantations were successful with four of the five patients living on
AbioCor support for more than the initial goal of 60 days (i.e. more than twice
their expected life expectancy without the AbioCor), three of the patients
recovered well enough to take excursions outside the hospitals, two of the
patients were discharged from the hospital to intermediate facilities and one of
these was discharged and released to his home. As of July 15, 2002, two of these
patients are alive. One of these two is living comfortably at home with his
family with routine, weekly check-up visits at the hospital. He has been
supported by the AbioCor for over ten months (implanted on September 13, 2001).
The second of these two patients has been readmitted to the hospital and is
being treated for a recurring respiratory condition. He has been supported for
over eight months (implanted on November 5, 2001).

In November 2001, under the terms of the FDA approval for the trial, we
were allowed to proceed with the second group of five patients. We also have
been preparing to commence clinical testing of the AbioCor in a few selected
clinical sites in Europe. We are focusing on learning as much as possible from
the experience of each patient to benefit successive patients. Considerable
amounts have been learned about the implant of the AbioCor and the subsequent
care of these patients. We are also ensuring that prospective patients are well
informed about the risks of the clinical trial. This process has contributed to
all of the patients thus far enrolled in the trial being patients with various
forms of CHF as opposed to patients dying from more acute events such CHD.
Although pre-existing non-cardiac conditions have made the care of these
patients more challenging and their hospital stays longer, the AbioCor's ability
to provide normal bi-ventricular blood circulation appears to have helped
alleviate some of these conditions in some of these patients.

While we do not yet have a sufficient number of patients to draw
statistically meaningful conclusions, we are very encouraged by the early
results of the AbioCor clinical trial. As of July 15, 2002, the duration of
support for the five patients supported by the AbioCor have ranged from 56 to
305 days, including 305 and 242 days for the two patients who remain alive on
AbioCor support. In a cumulative total of approximately 2.4 patient-years of
support, the mechanical operation of the AbioCor system has

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been highly reliable, providing appropriate circulatory support without any
clinically significant malfunction. All of the patients supported by the AbioCor
have lived beyond what would otherwise have been predicted, and the majority
have made reference to improved quality of life despite ups and downs during
their post-operative recovery course. None of the patients experienced
device-related infection or sepsis. Three patients have experienced strokes of
uncertain origin. Two of these strokes were serious and one was relatively minor
that led to recovery. Among the potential causes of those strokes could be: (1)
contact of atrial tissue with a structural element on the surgical cuff used to
surgically attach the patients' atria to the AbioCor, (2) the inability to
maintain target anticoagulation regimens in some of these patients because of
their severely compromised pre-operative status or a combination of the two.
Both of these potential issues are being addressed to help mitigate the
likelihood of stroke for future patients. Post-mortem examination of the AbioCor
thoracic units explanted from the three deceased patients that had been
supported with the AbioCor did not exhibit evidence of clinically significant
thrombus formation within the device itself, suggesting, we believe, that the
blood pumps have performed as designed and were likely not contributing factors
for those patients who experienced strokes.

Success of the initial clinical trial will be evaluated based upon periodic
review of the survival of AbioCor patients and their quality of life as measured
by a variety of assessment criteria. As we gain clinical experience with the
most seriously ill patients and demonstrate clinical efficacy and safety, we
expect to enhance the performance range, durability and reliability of AbioCor
systems and plan to seek regulatory approval for current and subsequent
generations of the AbioCor for use in imminently dying patients and in
increasingly broad patient populations and with longer intended durations. Such
regulatory approval will likely require clinical data and trials beyond this
initial trial. This regulatory plan is consistent with our experience with the
BVS system.

While the AbioCor is designed as a permanent replacement for the failing
heart, the AbioCor today is a first generation device that will likely require
improvement over time to incorporate feedback from its clinical use. The
patients that will be initially treated with the AbioCor will be relatively
large framed adults who are near death and for whom the AbioCor represents the
only potential viable alternative to death. We have tested the AbioCor
extensively. The results of such testing were part of our IDE submission to the
FDA from which we gained permission to commence initial clinical trials. We
believe that for patients ill enough to qualify for the initial clinical trial,
the first generation AbioCor presents the best alternative to potentially extend
their lives and to provide them with an acceptable quality of life. However, we
understand that this patient category represents only a fraction of the
potential patients who might benefit annually from the AbioCor. Our clinical and
regulatory strategy of continuing to improve the AbioCor based on clinical
experience is intended to allow us to demonstrate that the AbioCor can provide
patients with a reasonable quality of life for sustained periods of time. We
believe that demonstration of this capability is needed for eventual use of the
product in end-stage heart failure patients who are not as ill as is required to
qualify for our initial clinical trial.

COST EFFECTIVENESS. We are developing the AbioCor with the intent to eventually
offer a cost-effective treatment for end-stage heart failure patients. In
addition, the AbioCor has the potential to allow patients an opportunity to
return to productive lives. This would allow the medical system to save money by
discharging the patient from the hospital and allowing the person to become
productive and lead a reasonably normal life.

If the safety, effectiveness and durability of the AbioCor are clinically
demonstrated for multiple-year durations, it has the potential to be less
expensive than heart transplantation over a five-year period. One reason for
this reduced cost is that recipients of a mechanical replacement heart are not
expected to need immuno-suppression drugs. The blood and tissue contacting
portions of the AbioCor are constructed of inert materials, which are not
expected to elicit a response from a patient's immune system. Other cost savings
could result because the patients can receive a replacement heart sooner and
would not

10

require extensive tests and biopsies to assess donor heart compatibility. While
recipients of the AbioCor will need to purchase new batteries periodically, we
anticipate that the annual comparative cost of battery purchases will be
significantly less than the cost of immuno-suppression drugs required by donor
heart recipients.

While developing the AbioCor, we introduced the BVS, a temporary
heart-assist device, which is currently being sold in the U.S. and international
markets. Certain key elements of the technology developed for the AbioCor,
especially the blood contacting material, Angioflex, have been clinically tested
in the BVS and are currently in commercial use. In addition, the BVS has enabled
us to develop significant experience in areas such as research and development,
manufacturing, regulatory compliance, clinical support and sales and marketing.
We believe our experience with the BVS in these areas will provide us with a
competitive advantage in commercializing the AbioCor.

THE BVS 5000 TEMPORARY HEART ASSIST DEVICE

The BVS was the first heart assist device capable of assuming the full
pumping function of the heart to be approved by the FDA, and is the most widely
used heart assist device today, with thousands of patients supported to date. It
is a bridge-to-recovery device designed to provide a patient's failing heart
with full circulatory assistance while allowing the heart to rest, heal and
recover its function. The BVS can support the left, right or both ventricles of
the heart. The average age of patients supported with the BVS is 53, however the
BVS has been used to support patients as young as 8 and as old as 86 years old.

The BVS is the only device that the FDA has approved for the temporary
treatment of all categories of patients with failing but potentially recoverable
hearts. The BVS is most frequently used in patients whose hearts fail to recover
function immediately following heart surgery. The FDA approved the BVS through
its rigorous pre-market approval process for use with these post-surgical
patients in November 1992. In 1996, the FDA approved use of the BVS for all
other categories of post-surgical patients with potentially reversible heart
failure. In 1997, the FDA approved use of the BVS on patients who, prior to BVS
insertion, are non-surgical patients with abrupt heart failure as a result of
viral attack of the heart or certain heart attacks, expanding its use to the
temporary treatment of all patients with potentially reversible heart failure.
We market and sell the BVS system in Europe under a CE mark and in 2001 we
received regulatory approval to market and sell the BVS in Japan.

The following diagram illustrates the principal components of the BVS.

[GRAPHIC]

11

The BVS system consists of the following components:

- Single-use external blood pumps, which provide pumping of blood for
the left, right or both sides of a patient's heart and are designed to
emulate the function of the natural heart;

- Cannulae, which are specially designed tubes used to connect the blood
pumps to a patient's heart; and

- A computer-controlled pneumatic drive and control console, which
automatically adjusts the pumping rate to meet the basic needs of the
patient.

The integration of the cannulae, blood pumps and console creates an "external
heart" system with the ability to reduce the load on the heart, provide
pulsatile blood flow to vital organs and allow the heart muscles time to rest
and recover. The BVS is designed to be easy to use and does not require a
specially trained technician constantly to monitor or adjust the pumping
parameters.

The BVS is designed to facilitate the recovery of patients' hearts as
quickly as possible. Patients who recover under BVS support typically stabilize
in a period of less than one week. It generally takes three to five days for the
damaged but recoverable heart muscle to restore its function in a
post-cardiotomy patient. While the BVS has been used to support some patients
for weeks or months, the BVS is not intended nor approved for long-term use. The
BVS, although it is an external VAD, serves a different function than
bridge-to-transplant devices, which are intended for long-term use by patients
awaiting a heart transplant.

The BVS is most frequently used to support patients who have undergone
open-heart surgery, when the heart cannot be successfully restarted and weaned
off the heart-lung machine used in surgery. The BVS can assume the full pumping
function of the heart for these patients while reducing certain risks associated
with extended support on the heart-lung machine, including bleeding, strokes and
blood cell damage. The traditional therapy for these patients has been the
combined use of drugs and intra-aortic balloon pumps. Intra-aortic balloon pumps
are capable of providing limited enhancement to the pumping function of a
failing heart. Despite the availability of such therapy, many thousands of these
patients die each year.

Other categories of patients who can be supported by the BVS include those
suffering from viral myocarditis, a viral infection of the heart. For these
patients, the BVS assumes the full pumping function of the heart, allowing the
patient's immune system to defend against the virus. Other uses of the BVS
include supporting patients following failed heart transplants and supporting
the right ventricle of a patient's heart in conjunction with the implantation of
a device to assist the left ventricle. The BVS is typically used when the
patient's chances for survival are small. We are also exploring other potential
applications of the BVS, including its use as a staging device to support heart
failure patients prior to a permanent heart assist device or heart replacement.

Any hospital performing open-chest heart surgery may use the BVS. There are
approximately 900 of these hospitals in the U.S. and more than 1,000 such
hospitals outside the U.S. As of March 31, 2002, more than 500 medical centers
in the U.S. had purchased the BVS, including 70% of the major U.S. centers that
perform more than 500 heart surgeries annually. In marketing the BVS, we are
focusing on

12

selling additional consoles and disposable blood pumps to existing customers
with significant but less emphasis on adding new customers. Approximately 70% of
current BVS revenues are derived from sales of BVS single-use blood pumps to
existing customers. Our U.S. list prices for the BVS system are $12,400 for a
BVS single-use blood pump and cannulae set and $64,500 for a BVS console.

Since the BVS received its initial FDA approval, we have made various
improvements to the BVS system, primarily to make it easier to use. We continue
to enhance the BVS product line and are developing improved blood pumps,
cannulae and consoles. In May 2000, we received pre-market supplemental approval
from the FDA to begin selling our BVS 5000t Transport/Backup console. This new
console allows for transport of a patient by ambulance or aircraft between
hospitals as necessary in order to expand patient care. We believe this and
other pending improvements may permit use of the BVS for additional patient
conditions.

THE PENN STATE HEART

The Penn State Heart, like the AbioCor, is a battery-powered totally
implantable replacement heart system intended for use as destination therapy by
patients with irreparably damaged hearts who are at risk of imminent death due
to CHD or severe CHF but whose other vital organs remain viable. We acquired the
technology rights to the Penn State Heart in 2000, subject to reversion to The
Pennsylvania State University on or before September 2003 if we do not make a
reasonable effort to commercialize this technology. Similar to the AbioCor, the
development of the Penn State Heart was supported by significant funding from
the NHLBI. The AbioCor and the Penn State Heart were the only two replacement
heart programs that achieved the technological progress needed to qualify for
the final pre-clinical rounds of funding from the NHLBI. The Penn State Heart is
currently in an advanced stage of pre-clinical development. We are developing
this device in collaboration with the scientific team at The Pennsylvania State
University.

The Penn State Heart, like the AbioCor, consists of various subsystems
including a thoracic unit, rechargeable implantable battery,
microprocessor-based implantable electronic device, transcutaneous energy
transmission system and external rechargeable battery pack and monitor. The key
differentiation between the current design of the AbioCor and the Penn State
Heart is in the thoracic unit. In areas other than the thoracic unit, effort has
been made to utilize AbioCor subsystems where possible. The pumping mechanism in
the Penn State Heart's thoracic unit consists of two artificial ventricles but
is constructed and actuated differently than in the AbioCor. We believe that the
Penn State Heart and the AbioCor each has its unique advantages. The combination
strengthens ABIOMED's position to continue to lead in the introduction of heart
replacement technologies. It is our intention to continue to develop the Penn
State Heart in an effort to determine which device is more suitable for the
different classes of end-stage heart failure patients in need of heart
replacement. We may find that each is best for certain subsets of patients or
that certain features of the two technologies should be combined to produce a
better device.

OTHER PRODUCTS AND TECHNOLOGIES UNDER DEVELOPMENT

We are using the technology and know-how derived from the AbioCor and the
BVS in the research and development of other potential cardiovascular products.
We are also using our experience and commitment to this field to evaluate
potential collaborative arrangements relating to third-party technologies and
products.

Other new technologies are in various stages of research, development or
evaluation, and include passive and active heart wraps as well as specialized
implantable and external heart assist devices. In addition, research and
development activities under our product development programs incorporate
certain technologies that have potential as separate spin-off products. Examples
include implantable

13

monitoring systems with remote transmission capability software for virtual
surgery, non-invasive power transmission systems, and external monitoring
systems.

RESEARCH AND PRODUCT DEVELOPMENT

As of March 31, 2002, our research and development staff consisted of 166
professional and technical personnel, including 13 with PhDs, and 48 engineers,
many with advanced degrees, covering disciplines such as electronics, mechanics,
software, reliability engineering, fluid mechanics, physics, materials and
physiology. Included among the 166 employees are 52 employees engaged in the
pilot manufacturing and quality testing of AbioCor systems. All of the AbioCor
systems manufactured are being used for our ongoing initial clinical trial,
testing and other investigational purposes. None of the AbioCor systems
manufactured are available currently nor approved for commercial sale.

Our research and development efforts are focused on mechanical heart assist
and heart replacement, and the continued enhancement of the BVS and related
technologies. Interaction continues with the FDA and corresponding foreign
regulatory agencies to obtain the necessary clearances and approvals for our
products. Sophisticated but established tools, such as three-dimensional
computer-aided design systems are used to permit smooth transition of new
designs from research to product development and into manufacturing. We have
substantial expertise in electro-mechanical systems, cardiac physiology and
experimental surgery, blood-material interactions, fluid mechanics and
hemodynamics, internal and external electronic hardware, battery technology,
software, plastics processing, lasers, and optical physics. Our expertise has
been primarily focused on addressing challenges associated with the safe and
effective pumping of blood.

We expended $15.6, $28.7 and $27.4 million on research and development in
fiscal 2000, 2001 and 2002, respectively. These amounts included $11.5, $16.6
and $21.2 million, respectively, for AbioCor development and testing and $6.3
million in fiscal 2001 for the Company's acquisition of technology and marketing
rights to the Penn State Heart. Since our inception, U.S. government agencies,
particularly the NHLBI, have provided significant support to our product
development efforts when such products are in their early stages of research and
development. As of March 31, 2002, our total backlog of research and development
contracts and grants was $0.7 million. All of these contracts and grants contain
provisions making them terminable at the convenience of the government.

SALES, CLINICAL SUPPORT, MARKETING AND FIELD SERVICE

We believe that the sales, clinical support, marketing and field service
teams established for the BVS product line and the relationships developed with
existing customers will be instrumental not only in continuing to expand BVS
usage and sales, but also in launching new products such as the AbioCor and the
Penn State Heart.

The BVS is sold in the U.S. through direct sales and clinical support
teams. As of March 31, 2002, our worldwide BVS sales, clinical support,
marketing and field service teams included 47 full-time employees. Our sales
force primarily focuses on increasing sales from expanded usage of BVS
disposable blood pumps by our large installed base of customers as well as from
initial and upgrade sales to new and existing customers. Our clinical support
group focuses on training and educating new and existing customers in order to
help improve clinical outcomes. We believe that the efforts of our clinical
support group contribute significantly to the number of lives saved by
physicians using the BVS. This in turn promotes usage and reorders of BVS
single-use blood pumps. Approximately 70% of BVS revenues in fiscal 2002 were
derived from sales of BVS single-use blood pumps to existing customers. We
believe that the reputation and customer relationships of our sales and support
teams will be key assets for the

14

introduction of future products such as the AbioCor, the Penn State Heart and
BVS product extensions and other products under development.

Building on our experience in the U.S., we have expanded our international
sales efforts, both for the BVS and in preparation for the AbioCor. Our
international BVS product sales increased by $1.3 million, or 188%, during the
fiscal year ended March 31, 2002. In October 2001 we received approval from the
Japanese Ministry of Health, Labor and Welfare to market and sell the BVS system
in Japan. We conduct our international sales efforts through distributors and by
selling directly in selected European markets through ABIOMED B.V., our
wholly-owned subsidiary located in The Netherlands.

MANUFACTURING

We have over 10 years of experience in the manufacture of the BVS console,
BVS blood pumps, certain cannulae and related accessories. As of March 31, 2002,
our BVS manufacturing and quality assurance team consisted of 47 people. The
manufacture of our BVS blood pumps and consoles includes assembly, testing and
quality control. Key blood-contacting components for the BVS blood pumps,
including valves and bladders are manufactured from our proprietary Angioflex
polymer. We purchase a majority of the raw materials, parts and peripheral
components used in the BVS consoles. Depending on the size and design of the
cannulae, they are either purchased or manufactured by us.

As of March 31, 2002, 52 people in our research and development group were
engaged in AbioCor pilot manufacturing, process improvement and related quality
assurance. The production of the AbioCor is based on some processes that are
similar to the processes used for the BVS. We produce the majority of the
AbioCor blood contacting components in our facility and all such components are
assembled in-house. A majority of the metallic mechanical parts, electronic
components and batteries used to produce the AbioCor are purchased. We contract
with third parties to manufacture certain of the electronic systems used in the
AbioCor and we are increasingly moving such manufacturing to third parties.

In 2000, we moved our AbioCor pilot manufacturing to a new facility that
includes a state-of-the-art cleanroom area dedicated to AbioCor production. We
also moved our BVS console manufacturing to a dedicated area in this new
facility in 2000. In 2001, we completed moving all of our manufacturing
operations to this new facility, including moving our BVS blood pump and
cannulae manufacturing operations to a new state-of-the-art cleanroom
manufacturing area. We believe this new facility gives us the physical capacity
to produce sufficient quantities of AbioCor systems throughout the period of our
clinical trials as well as produce sufficient quantities of BVS disposable blood
pumps and cannulae to meet market demand for the foreseeable future. Our BVS
manufacturing area is ISO 9001 certified and operates under the FDA's current
Quality Systems Regulations and Good Manufacturing Practices, known as QSR/GMP.
Our AbioCor manufacturing areas are ISO 9001 certified and we are taking steps
towards ensuring that our AbioCor manufacturing area is QSR/GMP compliant for
purposes of eventual commercial distribution of AbioCor, subject to regulatory
approvals.

PROPRIETARY RIGHTS, PATENTS AND KNOW-HOW

We have developed significant know-how and proprietary technology, upon
which our business depends. To protect our know-how and proprietary technology,
we rely on trade secret laws, patents, copyrights, trademarks, and
confidentiality agreements and contracts. However, these methods afford only
limited protection. Others may independently develop substantially equivalent
proprietary information, gain access to our trade secrets or disclose such
technology without our approval.

15

A substantial portion of our intellectual property rights relating to the
AbioCor, the Penn State Heart and the BVS is in the form of trade secrets,
rather than patents. We protect our trade secrets and proprietary knowledge in
part through confidentiality agreements with employees, consultants and other
parties. We cannot assure that our trade secrets will not become known to or be
independently developed by our competitors.

As of July 15, 2002, we own 42 U.S. issued patents, including 12 related to
the AbioCor, 5 related to the Penn State Heart, and 2 related to the BVS. We
also own a number of corresponding patents in a limited number of foreign
countries. Our patents may not provide us with competitive advantages. They may
also be challenged by third parties. Our pending or future patent applications
may not be approved. The patents of others may render our patents obsolete or
otherwise have an adverse effect on our ability to conduct business. Because
foreign patents may afford less protection than U.S. patents, they may not
adequately protect our proprietary information.

The medical device industry is characterized by a large number of patents
and by frequent and substantial intellectual property litigation. Our products
and technologies could infringe on the proprietary rights of third parties. If
third parties successfully assert infringement or other claims against us, we
may not be able to sell our products. In addition, patent or intellectual
property disputes or litigation may be costly, result in product development
delays, or divert the efforts and attention of our management and technical
personnel. If any such disputes or litigation arise, we may seek to enter into a
royalty or licensing arrangement. However, such an arrangement may not be
available on commercially acceptable terms, if at all. We may decide, in the
alternative, to litigate the claims or to design around the patented or
otherwise proprietary technology.

The government may obtain certain rights to use or disclose technical data
developed under government contracts that supported the development of some of
our products. We retain the right to obtain patents on any inventions developed
under those contracts (subject to a non-exclusive, non-transferable,
royalty-free license to the government), provided we follow prescribed
procedures.

COMPETITION

Competition among providers of treatments for the failing heart is intense
and subject to rapid technological change and evolving industry requirements and
standards. Many of the companies developing or marketing cardiovascular products
have substantially greater or broader financial, product development, sales and
marketing resources and experience than ABIOMED. These competitors may develop
superior products or products of similar quality at the same or lower prices.
Moreover, improvements in current or new technologies may make them technically
equivalent or superior to our products in addition to providing cost or other
advantages. Other advances in medical technology, biotechnology and
pharmaceuticals may reduce the size of the potential markets for our products or
render those products obsolete.

No implantable replacement heart is commercially available today. We are
aware of other heart replacement device development efforts in the U.S., Canada,
Europe and Japan but are not aware of any plans for any other totally
implantable replacement heart to commence clinical trials in the U.S. or
anywhere in the world. We believe that if and when other implantable replacement
hearts are available, our AbioCor and Penn State Heart will compete with them
based on quality-of-life advantages, cost effectiveness, device reliability,
clinical support and customer relationships.

In addition to the developers of implantable replacement hearts, there are
a number of companies, including Arrow International, Thoratec Corporation and
World Heart Corporation which are developing permanent heart assist products,
including implantable LVADs and miniaturized rotary ventricular assist

16

devices, that may address markets that overlap with certain segments of the
markets targeted by AbioCor, the BVS and the Penn State Heart. AbioCor and the
Penn State Heart may compete with those devices for some patient groups, notably
patients with severe CHF due to predominant left ventricular heart failure. We
believe that implantable replacement hearts, LVADs and other VADs, if developed
and proven effective for destination therapy, will generally be used to address
the needs of different patient populations, with an overlap for certain segments
of the heart failure population. We believe that there is a need for both
implantable LVADs and implantable replacement hearts as destination therapies,
and that when both technologies demonstrate the required reliability, surgeons
will favor implantable replacement hearts for most CHD patients and a
significant fraction of CHF patients.

In addition to devices being developed for patients in need of heart
replacement, several companies and institutions have been for many years
investigating xenotransplantation, the transplantation of a heart from another
species, as a potential therapy. Most notably, some developers are investigating
the use of genetically engineered pig hearts as an alternative source of donor
hearts. This technology remains in its formative stage and subject to a number
of significant scientific challenges, including controlling elevated immunologic
reactions leading to heightened rejection problems between cross-species
grafting and concerns for cross-species disease transmission to the recipient
and the public at large. We believe that this technology will not achieve
practical application for heart replacement for decades, if ever.

The BVS is a device that can assume the full pumping function of the heart.
The FDA has approved the BVS as a bridge-to-recovery device for the treatment of
all patients with potentially reversible heart failure. The BVS competes with a
temporary cardiac assist device from Thoratec Corporation, which is also capable
of assuming the full pumping function of the heart and is today approved for
post-cardiotomy support. The Thoratec device was originally approved for
bridge-to-transplant and bridge-to-transplant continues to be the primary use of
the device. In addition, the BVS competes with blood pumps, such as intra-aortic
balloon pumps and centrifugal pumps, that are used in medical centers for a
variety of applications but which are limited to providing partial pumping
support of failing hearts, are non-pulsatile, or are not recommended for the
duration of support generally required for bridge-to-recovery. We are not aware
of any other company that has applied for FDA approval of a device that is
directly competitive with the BVS. Approval by the FDA of products that compete
directly with the BVS could increase competitive pricing and other pressures. We
believe that we can compete with such products based on cost, clinical utility
and customer relations.

Our customers frequently have limited budgets. As a result, our products
compete against a broad range of medical devices and other therapies for these
limited funds. Our success will depend in large part upon our ability to enhance
our existing products, to develop new products to meet regulatory and customer
requirements, and to achieve market acceptance. We believe that important
competitive factors with respect to the development and commercialization of our
products include the relative speed with which we can develop products,
establish clinical utility, complete clinical trials and regulatory approval
processes, obtain reimbursement, and supply commercial quantities of the product
to the market.

THIRD-PARTY REIMBURSEMENT

We sell our BVS product and intend to sell most of our potential products
under development to medical institutions. Medical institutions and their
physicians typically seek reimbursement for the use of these products from
third-party payers, including Medicare, Medicaid, and private health insurers
and managed care organizations. As a result, market acceptance of our current
and proposed products may depend in large part on the extent to which
reimbursement is available to medical institutions and physicians for use of our
products.

17

Coverage and the level of payment provided by U.S. and foreign third-party
payers varies according to a number of factors, including the medical procedure,
payer, location, outcome and cost. In the U.S., many private health care
insurance carriers follow the recommendations of the Centers for Medicare and
Medicaid Services (CMS), which establishes guidelines for the coverage of
procedures, services and medical equipment and the payment of health care
providers treating Medicare patients. Internationally, healthcare reimbursement
systems vary significantly. In certain countries, medical center budgets are
fixed regardless of levels of patient treatment. In other countries, such as
Japan, reimbursement from government or third party payers must be applied for
and approved. As of the date of this report, the amount that Medicare generally
pays a medical institution for in-patient care of Medicare patients is based on
a number of considerations, including a patient's diagnosis regardless of the
services that are provided. Physicians however bill separately for the
procedures that they perform. Medicare does not currently reimburse medical
institutions for the incremental cost of using the BVS. Certain private health
insurers and managed care providers provide incremental reimbursement to both
the medical institutions and their physicians.

The U. S. Department of Health and Human Services has proposed, among other
potential changes to the Medicare Hospital Inpatient Prospective Payment System
published as a Notice of Proposed Rulemaking in the Federal Register on May 9,
2002, creation of a new Diagnosis Related Group (DRG) for hospital discharges
involving implantation of external or implantable advanced mechanical cardiac
assist devices. If this proposal, which is subject to public comment and
administrative review, is incorporated as proposed into the Final Rule effective
October 1, 2002, Medicare program reimbursement to hospitals for patient cases
involving the BVS would be increased by approximately 40% over the current
level.

No reimbursement levels have been established for our products under
development, including the AbioCor. Prior to approving coverage for new medical
devices, most third-party payers require evidence that the product has received
FDA approval, European Union approval, or clearance for marketing, is safe and
effective and not experimental or investigational, and is medically necessary
and appropriate for the specific patient for whom the product is being used.
Increasing numbers of third-party payers require evidence that the procedures in
which the products are used, as well as the products themselves, are
cost-effective. Heart transplantation currently qualifies for reimbursement, as
does bridge-to-transplant treatment with implantable VADs. Comparatively, we
believe that when the AbioCor product reaches maturity, it should cost less over
a five-year period than heart transplantation today. We believe that these
factors should benefit the AbioCor when our customers begin to seek
reimbursement for it from third-party payers. However, we cannot assure that the
AbioCor or our other products under development will meet the criteria for
coverage and reimbursement or that third-party payers will reimburse physicians
and medical institutions at levels sufficient to encourage the widespread use of
the products. If the AbioCor receives such coverage, it will likely be
reimbursed as an implantable prosthetic device, with payments subject to rules
and limitation specific to such devices.

GOVERNMENT REGULATION

Clinical trials, manufacture and sale of our products and products under
development, including the BVS, AbioCor and Penn State Heart are, or will be,
subject to regulation by the FDA and corresponding state and foreign regulatory
agencies. Noncompliance with applicable regulatory requirements can result in,
among other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, refusal of the government
to grant marketing approval for devices, withdrawal of marketing approvals, 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
ABIOMED.

18

U.S. CLINICAL USE REGULATIONS. The BVS is classified as a Class III medical
device under FDA rules, as will be the AbioCor and the Penn State Heart. In the
U.S., medical devices are classified into one of three classes (i.e., Class I,
II or III) based on the controls deemed necessary by the FDA to reasonably
ensure their safety and effectiveness. Class III medical devices are subject to
the most rigorous regulation. Class III devices, which are typically
life-sustaining, life-supporting or implantable devices, or new devices that
have been found not to be substantially equivalent to legally marketed devices,
must generally receive pre-market approval by the FDA to ensure their safety and
effectiveness. Class III devices are also subject to some of the requirements
applicable to Class I and Class II devices, including general controls, such as
labeling, pre-market notification, performance standards, post-market
surveillance, patient registries and adherence to QSR/GMP requirements, which
include testing, control and documentation requirements.

A PMA application must be filed if a proposed device is a Class III device
for which the FDA has required PMAs in order to obtain permission to market and
sell the device in the U.S. for a particular indication (patient issue). A PMA
application must be supported by valid scientific evidence, which typically
includes extensive information including relevant bench tests, laboratory and
animal studies and clinical trial data to demonstrate the safety and
effectiveness of the device. The PMA application also must contain a complete
description of the device and its components, a detailed description of the
methods, facilities and controls used to manufacture the device, and the
proposed labeling, advertising literature and training materials. By regulation,
the FDA has 180 days to review the PMA application, and during that time an
advisory committee may evaluate the application and provide recommendations to
the FDA. Advisory committee reviews often occur over a significantly protracted
period, and a number of devices for which FDA approval has been sought have
never been cleared for marketing. In addition, modifications to a device that is
the subject of an approved PMA, or to its labeling or manufacturing process, may
require the submission of PMA supplements or new PMAs and approval by the FDA.
On an exception basis, the FDA also provides that certain devices can be
distributed for humanitarian purposes prior to gaining PMA approval. FDA
approval of a humanitarian device exemption is not broadly available and
requires that no other available therapy exists for such indication and that
adequate data be available to support that the therapy is reasonably safe,
though arguably less data than for a PMA.

If clinical trials of a device are required in order to obtain FDA
approval, the sponsor of the trial will have to file an Investigational Device
Exemption, known as an IDE, application prior to commencing clinical trials. The
IDE application must be supported by data, which typically include the results
of animal testing performed in conformance with Good Laboratory Practices and
formal laboratory testing and documentation in accordance with appropriate
design controls and scientific justification. If the FDA approves the IDE
application, and the institutional review boards or IRBs at the institutions at
which the clinical trials will be performed approve the clinical protocol and
related materials, clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA. Sponsors of clinical trials are permitted to charge for investigational
devices distributed in the course of the study provided that 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 investigator may make a change to the investigational plan that may
affect its scientific soundness or the rights, safety or welfare of human
subjects.

In November 1992, the FDA approved our PMA for the BVS. In 1996 and 1997,
the FDA approved the use of the BVS for additional indications, expanding its
use to the treatment of all patients with potentially reversible heart failure.
In May 1998, we received notice from the FDA that the BVS had successfully
concluded a required post-market surveillance study. The primary purpose of this
post-market surveillance study was to provide a warning system to alert the
health care community to any potential problems with a device within a
reasonable time of the initial marketing of the device. Post-

19

market surveillance provides clinical monitoring of the experiences with a
device once it is distributed in the general population under actual conditions
of use.

The AbioCor is classified as a Class III device and therefore is subject to
the IDE and PMA processes and QSR/GMP requirements. In January 2001, the FDA
granted an IDE providing us with regulatory permission to commence the initial
clinical trial of the AbioCor. The initial clinical trial, which began on July
3, 2001, when doctors at Jewish Hospital in Louisville, Kentucky, performed the
world's first implantation of our AbioCor Implantable Replacement Heart, is
subject to periodic review and to the readiness of each collaborating medical
center, including training of its surgical and post-operative care teams and
approval of the clinical trial protocol by the hospital's internal review board.
Our clinical trial is being undertaken with patients who, despite all available
therapies, have an extremely high probability of death within thirty days due to
heart failure.

We anticipate seeking initial FDA approval of the AbioCor for a limited
category of indications and patients, and subsequent approval for additional
indications and patient populations. After the initial regulatory approval, we
will need to complete additional clinical testing and request supplemental
approvals for additional indications and broader marketing claims. If we obtain
approval of the AbioCor in this manner, the FDA may initially impose
restrictions on use of the AbioCor. Nevertheless, we believe that this phased
approach will permit us to obtain initial marketing approval for the AbioCor
more quickly than if we were to seek a broader approval from the outset.

U.S. MANUFACTURING AND SALES REGULATION. Any devices, including the BVS,
which we manufacture or distribute pursuant to FDA clearances or approvals, are
subject to continuing regulation by the FDA and other regulatory authorities.
Manufacturers of medical devices for marketing in the U.S. are required to
adhere to QSR/GMP requirements and must also comply with Medical Devices
Reporting, or MDR, which requires that a firm report to the FDA any incident in
which its product may have caused or contributed to a death or serious injury,
or in which its product malfunctioned and, if the malfunction were to recur, it
would be likely to cause or contribute to a death or serious injury. Labeling
and promotional activities are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission. Current FDA enforcement policy
prohibits the marketing of approved medical devices for unapproved uses. We are
subject to routine inspection by the FDA and other regulatory authorities for
compliance with QSR/GMP and MDR requirements, as well as other applicable
regulations.

INTERNATIONAL REGULATION. We are also subject to regulation in each of the
foreign countries in which we sell our products. Many of the regulations
applicable to our products in these counties are similar to those of the FDA. We
have obtained the requisite foreign regulatory approvals for sale of the BVS in
many foreign countries, including most of Western Europe. We believe that
foreign regulations relating to the manufacture and sale of medical devices are
becoming more stringent. The European Union adopted regulations requiring that
medical devices such as the BVS comply with the Medical Devices Directive, which
includes ISO-9001 and CE certification. In 1998, we received ISO-9001 and CE
certification for the BVS. In 2001 we received ISO-9001 certification for the
AbioCor. Many manufacturers of medical devices, including ABIOMED, have often
relied on foreign markets for the initial commercial introduction of their
products. However, an evolving foreign regulatory environment could make it more
difficult, costly and time consuming for us to pursue this strategy for new
products. In the European Union, implantable devices, such as the AbioCor, must
comply with the Active Implantable Medical Devices Directive, known as AIMDD, in
order to obtain CE certification. We are working toward CE certification of the
AbioCor. Delays in obtaining this certifications for the AbioCor or other
products under development on a timely basis could delay commercial sales of the
products in the European Union.

20

EMPLOYEES

As of June 30, 2002, we had 295 full-time employees, including:

- 152 in research and development (including 52 people engaged in
AbioCor pilot manufacturing);

- 45 in sales, clinical support, marketing and field service; and

- 60 in BVS manufacturing and quality assurance.

Our remaining employees work in a variety of areas, including information
technology, human resources, accounting, facilities, corporate development and
management. We have entered into contractual agreements with all of our
employees, which include confidentiality and non-competition commitments by each
and every employee at all levels. None of our employees is represented by a
union. We consider our employee relations to be good.

EXECUTIVE OFFICERS OF THE REGISTRANT

The senior management of the Company consists of the following:

DR. DAVID M. LEDERMAN founded ABIOMED in 1981, and has served as Chairman
of the Board and Chief Executive Officer since that time. He has also served as
President of ABIOMED for the majority of time. He was Chairman of the Medical
Research Group at the Everett Subsidiary of Avco Corporation, which he joined in
1972. Dr. Lederman conceived and originated the BVS development program and the
design and development of the ventricles and valves that are integral to the
AbioCor implantable replacement heart. He holds various degrees in Physics and
Engineering, including a Ph.D. degree in Aerospace Engineering from Cornell
University.

MR. ANTHONY W. BAILEY has served ABIOMED since 1997, and has been Vice
President, Business Development since 2000 prior to which he was Vice President,
Engineering. From 1987 to 1997, he was Vice President and General Manager for
Pace Medical, Inc. and from 1982 to 1987, was Manager of

21

Design and Development at Shiley Infusaid, Inc. Prior to that, Mr. Bailey served
in various engineering functions with manufacturers of implantable pacemakers,
data acquisition and control systems and medical monitoring systems. Mr. Bailey
received his Bachelor's degree in Electrical Engineering from the University of
Lowell.

DR. EDWARD E. BERGER has served ABIOMED since 2001. He has been Vice
President Strategic Planning and Policy since 2001, having initially joined
ABIOMED as Vice President, Government and External Relations. From 2000 to 2001
he was Senior Consultant for Reimbursement Strategy at Thermo Cardiosystems,
Inc. From 1998 to 1999 he was Senior Consultant for Public Policy and Regulatory
Affairs for Navix Radiology Services, Inc. From 1983 to 1997 he held various
positions for Fresenius Medical Care, including Vice President and Director of
Government Relations. Prior to 1983, he held various positions, including as a
consultant on healthcare and social service issues for a public health group and
Assistant Professor at Boston University. Dr. Berger received his Ph.D. degree
in Political Science from Boston University.

MR. WILLIAM J. BOLT has served ABIOMED since 1982 and, has been Senior Vice
President, Product Development since August 2000. He is currently responsible
for Product Engineering, and pilot-manufacturing activities in the Company,
including the AbioCor. From 1999 to present, he was responsible for BVS product
development. From 1994 to 1998, he was President of ABIOMED's dental subsidiary,
ABIODENT. From 1982 to 1994, he served in various roles, from Vice President of
Engineering to Vice President of Operations, where he was the engineer in-charge
of the development of the BVS and other systems. Mr. Bolt received his
Bachelor's degree in Electrical Engineering and an MBA from Northeastern
University.

DR. ROBERT T.V. KUNG has served ABIOMED since 1982 and has been Senior Vice
President and Chief Scientific Officer since 1995. He was Vice President of
Research and Development from 1987 to 1995 and Chief Scientist from 1982 to
1987. Prior to joining ABIOMED, Dr. Kung was a Principal Research Scientist at
Schafer Associates from 1978 to 1982 and at the Avco Everett Research Laboratory
from 1972 to 1978. He developed non-linear optical techniques for laser
applications and investigated physical and chemical phenomena in re-entry
physics. Dr. Kung has been Principal Investigator for ABIOMED's National
Institutes of Health-funded AbioCor and AbioBooster programs and has conceived
of and directed the development of ABIOMED's laser-based minimally invasive
technologies. Dr. Kung received a Ph.D. degree in Physical Chemistry from
Cornell University.

DR. ZVI LADIN joined ABIOMED in April of 2002 as Vice President,
Clinical/Regulatory Affairs and QA. From 2001 to 2002 he founded RCR Consulting
serving as a consultant in Regulatory and Clinical affairs. From 1995 to 2001 he
held various positions at ESC Medical Systems, including Corporate Vice
President Clinical and Regulatory Affairs where he was involved with the
clinical introduction and regulatory approval of various medical devices. Prior
to 1995 he was a Science Advisor to the Food and Drug Administration, founder of
OsteoKinetics Corporation and Associate Professor of Biomedical Engineering at
Boston University. Dr. Ladin received his Ph.D. degree in Medical Engineering
from the joint program in Health Sciences and Technology from the Massachusetts
Institute of Technology and Harvard Medical School.

MR. EUGENE D. RABE has served ABIOMED since 1993 and has been Senior Vice
President, Global Sales and Services since 1999. Mr. Rabe assumed responsibility
for international sales in 1996, and was Vice President of Sales from 1993 to
1999. Prior to joining ABIOMED, Mr. Rabe was Vice President, Sales and Marketing
for Endosonics Corporation. Mr. Rabe was employed as a Sales Manager for St.
Jude Medical, Inc. He has been involved in the management of sales and marketing
of cardiovascular/cardiological devices for over fifteen years. Mr. Rabe
received a Bachelor's degree from St. Cloud State University and an MBA from the
University of California.

22

MR. JOHN F. THERO has served ABIOMED since 1994 and is currently Senior
Vice President, Treasurer and Chief Financial Officer. From 1994 to 1999 he was
Vice President of Finance, Treasurer and Chief Financial Officer. Prior to
joining ABIOMED, Mr. Thero was Chief Financial Officer and acting President for
the restructuring of two venture-backed companies from 1992 to 1995. From 1987
to 1992, he was employed in various capacities including Chief Financial
Officer, by Aries Technology, Inc. From 1983 to 1987, he was employed by the
commercial audit division of Arthur Andersen LLP during which time he became a
Certified Public Accountant. Mr. Thero received a Bachelor's degree in
Economics/Accounting from The College of the Holy Cross.

DR. FRED ZARINETCHI has served ABIOMED since 1994 and became Vice President
for Research and Development early in 2002. From 2001 to 2002 he served as
Program Manager for the Company's Penn State Heart development program and from
1994 to 2001 Dr. Zarinetchi served as Project Manager and Principal Staff
Scientist for the NIH-funded AbioCor Implantable Heart development program. From
1992 to 1993 he was Development Manager and co-founder of The Guild, Inc. Mr.
Zarinetchi received his Ph.D. degree in Electrical Engineering and Computer
Sciences from Massachusetts Institute of Technology and was a post-doctoral
fellow at Harvard University.

ITEM 2. PROPERTIES

Our headquarters is located in an industrial office park located 22 miles
north of Boston. This facility, located at 22 Cherry Hill Drive in Danvers,
Massachusetts, consists of approximately 80,000 square feet of space under an
operating lease that expires in 2010. Construction of this building was
completed in fiscal 2001 and it now houses all of our operations, including
research and development, manufacturing, sales and marketing and general and
administrative departments. During fiscal 2001 we completed construction of new
state-of-the-art manufacturing cleanrooms and moved pilot manufacturing and all
BVS production to this new facility. The lease contains provisions to allow
termination by us, subject to a defined termination fee, in 2005 and contains
options to extend beyond 2010 at market rates.

ITEM 3. LEGAL PROCEEDINGS

As of March 31, 2002, we were not party to any material pending legal
proceedings.

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

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 2002.

23

PART II

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

MARKET PRICE

Our common stock is traded on the Nasdaq Stock Market National Market under
the symbol "ABMD." The following table sets forth the range of high and low
sales prices per share of common stock, as reported by the Nasdaq National
Market for our two most recent fiscal years:

NUMBER OF STOCKHOLDERS

As of July 10, 2002, there were approximately 573 holders of record of our
common stock, including multiple beneficial holders at depositories, banks and
brokers included as a single holder in the single "street" name of each
respective depository, bank, or broker. We estimate that there are more than
14,000 beneficial holders who hold our common stock in street name.

DIVIDENDS

We have never declared or paid any cash dividends on our capital stock and
do not plan to pay any cash dividends in the foreseeable future. Our current
policy is to retain all of our earnings to finance future growth.

SALES OF UNREGISTERED SECURITIES

No sales of unregistered securities occurred during the Company's fiscal
year ended March 31, 2002.

TRANSFER AGENT AND RIGHTS AGENT

In May 2002, American Stock Transfer & Trust Company, 59 Maiden Lane, New
York, NY 10038, became the Company's stock Transfer Agent and Rights Agent.

24

ITEM 6. SELECTED FINANCIAL DATA

Portions of the following selected consolidated financial data has been
derived from the Company's unaudited Consolidated Financial Statements for
the fiscal years ended March 31, 2000, March 31, 2001 and March 31, 2002,
which are included elsewhere in this report. As discussed in Item 14 of this
Annual Report, the Company intends to amend its Annual Report when audited
financial statements are available to include such audited financial
statements. As discussed in Item 7 of this Annual Report and in Note 3 to our
Consolidated Financial Statements, the Company has restated its previously
audited consolidated statements for the fiscal years ended March 31, 2000 and
2001. Similar restatements with regard to the timing of revenue recognition
and related costs were made by the Company for its previously audited
financial statements for the fiscal years ended March 31, 1998 and 1999. The
effect of these restatements are reflected in this selected consolidated
financial data.

SELECTED CONSOLIDATED FINANCIAL DATA, AS RESTATED (UNAUDITED)
(In thousands, except per share data)

(1) Research and development expenses include certain contract costs. See Note
10 to Consolidated Financial Statements.
(2) Discontinued operations reflect the results of our dental subsidiary which
was discontinued in fiscal 1998 as we shifted all of our focus to our core
cardiovascular business.

25

The following table presents net increases and (decreases) in our
previously reported operating results for each of the five years ended March
31, 1998 through March 31, 2002 as a result of the aforementioned
restatements (in thousands):

INCREASES AND (DECREASES) IN
SELECTED CONSOLIDATED FINANCIAL DATA
AS A RESULT OF RESTATEMENTS (UNAUDITED)
(In thousands, except per share data)

(1) Changes in revenues and cost of products sold reflect timing differences
resulting from modification of the Company's revenue recognition policy.
Cost of product sales also includes an increase of $58,000 in fiscal 2001
for stock-based compensation.
(2) Increase in internal research and development expenses reflects adjustment
for stock-based compensation.
(3) Changes in research and development expenses reflect fully writing-off the
acquisition costs of the Penn State Heart in the year of acquisition, net
of previously reported amortization. These costs were reported previously
as Intellectual Property being amortized over the three-year period ending
September 2003.
(4) Because these modifications reflect timing of revenues and expenses and
other non-cash related adjustments, certain of the Company's balance sheet
data has changed including intangible assets, deferred revenue and accrued
expenses. The Company's capital resources, in particular cash and
marketable securities, were not changed as a result of these restatements.

26

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

ALL STATEMENTS, TREND ANALYSIS AND OTHER INFORMATION CONTAINED IN THE
FOLLOWING DISCUSSION RELATIVE TO MARKETS FOR OUR PRODUCTS AND TRENDS IN SALES,
GROSS PROFIT AND ANTICIPATED EXPENSE LEVELS, AS WELL AS OTHER STATEMENTS,
INCLUDING WORDS SUCH AS "MAY," "ANTICIPATE," "BELIEVE," "PLAN," "ESTIMATE,"
"EXPECT," AND "INTEND" AND OTHER SIMILAR EXPRESSIONS CONSTITUTE FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO BUSINESS AND
ECONOMIC RISKS AND UNCERTAINTIES, AND OUR ACTUAL RESULTS OF OPERATIONS MAY
DIFFER MATERIALLY FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED BELOW UNDER "RISK FACTORS" AS WELL AS OTHER RISKS
AND UNCERTAINTIES REFERENCED IN THIS REPORT.

OVERVIEW

We are a leading developer, manufacturer and marketer of medical products
designed to safely and effectively assist or replace the pumping function of the
failing heart. In July 2001, in collaboration with leading medical centers, we
commenced initial clinical trials for the world's first implantable,
battery-powered replacement heart, the AbioCor. The AbioCor, which is intended
for end-stage heart failure patients, is designed to replace the failing
ventricles of a patient's diseased heart and take over their pumping function.
The commencement of this initial clinical trial, approved by the FDA under an
IDE, follows nearly three decades of research, development and testing related
to this technology. We currently manufacture and sell the BVS, a temporary heart
assist device which was the first device approved by the FDA as a
bridge-to-recovery device for temporary treatment of all patients with failing
but potentially recoverable hearts. And, we are working to develop other
products to assist or replace the heart, including development of the Penn State
Heart. Our operating results reflect the dual activities of commercial
operations and investments in the research and development of new technologies.

The BVS is a temporary heart assist device designed to assume the full
pumping function of a patient's failing heart while allowing the heart to rest,
heal and recover its function. The BVS consists of single-use external blood
pumps and cannulae and a reusable pneumatic drive and control console. All of
our product revenues are currently derived from the BVS product line. BVS
revenues consist of sales to new customers and reorders from existing customers.
Following commercial introduction of the BVS in the U.S., our focus was on
obtaining market share beginning with the largest medical centers. As of March
31, 2002, more than 500 medical centers in the U.S. had purchased the BVS,
including 70% of all major medical centers that perform more than 500 heart
surgeries annually. While we continue to seek additional new customers for the
BVS, our primary focus is to increase usage and product reorders by existing
customers. Product reorders currently represent approximately 76% of BVS product
revenues. During fiscal 2002, no single customer represented more than 5% of
product revenues.

Research and development is a significant portion of our operations. Our
research and development efforts are focused on the development of new
products, primarily related to heart assist and heart replacement, and the
continued enhancement of the BVS and related technologies. In fiscal 2002, we
incurred $21.2 million in total research and development spending directed at
the AbioCor and $6.2 million in research and development spending directed at
BVS improvements, the Penn State Heart and development of other potential
products. These expenditures were partially offset by revenues from contracts
and grants of $2.2 million, of which the majority were from the NHLBI. We
retain rights to commercialize all technological discoveries and products
resulting from these contracts and grants.

27

RESTATEMENT OF PRIOR YEAR'S FINANCIAL STATEMENTS

We have modified our methods of revenue recognition for certain sales
contracts and funded research and development contracts. Such modifications
result in the shifting of portions of revenues and related expenses between
fiscal quarters and fiscal years. In addition, we have modified the timing of
expenses recorded in connection with our acquisition in September 2000 of rights
to the Penn State Heart and we have recorded expense for certain non-cash
transactions involving stock option exercises made by employees with the
assistance of the Company. Accordingly, our financial results presented below
for each of the two years ending on March 31, 2000 and 2001 have been restated
from our previously audited consolidated financial statements and our financial
results presented below for our year ending on March 31, 2002 have been revised
from our previously announced fiscal 2002 results included in our press release
on operating results dated May 16, 2002. Throughout this Management's Discussion
and Analysis of Financial Condition and Operations (MD&A), the term "previously
reported" will be used to refer to our previously filed financial statements for
the two years ending on March 31, 2001 as well as our previously announced
fiscal 2002 results.

The following table presents increases and decreases to our previously
reported operating results for each of the three years ending on March 31,
2002 that resulted in the aforementioned restatements:

CHANGES IN PREVIOUSLY REPORTED AMOUNTS
(THOUSANDS, EXCEPT PER SHARE DATA)

Previously reported deferred revenues increased by $1.3 million, $3.4
million, and $1.3 million as of March 31, 2000, 2001 and 2002, respectively, as
a result of the aforementioned restatements. The increase in deferred revenue on
March 31, 2002 is scheduled for recognition as revenue in our fiscal year that
ends March 31, 2003 upon the earlier of shipment of product or the end of the
terms of the relevant contracts.

The majority of our product revenues are derived from our shipment of
products to fulfill customer orders for specified numbers of BVS consoles and
blood pumps at specified prices. We recognize revenues and record costs related
to such sales upon product shipment. A portion of our product revenues are
derived from contracts which provide for the Company to receive a fixed,
non-refundable amount of money over a set period of time in return for our
providing these customers with BVS product

28

at the start of the contract and restocking the customer with BVS blood pumps
during the term of the contract. The exact quantity of such additional BVS blood
pumps, including related cannulae, to be supplied, if any, during the term of
the contract depends upon the actual usage of the product by the customer. The
terms of such contracts are typically one to three years. In many of these
extended-term contracts, the fixed non-refundable amount is paid at the
beginning of the contract while in other contracts payment of the fixed
non-refundable amount is paid over the term of the contract. We must be
satisfied that the contract is supported by a valid order from the customer and
is collectible before any revenue will be recognized.

We group these extended-term contracts into two primary categories. The
first category is comprised of contracts that include substantial up-front
shipments of BVS console(s) and related blood pumps to customers with a
commitment to provide additional blood pumps during the term of the contract if
the customer uses more blood pumps than we originally supplied. The second
category is comprised of contracts that include up-front shipment of blood pumps
with additional blood pumps to be provided during the term of the contract if
the customer uses more blood pumps than we originally supply. In this second
category the primary element of the contract is the blood pumps.

Our timing of revenue recognition for the first category of contracts has
historically been in accordance with sales-type leases. In this previously
reported accounting, we sought to match revenues, costs and, where possible,
cash flow in the same period by recognizing the full value of the contract, less
deferral of the time value of money for multi-year contracts, as revenue upon
the shipment of the BVS console and related initial shipment of BVS pumps. In
the same period, we recorded cost of product revenue for both the cost of
initial console and pump shipments and for an estimate of the cost of additional
pumps that might be shipped during the term of such contract.

In our restated accounting for this first category of contracts, we prorate
revenue between the value of the BVS console(s) and BVS pumps that are shipped
initially and the value of the maximum contractual number of additional pumps
that might be shipped during the contract. If a contractual maximum number of
additional pumps is not specified, we estimate the number of additional pumps
that might be shipped based upon historical experience and input from the
customer. After such prorating of revenues, we recognize revenue for the initial
shipment of each BVS console and pump at the time of shipment. Under this
method, we defer the portion of revenue prorated to the contractual maximum or
otherwise estimated number of additional pumps that might ship over the term of
the contract. This deferred revenue is then recognized ratably over the
remaining term of the contract as BVS pumps are shipped. To the extent that our
deferral of revenues for this potential additional pump usage proves to be too
high, any remaining deferred revenue at the end of the contract term is
recognized at that time. Under this method, cost of product revenue is recorded
upon shipment.

Our timing of revenue recognition for the second category of contracts, our
"extended-term renewal contracts", has since our adoption of Staff Accounting
Bulletin (SAB) No. 101, REVENUE RECOGNITION, for our fiscal year ended March 31,
2001, been ratably over the contract term. We have historically used one of two
methods for the ratable recognition of such revenues. The first method is the
recognition of such revenues on a blood pump units basis. Under this method, the
total contract value was initially deferred. This deferred value was divided by
our estimate of the number of blood pumps to be shipped over the term of a
contract to determine an average price per blood pump under the contract. As
each blood pump ships under the contract, the average price per blood pump under
the contract was recognized as revenue up to, but not in excess of, the total
order value. Costs of blood pumps were recorded upon shipment. To the extent
that our original estimate of additional pump usage proved to be too high, any
remaining deferred revenue at the end of the contract term was recognized at
that time. The second method we used for ratable revenue recognition of certain
of these contracts was based upon elapsed time. Under this method, a pro rata
portion of the total contract value was recognized over the

29

term of the contract based upon the relative elapsed term of the contract to the
total term of the contract. Prior to the adoption of SAB No. 101, we recognized
revenues under extended term renewal contracts in a manner that was consistent
with our recognition for sales-type leases.

In our restated accounting for this second category of contracts, we do not
recognize any revenue based on the time elapsed method but only on a units
basis. Under this units basis we calculate the average price per blood pump
using the maximum number of pumps allowed under the contract, provided that if
no maximum number is provided in the contract, we estimate the anticipated usage
based upon historical experience and input from the customer. We recognize
revenue based upon this calculated average price per blood pump upon shipment of
each pump. To the extent that our deferral of revenues for potential additional
pump usage proves to be too high because the customer uses fewer blood pumps
than the contractual maximum number of additional blood pumps, or, where
applicable, fewer than our estimated number of additional blood pumps, any
remaining deferred revenue at the end of the contract term is recognized at that
time.

The following table presents the amounts of revenue recognized under
extended-term contracts for each of the two categories described above during
each of the three years ended March 31, 2002, as restated (in millions):