Management’s Discussion and Analysis  of Financial Condition and Results of Operations As part of the strategy to manage risk while minimizing hedging costs, the Company utilizes both foreign currency forward exchange contracts and option-based products in managing its exposure to currency rate fluctuations. Option- based products consist primarily of purchased put options in conjunction with written (sold) call options to create collars. Option-based products are agreements that either grant the Company the right to receive, or require the Company to make payments at, specified currency rate levels. subject to rate and price fluctuations. Credit risk is managed through the use of credit standard guidelines, counter-party diversification, monitoring of counter-party financial condition and master netting agreements in place with all derivative counter-parties. Credit exposure of derivative financial instru- ments is represented by the fair value effects of contracts with a positive fair value at December  31 , 2001, reduced by the effects of master netting agreements. Additionally, at December  31 , 2001 , all derivative financial instruments, based on notional amounts, were with commercial banks and investment  banking firms assigned investment grade ratings of “AA” or better by national rating agencies. The Company does not anticipate non-performance by its counter-parties and has no reserves related to non-performance as of December  31 , 2001 ; the Company has not experienced any counter-party default during the three years ended December  31 , 2001 . As part of its risk-management process, the Company uses a value-at-risk (“VAR”) methodology in connection with other management tools to assess and manage its foreign currency financial instruments and measure any potential loss in earnings as a result of adverse movements in currency exchange rates. The Company utilizes a Monte Carlo simulation, with a  95 percent confidence level, using spot and three-month implied volatilities as stochastic variables and correlations (as of the measurement date) to estimate this potential loss. The Company’s calculated VAR at December  31 , 2001 , with a maturity of up to one year, is $ 2 million. This amount excludes the potential effects of any changes in the value of the underlying transactions or balances. The Company’s calculated VAR exposure represents an estimate of reasonably possible net losses that would be recognized on its portfolio of financial instruments assuming hypothetical movements in future market rates and is not necessarily indicative of actual results which may occur. It does not represent the maximum possible loss or any expected loss that may occur. Actual future gains or losses may differ from (and could be significantly greater than) these estimates based upon actual fluctuations in market rates, operating exposures and the timing thereof, and changes in the Company’s portfolio of derivatives during the measured periods. In addition, the assumption within the VAR model is that changes in currency exchange rates are adverse, which may not be the case. Any loss incurred on the financial instruments is expected to be offset by the effects of currency movements on the hedging of all exposures; there may be currency exchange- rate gains or losses in the future. The Company has invested in several unconsolidated affiliates valued as of December  31 , 2001 at $ 93 million, of which approximately $ 74 million is attributable to the Company’s investment in World Heart Corporation (see “Disposition of Assets and Other Non-Recurring Charges, net”). The valuation of these investments is dependent upon the affiliates’ abilities to achieve development milestones and cash flow projections. While a reduction in the fair values of the unconsolidated affiliates could have a material adverse impact to Edwards Lifesciences’ operating results, management believes a reduction in the fair values of the affiliates would not be material to Edwards Lifesciences’ financial position or cash flows. Derivative financial instruments used by the Company involve, to varying degrees, elements of credit risk in the event a counter- party should default and market risk as the instruments are In the normal course of business, Edwards Lifesciences provides credit to customers in the health-care industry, performs credit evaluations of these customers and maintains reserves for potential credit losses, which, when realized, have been within the range of management’s allowance for doubtful accounts during all periods presented. Concentrations of Credit Risk Other Risks Credit Risk Sales to Baxter, acting in the capacity of the Company’s distributor subsequent to the Distribution, represented  11 % and  12 % of the Company’s total net sales for  2001 and  2000 , respectively. 24 Edwards Lifesciences Corporation 25 Edwards Lifesciences Corporation PricewaterhouseCoopers LLP Orange County, California February 5, 2002 As discussed in Note  2 to the financial statements, the Company was required to adopt the provisions of Statement of Financial Accounting Standards No. 133 , “Accounting for Derivative Instruments and Hedging Activities,” as amended. United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Edwards Lifesciences Corporation and its subsidiaries at December  31 , 2001 and  2000 , and the results of their operations and their cash flows for each of the three years in the period ended December  31 , 2001 , in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the Management relies upon established accounting procedures and related systems of internal control for meeting its responsibilities to maintain reliable financial records. These systems are designed to provide reasonable assurance that assets are safeguarded and that transactions are properly recorded and executed in accordance with management’s intentions. Internal auditors periodically review the accounting and control systems, and these systems are revised if and when weaknesses or deficiencies are found. The Audit and Public Policy Committee of the Board of Directors, composed of directors from outside the Company, meets regularly with management, the Company’s internal auditors and its independent accountants to discuss audit scope and results, internal control evaluations, and other accounting, reporting and financial matters. The independent accountants and internal auditors have access to the Audit and Public Policy Committee without management’s presence. The management of Edwards Lifesciences is responsible for the integrity of the financial information presented in this Annual Report to Shareholders. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles. Where necessary, they reflect estimates based on management’s judgment. Report of  Independent Accountants To the Board of Directors and  Shareholders of Edwards Lifesciences Corporation Report of  Management  Bruce J. Bentcover Corporate Vice President, Chief Financial Officer & Treasurer Michael A. Mussallem Chairman & Chief Executive Officer