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

• Incision. Our incision products include devices used to obtain a patient's blood sample for diagnostic testing and screening for platelet function.

Critical Accounting Policies and Estimates We have identified the policies and estimates below as critical to our business operations and the understanding of our results of operations. The impact of, and any associated risks related to, these policies and estimates on our business operations are discussed below. Preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. There can be no assurance that actual results will not differ from those estimates and assumptions. Revenue Recognition
We recognize revenue from product sales for our Cardiovascular and ITC business divisions when evidence of an arrangement exists, title has passed (generally upon shipment) or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured. Sales to distributors are recorded when title transfers upon shipment. A reserve for sales returns is recorded for sales through the distributor applying reasonable estimates of product returns based upon historical experience.
We recognize sales of certain Cardiovascular division products to first-time customers when we have determined that the customer has the ability to use the products. These sales frequently include the sale of products and training services under multiple element arrangements. Training is not considered essential to the functionality of the products. The amount of revenue under these arrangements allocated to training is based upon fair market value of the training, which is typically performed on our behalf by third party providers. Under this method, the total value of the arrangement is allocated to the training and the Cardiovascular division products based on the relative fair market value of the training and products.
In determining when to recognize revenue, management makes decisions on such matters as the fair values of the product and training elements when sold together, customer credit worthiness and warranty reserves. If any of these decisions proves incorrect, the carrying value of these assets and liabilities on our consolidated balance sheets or the recorded product sales could be significantly different, which could have a material adverse effect on our results of operations for any fiscal period. Reserves
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make payments owed to us for product sales and training services. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
The majority of our products are covered by up to a two-year limited manufacturer's warranty from the date of shipment or installation. Estimated contractual warranty obligations are recorded when the related sales are recognized and any additional amounts are recorded when such costs are probable and can be reasonably estimated, at which time they are included in "Cost of product sales" in our consolidated statements of operations. In determining the warranty reserve estimate, management makes judgments and estimates on such matters as repair costs and probability of warranty obligations. The change in accrued warranty expense is summarized in the following table:

                                  Balance       Charges to                       Balance
                                 Beginning       Costs and        Warranty         End
                                  of Year        Expenses       Expenditures     of Year
                                                     ( in thousands)
       Fiscal year ended 2008    $   1,006      $    1,925      $    (1,860 )   $ 1,071
       Fiscal year ended 2007    $   1,032      $      634      $      (660 )   $ 1,006
       Fiscal year ended 2006    $   1,073      $      756      $      (797 )   $ 1,032

Estimated excess and obsolete inventory reserves are recorded when inventory levels exceed projected sales volume for a certain period of time. In determining the excess obsolete reserve, management makes judgments and estimates on matters such as forecasted sales volume. If sales volume differs from projection, adjustments to these reserves may be required.
Management must make judgments to determine the amount of reserves to accrue. If any of these decisions proves incorrect, our consolidated financial statement could be materially and adversely affected. Income Taxes
We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits, and deductions, such as tax benefits from our non-U.S. operations and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of revenue and expense for tax and financial statement purposes.
We record a valuation allowance to reduce our deferred income tax assets to the amount that is more-likely-than-not to be realized. In evaluating our ability to recover our deferred income tax assets we consider all available positive and negative evidence, including our operating results, on going tax planning and forecasts of future taxable income on a jurisdiction by jurisdiction basis. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes. Conversely, in the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made.
We believe we have provided adequate reserves for uncertain tax positions for anticipated audit adjustments by United States federal, state and local, as well as foreign, tax authorities based on our estimate of whether, and the extent to which, additional taxes, interest and penalties may be due. If events occur which indicate payment of these amounts is unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the accrued liabilities are no longer warranted. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.
Evaluation of Purchased Intangibles and Goodwill for Impairment In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we periodically evaluate the carrying value of long-lived assets to be held and used, including intangible assets subject to amortization, when events or circumstances warrant such a review. The carrying value of a long-lived asset to be held and used is considered impaired when the anticipated separately-identifiable undiscounted cash flows from such an asset are less than the carrying value of the asset. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Management must make estimates of these future cash flows, if necessary, and the approximate discount rate, and if any of these estimates proves incorrect, the carrying value of these assets on our consolidated balance sheets could become significantly impaired.
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, such assets with indefinite lives are not amortized but are subject to annual impairment tests. If there is an apparent impairment, a new fair value would be determined. If the new fair value is less than the carrying amount, an impairment loss would be recognized.
Valuation of Share-Based Awards
We account for share-based compensation expense in accordance with the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment. Under SFAS No. 123(R), share-based compensation expense is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of option awards at the grant date requires judgment, including estimating the expected term of stock options, the expected volatility of our stock, expected forfeitures and expected dividends. The computation of the expected volatility assumption used in the Black-Scholes option pricing model for option grants is based on historical volatility. When establishing the expected life assumption, we review annual historical employee exercise behavior of option grants with similar vesting periods. In addition, judgment is also required in estimating the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, share-based compensation expense and our results of operations could be materially affected.

Fair Value Measurements
We adopted the provisions of SFAS No. 157, Fair Value Measurements, on December 30, 2007. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability ("exit price") in an orderly transaction between market participants at the measurement date.
In determining fair value, we use various approaches, including market, income and/or cost approaches, and each of these approaches requires certain inputs. SFAS No. 157 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions as compared to the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
• Level 1-Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. Assets and liabilities utilizing Level 1 inputs include broker-dealer quote securities that can be traded in an active market. We used Level I assumptions for cash and cash equivalents. Since valuations are based on quoted prices that are readily and regularly available in an active market, a significant degree of judgment is not required.

• Level 2-Valuations based on quoted prices of similar investments in active markets, of similar or identical investments in markets that are not active or model based valuations for which all significant inputs and value drivers are observable, directly or indirectly. Assets and liabilities utilizing Level 2 inputs primarily include municipal bonds and for the straight convertible debt feature of our senior subordinated convertible notes, except the make-whole provision, using a level 3 input, described below.

• Level 3-Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Assets and liabilities utilizing Level 3 inputs include certain auction rate securities, our Levitronix convertible debenture and the make-whole feature of our senior subordinated convertible notes. Given the current credit market illiquidity for auction rate securities, our estimates are subject to significant judgment by management.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our own assumptions are developed to reflect those that market participants would use in pricing the asset or liability at the measurement date. See Note 3 to the consolidated financial statements for further information about our financial assets that are accounted for at fair value.
Due to the uncertainty inherent in the valuation process, estimates of fair value may differ significantly from the values that would have been obtained had an active market for the securities existed, and the differences could be material. After determining the fair value of our available-for-sale security, gains or losses on these investments are recorded to other comprehensive income, until either the investment is sold or we determine that the decline in value is other-than-temporary. Determining whether the decline in fair value is other-than-temporary requires management judgment based on the specific facts and circumstances of each investment. For investments in available-for-sale securities, these judgments primarily consider: the financial condition and liquidity of the issuer, the issuer's credit rating, and any specific events that may cause us to believe that the debt instrument will not mature and be paid in full; and our ability and intent to hold the investment to maturity. Given the current market conditions, these judgments could prove to be incorrect, and companies with relatively high credit ratings and solid financial conditions may not be able to fulfill their obligations. In addition, if we decide not to hold an investment until maturity, it may result in the recognition of an other-than-temporary impairment.

Results of Operations
The following table sets forth selected consolidated statements of operations data for the years indicated and as a percentage of total product sales:

                                                        For the Fiscal Years Ended
                                    2008                           2007                           2006
                                                    (in thousands, except percentages)
Product sales              $ 313,564           100 %      $ 234,780           100 %      $ 214,133           100 %
Cost of product sales        127,566            41           98,516            42           88,648            41

Gross margin                 185,998            59          136,264            58          125,485            59

Operating expenses:
Selling, general and
administrative                94,142            30           82,044            35           73,687            35
Research and
development                   52,943            17           43,835            19           39,841            19
Amortization of
purchased intangible
assets                        13,183             4           12,582             5           12,055             6
Purchased in-process
research and
development                        -             -                -             -            1,120             1
Litigation                         -             -                -             -              447             -

Total operating
expenses                     160,268            51          138,461            59          127,150            61

Income (loss) from
operations                    25,730             8           (2,197 )          (1 )         (1,665 )          (2 )
Other income and
(expense):
Interest expense              (4,039 )          (1 )         (4,085 )          (2 )         (4,276 )          (2 )
Interest income and
other                          9,146             3            8,624             4            8,451             5

Income before taxes           30,837            10            2,342             1            2,510             1
Income tax expense
(benefit)                      8,305             3             (893 )           -           (1,463 )           -

Net income                 $  22,532             7 %      $   3,235             1 %      $   3,973             1 %

Product Sales
   Product sales in 2008 increased $78.8 million or 33.6% as compared to 2007
and in 2007 increased $20.6 million or 9.6% as compared to 2006.

                             For the Fiscal Years Ended             Annual Percentage Change
                          2008          2007          2006         2008/2007         2007/2006
                                   (in thousands)
  Cardiovascular        $ 214,976     $ 144,220     $ 133,710            49.1 %             7.9 %
  ITC                      98,588        90,560        80,423             8.9 %            12.6 %

  Total product sales   $ 313,564     $ 234,780     $ 214,133            33.6 %             9.6 %

In 2008 as compared to 2007, Cardiovascular product sales increased by $70.8 million primarily due to higher sales from our HeartMate product line. The higher sales resulted from increased HeartMate II volume in North America and Europe, a commercial price increase for the HeartMate II in North America, and higher stocking revenue associated with the addition of fifty-five new HeartMate II centers. Also, product sales increased because of favorable foreign currency translation and higher Centrimag sales due to increased implant activity. This increase in product sales was partially offset by a 4% decline in the sales of the Thoratec product line due to HeartMate II cannibalization. ITC product sales increased by $8.0 million primarily due to higher domestic and international sales of our HEMOCHRON product line and higher international sales of our Alternate Site product line, partly offset by the decrease of our incision product line sales due to competitive offerings affecting both volume and selling price.
In 2007 as compared to 2006, Cardiovascular product sales increased by $10.5 million, primarily due to increased sales of HeartMate II, partially offset by lower sales in our Thoratec product line as a result of increased usage of short term devices. In addition, a full year of product sales of CentriMag in 2007 totaling $6.6 million, contributed to the overall increase in product sales as compared to the three month of sales in 2006. ITC product sales increased by $10.1 million, primarily due to increased sales of our hospital point-of-care products along with increased sales of our alternate site and incision products resulting from market expansion and competitor product recalls. In addition, product sales of AVOXimeters also contributed to the increase in sales in 2007 as opposed to only fourth quarter sales in 2006.

Sales originating outside of the United States and U.S. export sales accounted for approximately 26%, 28% and 24% of our total product sales in 2008, 2007 and 2006, respectively.
Gross Profit
Gross profit and gross margin are as follows:

For the Fiscal Years Ended Annual Percentage Change 2008 2007 2006 2008/2007 2007/2006

Total gross margin 59.3 % 58.0 % 58.6 % 1.3 % 0.6 %

In 2008 as compared to 2007, Cardiovascular gross margin percentage increased by 2.2% primarily due to increased HeartMate II prices in North America, favorable foreign currency translations, partially offset by the increased percentage of non-pump revenue and unfavorable manufacturing variances. ITC gross margin percentage decreased by 4.8% due to unfavorable geographic and product mix and increased unfavorable manufacturing variances.
In 2007 as compared to 2006, Cardiovascular gross margin decreased by 0.6% due to unfavorable non-pump product mix and manufacturing variances partially offset by improved foreign currency exchange from our international operations. ITC gross margin was the same for 2007 and 2006, due to lower product costs offset by higher costs from product and geographic mix and the expenses related to the voluntary Pro Time recall.
Selling, General and Administrative
Selling, general and administrative expenses increased $12.1 million in 2008 as compared to 2007 and increased $8.3 million in 2007 as compared to 2006:

                                            For the Fiscal Years Ended                   Annual Percentage Change
                                       2008             2007            2006           2008/2007           2007/2006
                                                  (in thousands)
Total selling, general and
administrative                       $  94,142        $ 82,044        $ 73,687               14.7 %              11.3 %

In 2008 as compared to 2007, Cardiovascular costs increased by $8.6 million, primarily due to market development initiatives and commercialization efforts associated with the HeartMate II and higher compensation expense. ITC costs increased $1.0 million, primarily due to higher sales and marketing personnel and travel costs. Corporate costs increased by $2.5 million, primarily due to higher compensation and various other corporate expenses.
In 2007 as compared to 2006, Cardiovascular costs increased by $2.6 million, primarily due to an increase in personnel expenses in 2007 related to market expansion and preparation for HeartMate II commercial approval, unfavorable foreign currency exchange and an increase in share-based compensation expenses. ITC costs increased by $2.6 million, primarily due to higher personnel costs, consulting fees and an increase in reserves for overdue accounts receivable. In addition, in 2007 our ITC division incurred costs related to the AVOXimeter products for the full year as compared to selling costs incurred in 2006 for the fourth quarter only. Corporate costs increased by $3.1 million, because of higher consulting and legal expenses related to the review of our stock option granting practices conducted during the first quarter of 2007, market research and compliance costs.

Research and Development
   Research and development expenses in 2008 were $52.9 million, or 17% of
product sales, compared to $43.8 million, or 19% of product sales, in 2007.
Research and development expenses in 2007 were $43.8 million, or 19% of product
sales, compared to $39.8 million, or 19% of product sales, in 2006.

                                            For the Fiscal Years Ended                   Annual Percentage Change
                                       2008             2007            2006           2008/2007           2007/2006
                                                  (in thousands)
Total research and development
expenses                             $  52,943        $ 43,835        $ 39,841               20.8 %              10.0 %

Research and development costs are largely project driven, and fluctuate based on the level of project activity planned and subsequently approved and conducted.
In 2008 as compared to 2007, research and development costs increased $9.1 million. Cardiovascular costs increased $6.9 million, primarily due to increased research and development costs associated with our HeartMate product line peripheral enhancements and new product technology. ITC costs increased $2.2 million, primarily due to new product development.
In 2007 as compared to 2006, research and development costs increased $4.0 million. Cardiovascular costs increased $2.2 million, primarily due to regulatory and clinical costs associated with Phase II of the HeartMate II pivotal trial and HeartMate II product development. ITC costs increased $1.8 million, primarily due to higher personnel and consulting costs related to new product development. . . .